ARRC introduces an ISDA-like option for LIBOR to SOFR fallback language

The Alternative Reference Rates Committee (ARRC) today issued a supplemental consultation seeking further views on certain technical issues related to spread adjustment methodologies for cash products referencing U.S. dollar (USD) LIBOR. The consultation announced today builds on the feedback the ARRC has received on its original consultation on potential spread adjustment methodologies issued in January 2020 and includes a summary of feedback received to date on the initial consultation.

As noted in the announcement of the initial consultation, the spread adjustments are intended for use in USD LIBOR contracts that have incorporated the ARRC’s recommended fallback language or for legacy USD LIBOR contracts where a spread-adjusted Secured Overnight Financing Rate (SOFR) can be selected as a fallback. Following its April 7, 2020 meeting, the ARRC announced that its recommended spread adjustment methodology will be based on a historical median over a five-year lookback period, calculating the difference between USD LIBOR and SOFR. This methodology aligns with the International Swaps and Derivatives Association’s (ISDA) recommended methodology for derivatives and would make the ARRC’s recommended spread-adjusted version of SOFR comparable to USD LIBOR.

In reviewing the feedback, the ARRC determined that it could be useful to consider another potential option for calculating the five-year median spread that had not been included in the initial consultation. Today’s supplemental consultation invites participants to consider the option to use the same spread adjustment values that will be used by ISDA across all of the different fallback rates, rather than using the same adjustment methodology to calculate a different spread adjustment for each potential fallback rate. The supplemental consultation also seeks views on a second issue: recognizing that ISDA will now include a pre-cessation trigger, the supplemental consultation seeks views on whether the timing of the calculation of the ARRC’s spread adjustment should match ISDA’s timing if a pre-cessation event is operative.

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