April 22, 2020 - On April 17th, the Alternative Reference Rates Committee (“ARRC”) released its 2020 Objectives. We flag them because many of the objectives intersect with recommended best practices for industry, including the loan industry. As a reminder, the LSTA is on the ARRC itself and co-chairs the ARRC’s Business Loans Working Group (“BLWG”).
As background, and as the ARRC has noted, there has been no indication that the LIBOR submitting banks will continue to quote LIBOR after the end of 2021. Thus, notwithstanding the Covid-19 crisis, industry should still consider 12/31/21 as the end date for LIBOR. To facilitate the industry’s move from LIBOR, the ARRC identified six broad categories of objectives with 2020 milestones to meet those objectives. The six are: i) Supporting SOFR Use and Liquidity; ii) Market Infrastructure and Operations; iii) Contractual Fallbacks; iv) Consumer Products; v) Legal, Tax, Accounting and Regulatory Clarity and vi) Outreach, Education and Global Coordination. Four of the six objectives impact the loan market.
First, in Supporting SOFR Use and Liquidity, the ARRC reiterated that it intends to publish forward looking term SOFR in first half 2021 if sufficient SOFR derivative liquidity develops. To get there, by September 30, 2020, the ARRC will establish an RFP process and criteria for recommendations to select an administrator. In addition, by July 31st, the ARRC plans to publish final recommended conventions for business loans, as well as FRNs and securitizations.
Under Market Infrastructure and Operations, the ARRC intends to create tools to help market participants make the operational and infrastructure changes necessary to prepare for LIBOR cessation. The BLWG has been working hard on this, with both market participants and vendors.
Under Contractual Fallbacks, by June 30th, the ARRC plans to publish a refreshed hardwired fallback for business loans. (The Covid-19 crisis should demonstrate why seeking thousands of fallback amendments simultaneously in a period of potential market disruption may not be the most robust or equitable approach.) In addition, the ARRC recently issued a press release on spread adjustments for cash products that fall back from LIBOR to SOFR. By September 30th, the ARRC will establish an RFP process for an administrator for ARRC recommended spread adjustments.
Under Legal, Tax, Accounting and Regulatory Clarity, the ARRC will continue to work with the appropriate authorities and SROs as they finalize their proposals. Importantly, much of the guidance from the authorities around tax and accounting has been helpful and smoothed the path already for issues such as hedging SOFR loans.
The ARRC objectives – and their implications for business loans – should provide clarity for the thousands of loan market participants that are working to transition away from LIBOR. The LSTA co-chairs the ARRC Business Loans Working Group; we take questions at LIBORInformation@lsta.org and host a weekly LIBOR Q&A call on Mondays at 3PM (ET) to address member questions.