News & Insights

Recent update on Term SOFR and ARRC’s best practice recommendations

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On 27 August 2021, the Alternative Reference Rates Committee (“ARRC”), a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York in 2014 to lead the LIBOR transition in the United States, issued FAQs and Best Practice Recommendations on, among other things, the use of the Secured Overnight Financing Rate (“SOFR”) and its term rates (“Term SOFR”), following the ARRC’s formal recommendation to use Term SOFR on 29 July 2021.

The ARRC supports using Term SOFR in business loan activities, in particular in syndicated loans, middle market loans and trade finance loans, where the use of forward-looking term rates is likely better to address difficulties transitioning from LIBOR (which is a forward-looking rate) than other alternative reference rates (where a number of options are backward-looking, prior to Term SOFR being made available to the market).

For derivatives, the ARRC’s general position is that Term SOFR should not be used for the majority of derivative products, except that limited use of Term SOFR in end-user facing derivatives that intend to hedge cash products is recommended. For these purposes, an end-user is classified by the ARRC as (a) a direct party or guarantor in respect of a new SOFR term rate loan, (b) a securitization linked to SOFR term rate assets or (c) a legacy LIBOR product that has converted to Term SOFR.

For more details on the FAQs, please see here.

For more details on the Best Practice Recommendations, please see here.

Key Contacts

Simon Deane

Consultant | Banking and Finance

Email or call +852 2825 9209

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