ARRC Releases Recommendations for Interdealer Cross-Currency Swap Market Conventions

The Alternative Reference Rates Committee (ARRC) today released final recommendations for new interdealer cross-currency basis swaps that use the Secured Overnight Financing Rate (SOFR) and overnight risk-free rates (RFRs) recommended by National Working Groups (NWGs) in other jurisdictions. The conventions outlined in today’s document are for market participants’ voluntary use.

Today’s document consists of three sections and it focuses on interdealer transactions. The first section covers conventions for RFR-RFR cross-currency swaps. The second section covers conventions for RFR-interbank offered rates (IBORs) cross-currency swaps. The third section covers potential fallbacks for cross-currency swaps currently referencing IBORs, focusing on the prospect of one or both counterparties in an IBOR-based swap transitioning from an IBOR to an RFR.

“Most existing conventions for cross-currency swap transactions focus on LIBOR or other IBORs—which is untenable considering LIBOR’s fast-approaching expiration date. Today’s document addresses this issue by providing essential structures for cross-currency swaps that use SOFR and other RFRs,” said Tom Wipf, ARRC Chair and Vice Chairman of Institutional Securities at Morgan Stanley. “By outlining conventions that support RFR-based cross-currency transactions, the ARRC is helping market participants avoid unnecessary operational complexities, allow for easier hedging, and limit transaction costs.”

Today’s recommendations were developed by the ARRC’s Market Structure and Paced Transition Working Group, which includes buy side, sell side, and intermediary market participants. Throughout 2019, the Group consulted with several other NWGs in developing recommendations. In May 2019, the Group produced a summary document of its initial work. The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association used this summary document to solicit input from a wider set of market participants. The Association for Financial Markets in Europe also circulated the summary document to its members for input. The Market Structure and Paced Transition Working Group incorporated feedback on the summary document in the final recommendations released today.

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