May 21, 2021 - by Tess Virmani. Today the ARRC has taken one step closer to making its Term SOFR recommendation in announcing that CME Group has been selected as the administrator of the Term SOFR the ARRC intends to recommend once the market indicators have been met (which is expected to occur “soon”). CME Group has been publishing its BMR and IOSCO compliant Term SOFR since April and was the administrator that the ARRC determined most effectively met the evaluation criteria used in its robust RFP process.
As a reminder, the ARRC recommended term rate is referenced directly in the New York State Legislation and ARRC fallback language, as well as many other variants of fallback language in loans and CLOs. In addition, the ARRC recommended term rate is referenced in the Term SOFR “flip forward” construct prevalent in loans. With respect to appropriate uses of Term SOFR once recommended, the ARRC’s press release stated that the ARRC plans to recommend best practices for the use of the term rate, “including for example as a fallback rate for legacy cash products referencing LIBOR and in new loans where the borrowers otherwise have difficulty in adapting to the new environment.”
After today’s announcement, there is just one last step for the ARRC to take – the recommendation itself. In the meantime, now that market participants know exactly what Term SOFR will look like once recommended, interested loan market participants can continue with their transition plans to Term SOFR. As Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley, stated, “Today’s announcement should allow market participants to plan ahead for the recommendation of CME Group as the term rate administrator soon.” Indeed, we will have to see if the ARRC’s support of CME Group’s rate gives comfort to certain loan market participants who wish to use that rate now.
Bottom Line: Fears that the ARRC will not recommend Term SOFR this year should be calmed; CME Group’s Term SOFR will be the ARRC’s recommended rate and that recommendation should come “soon”.