Introduction
On July 29, 2021, the Alternative Reference Rates Committee (ARRC) formally recommended CME Group's forward-looking Secured Overnight Financing Rate (SOFR) term rates ("SOFR Term Rates"),1 marking a key step in the transition away from U.S. dollar LIBOR and providing market participants with an essential transition tool.
Background
In May 2021, the ARRC published a statement setting out the market indicators it would consider in order to recommend a term rate.2 These indicators included continued growth in overnight SOFR-linked derivatives, visible progress towards deepening SOFR liquidity (consistent with ARRC best practices) and visible growth in cash product offerings, including loans linked to averages of SOFR (either in advance or arrears). Following this statement, in June 2021 the CFTC's Market Risk Advisory Committee's Interest Rate Benchmark Reform Subcommittee (the "MRAC Subcommittee") recommended a "SOFR First" market best practice for transitioning interdealer trading conventions from LIBOR to SOFR for USD linear interest rate swaps.3 Pursuant to the initiative, the subcommittee recommended that beginning on July 26, 2021, interdealer brokers halt trading of LIBOR linear swaps in favor of SOFR linear swaps. Given the large share of trading accounted for by interdealer brokers, this was an important step in the LIBOR transition towards increasing overall SOFR swap volumes and liquidity.
Completion of the Transition Plan and Looking Forward
The July 29 formal recommendation follows the ARRC's July 21 announcement of conventions and recommended best practices for the use of the SOFR Term Rates.4 This publication set out specific areas where using Term Rates will help support the transition away from USD LIBOR. Tom Wipf, ARRC's Chairman, said "this formal recommendation of SOFR Term Rates is an achievement for the USD LIBOR transition specifically and for financial stability overall. This concludes the ARRC's Paced Transition Plan and market participants now have all the tools they need as we enter the transition's homestretch. With just five months until no new LIBOR, significant work remains and I urge everyone with LIBOR exposures to immediately take action and base their new contracts on forms of SOFR."
Footnotes
1. ARRC, ARRC Formally Recommends Term SOFR (July 29, 2021).
2. ARRC, ARRC Identifies Market Indicators to Support a Recommendation of a Forward-Looking SOFR Term Rate (May 6, 2021).
3. CFTC, CFTC's Interest Rate Benchmark Reform Subcommittee Recommends July 26 for Transitioning Interdealer Swap Market Trading Conventions from LIBOR to SOFR, Release Number 8394-21 (June 8, 2021).
4. ARRC, ARRC Recommends Loan Conventions and Best Practices for Use of Forward-Looking SOFR Term Rate to Accelerate the Transition Away from LIBOR (July 21, 2021).
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