Thursday, August 05, 2021

Alternative Reference Rates Committee formally recommends CME’s forward-looking SOFR term rates

By Lene Powell, J.D.

At five months before the slated end of the LIBOR benchmark rate, the Alternative Reference Rates Committee (ARRC) announced it is formally recommending CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates (SOFR Term Rates). The move marks a significant milestone in the transition away from the use of LIBOR.

The formal recommendation follows the ARRC’s July 21 announcement of conventions and recommended best practices for the use of the SOFR Term Rates, which market participants can use in legacy fallbacks and new contracts to prepare for the end of LIBOR.

ARRC also released a fact sheet about the use of SOFR Term Rates. The group consists of private-market participants convened by the Federal Reserve Board and Reserve Bank of New York in cooperation with major financial regulators.

"This concludes the ARRC’s Paced Transition Plan and market participants now have all the tools they need as we enter the transition’s homestretch," said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley. "With just five months until no new LIBOR, significant work remains and I urge everyone with LIBOR exposures to immediately take action and base their new contracts on forms of SOFR."

CME Group issued a statement welcoming the announcement, noting that more than 600 participants are now globally trading CME SOFR futures, with 118,000 SOFR futures contracts traded on average each day during Q2 2021.

"The ARRC's formal recommendation of CME Term SOFR Reference Rates is an important milestone for the industry and the continued development of the broader SOFR ecosystem," said Sean Tully, CME Group Global Head of Financial and OTC Products. "Today's decision provides the market with greater clarity and ensures CME Term SOFR Reference Rates are widely available for use alongside other forms of SOFR. We look forward to continued collaboration with the ARRC and market participants."