ARRC Recommends Best Practices for Completing LIBOR Transition
On May 27, 2020, the Alternative Reference Rates Committee (“ARRC”) published its recommended best practices with respect to the transition from U.S. dollar (“USD”) LIBOR to the ARRC’s recommended alternative risk-free rate, the Secured Overnight Financing Rate (“SOFR”).
The ARRC’s recommended key best practices are as follows:
To the extent not already utilized, new USD LIBOR cash products should include ARRC-recommended, or substantially similar, fallback language as soon as possible, but in no event later than the deadlines specified by the ARRC for each product.
Relevant third-party technology and operations vendors should complete all necessary enhancements to support SOFR by the end of 2020.
New use of USD LIBOR should stop by the following deadlines for products with maturities after December 31, 2021:
for floating-rate notes (excluding securitizations) – December 31, 2020;
for business loans (including renewals and refinancings) – June 30, 2021;
for closed-end residential mortgages – September 30, 2020;
for securitizations (other than collateralized loan obligations) – June 30, 2021, and for collateralized loan obligations (both corporate and commercial real estate) – September 30, 2021; and
for derivatives that increase LIBOR risk (unless such trades are for risk or default management of legacy LIBOR positions) – June 30, 2021.
For contracts specifying that one or more parties will select a replacement rate at their discretion following a LIBOR transition event (e.g., an announcement that LIBOR is no longer representative or the permanent cessation of LIBOR), the determining party (or parties) should disclose their planned selection at least six months prior to the date that the replacement rate would become effective.
With only 19 months left until LIBOR becomes unusable and with current outstanding contracts referencing USD LIBOR, including floating-rate notes, adjustable-rate mortgages, bilateral and syndicated corporate loans, securitized products, and derivatives products, totaling an estimated $200 trillion,