The group that spearheaded the transition to an alternative reference rate from the long-used, but now defunct, LIBOR declared itself Thursday over and out as an organization – but not before issuing a final report.
The Alternative Reference Rate Committee (ARRC) said its final report highlights key areas that the it believes “firms should focus on going forward to preserve the robust system of reference rates achieved through the decade-long transition effort.”
The ARRC is made up of a group of private-market participants; it was convened by the Federal Reserve Board and Federal Reserve Bank of New York in 2014 to identify risk-free alternative reference rates for USD LIBOR, which became completely defunct in June. The group developed the Secured Overnight Financing Rate (SOFR), which it ultimately recommended for use in certain new USD derivatives and other financial contracts, and as a replacement for LIBOR.
According to the group, the report highlights three areas for firms to “continuously prioritize:”
- Active review of any reference rates that firms may consider using;
- Appropriate fallback language for any contractual use of reference rates; and,
- Maintaining an appropriate balance between use of SOFR and Term SOFR.
“As noted in the Closing Report, the ARRC emphasizes that market participants should seek to avoid the mistakes that were made with LIBOR and consider their exposures to reference rate benchmarks in the same way that they consider other material sources of risk,” the group said in issuing the report.