September 22, 2021 - by Meredith Coffey. As Term SOFR gets up and running, there is one key thing that probably should be on everyone’s to-do list: Getting a CME Term SOFR License. We are attaching a link that explains CME Term SOFR and licensing requirements, briefly cover the issues below and will be posting a zoomcast featuring CME next week explaining who needs a CME Term SOFR license.
Bottom line: If you firm invests in loans, you likely need a CME Term SOFR license, just like you have an Ice Benchmark Administration (IBA) LIBOR license. (Even if you don’t know you have a LIBOR license!)
The Background: Nearly every lender and investor in loans has a license with the IBA to do things with LIBOR like calculate interest, perform reconciliation, etc. While managers themselves might access LIBOR through a Bloomberg terminal, Refinitiv screen or feed, we understand that there generally also is a license with IBA – often at the parent company level – to use LIBOR for calculations. Similarly, most parties to Term SOFR loans will need a CME Term SOFR license. Since we likely are on the cusp of Term SOFR loans coming to the loan market, it behooves lenders to ensure that they have a CME Term SOFR license or are in the process of obtaining one. Fortunately, the CME – which is publishing the ARRC Recommended Term SOFR – has waived licensing fees for cash products until 2026 and is working assiduously (and flexibly) with loan market participants to get the licensing done.
Who needs a license to use CME Term SOFR: We believe the answer is “nearly everyone.” FAQ 8 in CME’s Term SOFR FAQs explains that “[a]n end user does not need a Use License for CME Term SOFR simply to enter into a transaction, however if the end user wishes to use Term SOFR in a system for purposes of valuation, analysis risk/collateral management, among other things, a license would be required (emphasis added).” FAQ 9 further explains that a Category 1 license is required for use of CME Term SOFR:
- “as a primary reference rate or fallback reference rate in Cash Market Financial Products, including in connection with interest amount, default rate and close-out calculations”
- “with respect to such Cash Market Financial Products, in valuation and pricing activities, including, but not limited to, collateral calculations, interest rate calculations, the creation of pricing, discount and forward curves (emphasis added)”
And FAQ 13 uses a loan as a model: “[f]or example, a client that requires use of CME Term SOFR in a loan (Category 1)…”
Next steps: Some LSTA members were surprised to hear that they needed a license with CME to use CME Term SOFR. However, this is actually how LIBOR works and LSTA members likely also have an IBA LIBOR license, albeit at the firm level, not at the individual manager level. Members may want to determine who at their institution is responsible for licensing and have them engage immediately with the CME. As discussed above, the CME is working proactively and flexibly to get firms licensed in time for the imminent arrival of Term SOFR loans. (And, they’re not even making money on cash licenses for years!). This link can take members to resources including FAQs, the CME Term SOFR license agreement, CME licensing contacts and licensing fees (which are currently zero for cash products). In addition, the LSTA will post a zoomcast next week discussing CME Term SOFR licenses.