On Aug. 27, 2021, the Alternative Reference Rates Committee (“ARRC”) announced conventions and use cases for how best to employ the Secured Overnight Financing Rate (“SOFR”) term rate (“SOFR Term Rate”) in transitioning away from USD LIBOR. For new contracts, the ARRC continues to recommend SOFR for all products, recommending overnight SOFR and SOFR averages, particularly for floating rate notes, consumer products (including adjustable rate mortgages and student loans) and most securitizations. The ARRC noted that it supports the SOFR Term Rate in areas where use of overnight and averages of SOFR has proven difficult, specifically supporting the SOFR Term Rate in addition to other forms of SOFR for business loan activity. The ARRC does not, however, support the use of the SOFR Term Rate for the vast majority of the derivatives market because these markets already reference SOFR compounded in arrears. The conventions and use cases apply to CME Group’s forward-looking term rates, which the ARRC formally recommended on July 29, 2021.
The ARRC also released a related “Frequently Asked Questions on Best Practice Recommendations Related to Scope of Use of the Term Rate” addressing how best to employ the SOFR Term Rate in contracts.