June 28, 2021

The ARRC’s ‘Guide to Published SOFR Averages’

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THE ARRC’S ‘GUIDE TO PUBLISHED SOFR AVERAGES’

Introduction

On May 11, 2021, the Alternative Reference Rates Committee (ARRC) released the “Guide to Published SOFR Averages”[1] in order to provide market participants with key information on how the published Secured Overnight Finance Rate (SOFR) Averages can be used today and what factors market participants should consider before selecting the alternative rate they use. The Guide clarifies what the New York Fed-published SOFR Averages are and how to use them. This information is intended to help borrowers understand the different types of SOFR-based loans potentially provided by their lenders. With less than a year left until certain LIBORs are no longer published, the need for SOFR-based rate choices, including SOFR averages that can be applied both in advance and in arrears, are a necessary piece of the LIBOR transition.

Background

The ARRC published the “Guide to Published SOFR Averages” to illustrate the various ways for market participants, especially nonfinancial corporates, to use SOFR Averages. The Guide specifically focuses on the New York Fed-published SOFR Averages, but market participants may reference the ARRC’s “User’s Guide to SOFR[2] for a more comprehensive overview of options for using averages of SOFR.

Summary of the Guide

SOFR Averages have been published by the New York Fed since March 2020. These Averages are an average of the daily overnight SOFR rate over 30-, 90-, and 180-days on a compounded basis. The SOFR Averages reflect movements in interest rates over a given time period, but since they are based on an average of SOFR, the Averages smooth out day-to-day volatility in market rates over that period. Another advantage of these Averages is that they can be easily referenced in financial contracts today, as seen in the increasing use of SOFR in futures, swaps and floating-rate debt. Since they are available now, are consistently calculated across different time periods and are published by the official sector, these Averages are an attractive and reliable tool for borrowers to use during the last leg of the LIBOR transition.

How the Averages are Calculated:

  • The 30-, 90-, and 180-day SOFR Averages are compounded daily on each business day.
  • On non-business days, simple interest at an interest rate equal to the SOFR value for the preceding business day applies.
  • Interest is calculated using the actual number of calendar days based upon a 360-day year.
  • SOFR Averages for a given date incorporate all SOFR values starting exactly 30, 90, and 180 calendar days before the publication date, regardless of whether such date is a weekend or holiday and extend through SOFR published that day.

SOFR Averages are Particularly Useful for Market Participants Looking for:

  • a rate for a 30-, 90- and/or 180-day term product;
  • a rate known in advance to apply to the relevant product up front;
  • a publicly available rate produced by the official sector that is transparent to all market participants; and
  • a rate that is robust and reliable, based on thousands of transactions.

How to Use New York Fed-Published SOFR Averages

To meet market participants’ needs and to help inform their LIBOR transition plans, the Guide describes the various ways in which SOFR Averages can be used in either an “in advance” or “in arrears” structure. In addition, the Guide also touches upon the applicability of using these Averages now for financial products such as student loans, intercompany loans, business loans and securitizations.[3]

Know Your Reference Rate

Market participants are encouraged to “know” the reference rates that they choose as an alternative to LIBOR in order to avoid finding themselves in a position where they will have to go through a costly and risky transition again. More specifically, the Guide stresses the importance of “knowing” SOFR as a reference rate, and why it is recommended by the ARRC as the most robust replacement for LIBOR.

As a best practice, the Guide also states that market participants should:

  • Understand the construction and vulnerabilities of any financial benchmark they use;
  • Consider the degree to which such benchmarks adhere to the IOSCO Principles;[4] and
  • Evaluate the appropriateness of such benchmarks for their use.

Next Steps

As the LIBOR transition continues, it is increasingly important for market participants to understand the ARRC recommended fallback rates. The ARRC’s Guide helps market participants better understand the calculations to determine and the uses for the SOFR Averages published by the New York Fed. Nonfinancial corporates, in particular, may also want to consult our guide on “How to Best Navigate the LIBOR Transition.

脚注

[1] ARRC, Alternative Reference Rates Committee Guide to Published SOFR Averages (May 11, 2021).
[2] ARRC, An Updated User’s Guide to SOFR (February 2021).
[3] Id.
[4] International Organization of Securities Commissions, Principles for Financial Benchmarks (July 2013).

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