The future dominant reference rate of the loan market: will there be one rate to rule them all? | Moore & Van Allen SARL
On July 29, 2021, the Federal Reserve’s Alternative Reference Rates Committee (“ARRC”) formally announced and recommended1 CME Group’s Forward-Looking Guaranteed Overnight Funding Rate (“Term SOFR”) rates2. Conventions3 and Scope of Use Cases4, as well as a subsequently published Best Practices FAQ5. provides that the initial fallback rate is a forward-looking forward rate based on SOFR (provided a rate has been recommended in the appropriate term). This announcement provides such a recommendation, crystallizing the result that loans that include the fallback language recommended by the ARRC should switch from LIBOR to a forward SOFR rate with the same duration.
Another critical step in the transition from LIBOR 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 hedge treasury products that reference to the 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 treasury product, or a portfolio of such exposures.
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