Apr 24, 2020
On April 17, 2020, the Alternative Reference Rates Committee (ARRC) unveiled its 2020 objectives for facilitating the industry’s transition away from U.S. dollar (USD) LIBOR to the Secured Overnight Financing Rate (SOFR). These goals and projected timelines build on the ARRC’s previous transitioning work and aim to account for both the impact of COVID-19 on financial markets and the expectation that LIBOR still will be discontinued at the end of 2021.
The ARRC is the Federal Reserve’s LIBOR-transition working group comprised of private-sector entities and industry regulators. Among other things, the ARRC has (1) recommended SOFR plus a spread adjustment to replace USD LIBOR and to operate as a fallback; (2) released a transition plan promoting the use of SOFR voluntarily; and (3) conducted numerous market-wide consultations to determine how best to implement SOFR-based fallback language into existing (“legacy”) LIBOR-based financial contracts. The ARRC also has proposed a New York law to legislatively incorporate its recommended fallback language into legacy contracts.
In response to the COVID-19 pandemic and a March 25, 2020 U.K. Financial Conduct Authority (FCA) statement confirming that LIBOR probably still will not be published after 2021, the ARRC developed a set of objectives to help market participants meet transition goals. The ARRC’s six core objectives are:
These objectives and their target achievement dates are outlined in more detail below.
1. Supporting SOFR Use & Liquidity
By July 31, 2020, the ARRC intends to finalize recommended conventions for SOFR-based floating rate notes, business loans and securitizations.
By September 30, 2020, the ARRC intends (1) to establish an RFP process for selecting an administrator of an ARRC-recommended forward-looking term SOFR, and (2) to define the recommended scope of the rate’s use. This forward-looking rate would be published in the first half of 2021 if there is sufficient liquidity in SOFR-based derivatives markets at that time.
On an ongoing basis, the ARRC will (1) work with market participants and central clearing organizations to facilitate the use of SOFR PAI and discounting for USD interest rate derivatives; (2) recommend voluntary options for conventions on the exchange of compensation for legacy swaptions or discounting of new swaptions; and (3) explore methods for transitioning legacy derivative positions from USD LIBOR to SOFR before 2021.
2. Market Infrastructure & Operations
On an ongoing basis, the ARRC will (1) create tools for market participants in making operational and infrastructure changes while preparing to transition from USD LIBOR; and (2) minimize disruption by proposing industry timelines, checklists, market conventions and other actions to address specific implementation issues.
3. Contractual Fallbacks
By June 30, 2020, the ARRC plans to publish revisions to its hardwired fallback language, including a more permissive early opt-in trigger, recommended conventions and supporting materials for business loans.
By September 30, 2020, the ARRC intends to (1) establish an RFP process for selecting an administrator to publish the ARRC-recommended spread adjustments and spread-adjusted rates, and (2) finalize technical details relating to those spread adjustments.
4. Consumer Products
By June 30, 2020, the ARRC plans to publish (1) recommended fallback language for new student loans referencing LIBOR and (2) conventions for new student loans referencing SOFR.
By September 30, 2020, the ARRC intends to develop resource guides recommending action that supports efforts to create clear and effective programs for consumer education materials and outreach.
5. Legal, Tax, Accounting & Regulatory Clarity
On an ongoing basis, the ARRC will continue pursuing legislative solutions for legacy contracts that are difficult to amend or do not have economically appropriate fallback procedures. The ARRC also will collaborate with tax, regulatory and self-regulatory organizations to globally coordinate and finalize measures addressing the USD LIBOR transition (e.g., the removal of unintended transition impediments).
6. Outreach, Education & Global Coordination
On an ongoing basis, the ARRC will promote comprehensive outreach and education programs to facilitate the industry’s participation in both the USD LIBOR transition and the ARRC’s efforts to ease it.
Next Steps & Conclusion
To ensure market readiness for the USD LIBOR transition, the ARRC will circulate best-practices guidance for achieving these objectives in the coming weeks. Although the ARRC recognizes that its near-term goals may not be feasible because of the current economic environment, it continues to emphasize that market participants should be working to transition away from USD LIBOR.
 ARRC 2020 Objectives for the LIBOR Transition, April 17, 2020; ARRC Press Release on 2020 Objectives, April 17, 2020.
 ARRC LIBOR Paced Transition Plan.
 ARRC Executive Summary of Proposed Legislative Solution to LIBOR Transition, March 6, 2020. For a detailed analysis of the ARRC’s legislative proposal, see our previous report: ARRC Releases NY Law Proposal to Amend Transactions Referencing USD LIBOR, April 1, 2020.
 FCA Statement that LIBOR Discontinuation Timeline Remains Unaffected by COVID-19, March 25, 2020.
 For the preliminary results of the ARRC’s consultation on recommended spread-adjustment methodologies, see ARRC Spread Adjustment Methodology Press Release, April 8, 2020.