July 29, 2021 The Alternative Reference Rates Committee (ARRC) of the Federal Reserve officially announced and recommended the forward-looking CME Group Term Secured Overnight Funding (Term SOFR) rate, marking the latest step in the ARRC Phased Transition Plan released in 2017. Tom Wipf, Chairman of the ARRC, stated that “market participants now have all the tools. they need it as we hit the home stretch, “and he urged” everyone at risk of LIBOR to take immediate action and base their new contracts on SOFR forms. ” As noted by Meredith Coffey, executive vice president of research and co-director of public policy at the Credit Syndicates and Trading Association (LSTA), market update Last week, a rollback to Term SOFR (i.e. the first step in the ARRC recommended rollback waterfall) will now be available for existing contracts that have adopted the ARRC recommended fallback language, providing confidence to all parties regarding the exact rollback rate for LIBOR termination.
The latest announcement follows the ARRC on July 21, 2021. announcement regarding ARRC approval loan agreements and best practices in the use of urgent SOFRs pending this approval. The agreements are fully compliant with existing LIBOR agreements, including holiday, weekend and business agreements, loan notice period, daily counts, minimum interest rates, and rounding. This is likely to lead to a smooth transition if individuals and legal entities continue to take proactive measures to mitigate the LIBOR risk, as incorporating SOFR into future loan documents will be a relatively straightforward process. For older contracts that revert to SOFR based rates, ARRC continues to recommend spread adjustments and the same minimum rate level as the minimum LIBOR rate in the existing contract. ARRC has highlighted in its best practice areas where “the use of urgent SOFRs will be beneficial to support a smooth transition from dollar LIBOR”.
Now that the SOFR term has been officially recommended by ARRC, we expect to see the market move towards adopting SOFR as a benchmark for new transactions in the coming months. According to the ARRC chairman, “keep in mind: the end of 2021 and the new LIBOR rate is fast approaching, so act now.”
Copyright © 2021 Womble Bond Dickinson (US) LLP. All rights reserved.Review of National Legislation, Volume XI, Number 212