The Future Lending Market Dominant Benchmark Rate: Will There Be One Rate That Governs Them All? | Moore & Van Allen SARL

On July 29, 2021, the Federal Reserve’s Alternative Reference Rates Committee (“ARRC”) formally announced and recommended1 the forward-looking rates for the CME Group Guaranteed Overnight Term Finance Rate (“Term SOFR”). 2 Conventions3 and Scope of Use Cases, 4 and a later published FAQ on best practices. 5 As the ARRC noted in its Scope of Use Cases, an important element of this announcement concerns the preferred fallback language of ARRC for bilateral and syndicated loans, which provides that the initial cutback rate is a forward rate based on the prospective SOFR (provided that a rate has been recommended in the appropriate tenor). This announcement provides such a recommendation, crystallizing the result that loans that include the fallback language recommended by the ARRC should move from LIBOR to SOFR forward rate with the same duration.

Another crucial step in the LIBOR transition is that the ARRC has also approved the use of the term SOFR for derivatives markets in the limited case of end-user derivatives intended to cover cash products that are reference to SOFR forward rate.6 Here, the ARRC has recommended the use of SOFR forward swaps, caps, swaptions and similar derivatives to hedge exposure to a single loan or other cash product, or to a portfolio of such exhibitions.

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