Client Alert

ARRC Publishes the SOFR Starter Kit: An Up-to-Date Summary of the Transition Away from USD LIBOR

August 26, 2020

By Joyce Sophia Xu, Michael Spafford, Diona N. Park, Daren Stanaway & Matthew Smith

On August 7, 2020, the Alternative Reference Rates Committee (“ARRC”) published the SOFR Starter Kit, a set of three factsheets that provide market participants with a helpful summary of the transition away from U.S. dollar (“USD”) LIBOR to the ARRC’s recommended alternative reference rate, the Secured Overnight Financing Rate (“SOFR”).[1] The three factsheets include:

  1. History and Background,[2] which explains the background information on the LIBOR transition and the ARRC’s selection of SOFR as its preferred replacement rate, including:

  2. The scarcity of underlying transactions called into question the sustainability of LIBOR (a short-term wholesale unsecured rate), and the Financial Conduct Authority stated that firms could not rely on LIBOR being published after the end of 2021.

  3. In 2017, the ARRC identified SOFR as the preferred alternative to USD LIBOR based on its benchmark quality, methodological quality, accountability, governance structure, and ease of implementation.

  4. Key Facts About SOFR,[3] which summarizes key facts and figures relating to SOFR and common misconceptions about the alternative reference rate:

  5. SOFR is a secured overnight rate, reflecting actual transactions in the Treasury repo market produced in compliance with international best practices and is suitable for use across a broad range of financial products.

  6. Averages of SOFR rates are relatively stable and are suitable for use by various institutions across all types of products. Transition to SOFR should not be delayed by waiting for a SOFR term-rate or the challenges due to the COVID-19 pandemic.

  7. SOFR Next Steps,[4] which provides the ARRC’s recommendations for best practices for meeting the recommended milestones for transitioning to SOFR, incorporating LIBOR fallback language by product type, and the next steps market participants should take, as well as a list of helpful tools published by the ARRC to assist market participants with the LIBOR transition.

Publication of the SOFR Starter Kit follows the conclusion of the ARRC’s SOFR Summer Series, a collection of six panel discussions aimed at educating market participants about the transition to SOFR. Both the SOFR Starter Kit and the SOFR Summer Series are part of the ARRC’s continued efforts to ensure that the market is ready for the USD LIBOR-to-SOFR transition as LIBOR’s anticipated cessation at the end of 2021 quickly approaches. As noted by ARRC Chairman Tom Wipf, “[t]ransition efforts have been underway for many years now, and this change has far-reaching impacts. The SOFR Starter Kit aims to help anyone impacted by the transition quickly familiarize themselves with the history and core issues involved in transitioning.”[5]

[1]    “ARRC Releases the SOFR Starter Kit,” available here [hereinafter, “Press Release”].

[2]    “Alternative Reference Rates Committee: SOFR Starter Kit Part I,” available here.

[3]  “Alternative Reference Rates Committee: SOFR Starter Kit Part II,” available here.

[4]   “Alternative Reference Rates Committee: SOFR Starter Kit Part III,” available here.

[5]    See Press Release.

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