On July 21, 2021, the Alternative Reference Rates Committee’s (“ARRC”) announced conventions and use cases (“Best Practice Recommendations”) for how best to employ Secured Overnight Financing Rate term rates (“SOFR Term Rates”), produced by the CME Group, to successfully transition away from U.S. dollar LIBOR.
The Best Practice Recommendations highlight particular areas where use of the SOFR Term Rates will be helpful to support a smooth transition away from U.S. dollar LIBOR. Specifically, the ARRC supports the use of SOFR Term Rates for the business loans market — particularly multi-lender facilities, middle market loans, and trade finance loans — where transitioning from LIBOR to an overnight rate has been difficult. Moreover, the ARRC recognizes that the SOFR Term Rate may also be appropriate for certain securitizations that hold underlying business loans or other assets that reference the SOFR Term Rate and where those assets cannot easily reference other forms of SOFR. The Best Practice Recommendations also support the use of SOFR Term Rates in end-user facing derivatives that hedge cash instruments linked to the SOFR Term Rates, and certain securitizations with underlying assets that are themselves tied to SOFR Term Rates.
To help further facilitate the use of the SOFR Term Rates and SOFR Averages in advance, the ARRC has previously published recommended conventions for these rates in the business loans market.