UK: ARRC's Latest Recommendations (Jan 19, 2023)

So, following their Jan 19, 2023 meeting (see January 19 Meeting Readout (newyorkfed.org)), the US Alternative Reference Rates Committee (ARRC) has issued a reminder to market participants (see Alternative Reference Rates Committee: Key Messages (newyorkfed.org)). Nothing new, really just a reminder and a call to arms - #LetsGetAmending ! We are seeing movement across all our markets although some gathering momentum quicker than others - still a lot more to be done.

1. Take action now to remediate legacy contracts ahead of June 30, 2023. The action needed is to remediate contracts by moving off LIBOR so as to allow counterparties to set the terms of the LIBOR transition that best suit them, rather than needing to rely on fallback language or the LIBOR Act to set those terms (and of course, non-US law governed contracts won't benefit from the LIBOR Act).

2. Communicate planned rate changes and (for US-issued securities) use the DTCC's enhanced LENS system as soon as available to effectively disseminate information on rate changes.

3. Use the Secured Overnight Financing Rate (SOFR) as the replacement rate for USD LIBOR and as the basis of the transition in cash and derivatives markets.

The ARRC and official sector recommend that use of Term SOFR remain limited to support financial stability. They reminded us that ARRC only recommends use of Term SOFR in certain circumstances:

1. For new contracts, the use of Term SOFR (in addition to other forms of SOFR), for business loan activity (particularly multi-lender facilities, middle market loans, and trade finance loans)

2. The use of Term SOFR for certain securitizations that hold underlying business loans or other assets that reference Term SOFR and where those assets cannot easily reference other forms of SOFR.

3. Any use of SOFR Term Rate derivatives be limited to end-user facing derivatives intended to hedge cash products that reference the Term SOFR.

They stressed that the limited scope of use is critical to ensure that the vulnerabilities that prompted the LIBOR transition are not reintroduced; for example, having use of Term SOFR that becomes disproportionate relative to the volume of transactions underlying Term SOFR.

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