The Alternative Reference Rates Committee (ARRC) today released the Secured Overnight Financing Rate (SOFR) Floating Rate Notes (FRNs) Conventions Matrix. The Matrix identifies considerations relevant to using SOFR – the ARRC’s recommended alternative to U.S. dollar LIBOR – in new floating rate notes and supplements the ARRC’s spring paper, “A User’s Guide to SOFR.” The Matrix is accompanied by the SOFR FRNs Comparison Chart, which outlines conventions already being used in the market. Both documents were developed to help market participants as they consider issuing or investing in a SOFR-based FRN and may be updated or supplemented periodically.
“Significant work remains to buttress against the financial stability risks associated with LIBOR potentially becoming unusable in less than two and a half years,” said Tom Wipf, ARRC Chair and Vice Chairman of Institutional Securities at Morgan Stanley. “As SOFR FRN issuance continues to increase, tools like the Matrix and Comparison Chart aid those seeking alternatives to LIBOR by illustrating how conventions are evolving.”
Among other topics, key issues for SOFR-based FRNs that are covered in the Matrix include:
- Using a compounded average of SOFR, as opposed to a simple average;
- Employing an in arrears framework using SOFR rates over the applicable interest period, and noting that this necessitates a lockout, lookback, or payment delay – or a combination of these conventions; and
- Adding margin at the end of the compounding period (“margin exclusive compounding”).
Additionally, the Matrix notes that a definitive published compounded SOFR index or compounded SOFR calculator would be helpful to market participants.