July 29, 2021 - by Meredith Coffey. It’s official! Today the ARRC formally recommended CME Group’s forward looking Secured Overnight Financing Rate (SOFR) term rates (SOFR Term Rates), following the completion of a key change in interdealer trading conventions on July 26, 2021 under the SOFR First initiative. This is the critical final step; at this point, all parties should know that contracts using ARRC Hardwired Fallbacks will fall back to Term SOFR, the first step of the ARRC Hardwired waterfall. In addition, those parties that wish to use Term SOFR for business loan or CLO origination clearly can do so. To facilitate the use of Term SOFR in loans, on July 21st, the ARRC published conventions on how to use Term SOFR in syndicated and bilateral business loans and explicitly stated that business loans, CLOs, and end-user facing hedges on Term SOFR-referenced assets could use Term SOFR.
Today marks the culmination of a whirlwind of work to prepare the markets for ending LIBOR originations by December 31, 2021 (five months away!). On April 21, 2021, the ARRC published principles for the recommendation of Term SOFR; on May 6th, the ARRC published indicators for the ARRC’s recommendation of Term SOFR; on May 20th, the ARRC identified CME Term SOFR as its recommended rate (once the formal recommendation was made); on July 13th, the CFTC announced the launch of the “SOFR First” initiative; on July 21st, the ARRC published Term SOFR Conventions for business loans and Term SOFR Use Cases; on July 26th, the SOFR First initiative launched; and on July 29th, based on the successful SOFR First trajectory, the ARRC was able to formally recommend Term SOFR. Huzzah!
The LSTA is a member of the ARRC and co-chair of the ARRC’s Business Loans Working Group (which developed the Business Loan Hardwired Fallbacks and Term SOFR Business Loans Conventions). In addition, the LSTA is a member of the CME Term SOFR Advisory Committee, where it helped with the process to develop a Term SOFR rate that would be effective for the loan market.
As the ARRC itself stated today – the SOFR Toolkit is now complete. We hope that with this important step, market participants now feel fully equipped to adopt replacement rates in the near term – as they must do.