FAQs attempt to explain term rate best practices for LIBOR alternative

Frequently asked questions (FAQs) about an alternative reference rate to LIBOR – especially best practices related to the use of a term rate for the alternative – were issued Friday by a Federal Reserve-sponsored group.

The Alternative Reference Rate Committee (ARRC) said its FAQs addressed recommendations related to the Secure Overnight Financing Rate (SOFR), which the group developed in response to the demise of LIBOR (the London Interbank Offered Rate), which is scheduled to be discontinued for use at the end of this year. (Existing contracts may continue to the use rate until June 30, 2023.)

According to the ARRC – which is sponsored by the Fed and the Federal Reserve Bank of New York – the FAQs address general questions about the scope of use of the term rate, including why the recommendations were made, and more specific questions, such as the use of the SOFR term rate in end-user facing derivatives.

Under the FAQ of “why did ARRC publish recommendations related to the scope of the SOFR term rate,” the group writes that it “continues to recommend SOFR for all products, and as a general principle, recommends that market participants use overnight SOFR and SOFR averages given their robustness, particularly in markets where we have seen that there can be successful adoption of these rates.”

However, the group stated, the ARRC also recognizes that there could be certain conditions where adapting to an overnight rate “could be more difficult and it thus developed its recommendations for the use of the SOFR Term Rate.”

ARRC Releases Frequently Asked Questions on Best Practice Recommendations Related to Scope of Use of the Term Rate