Following on our post discussing the ARRC’s recommendations outlining a spread adjusting procedure, we mentioned that the ARRC planned to release a more detailed final recommendation of the spread adjustment methodology for cash products. On May 6, 2020, the ARRC released a supplemental consultation seeking further views on certain technical questions for the spread adjustment methodologies for USD LIBOR cash products. In April 2020, the ARRC had agreed on a spread adjustment methodology based on an historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR. Nevertheless, the ARRC has determined that it could be useful to consider another potential option for calculating the five-year median spread. Market participants are requested to submit responses to the consultation no later than June 8, 2020. Thereafter, the ARRC plans to review these responses and release a final recommendation with respect to the spread adjustment methodology for cash products.
Additionally, the ARRC issued guidance on how to use the SOFR Index published daily by the Federal Reserve Bank of New York in practice. Specifically, the advice relates to Floating Rate Notes (“FRN”). The guidance states that by allowing market participants to more easily calculate payment amounts, the SOFR Index will streamline documentation, diminish operational risk and simplify system development. They advise that the SOFR Index can only be used by FRNs that use a lookback with a backward-shifted observation period. To encourage use of the SOFR Index, the guidance includes sample key definitions and provisions of an FRN referencing SOFR, as well as a section with fallback contract provisions.
Norton Rose Fulbright has assembled a group of its attorneys from around the globe to stay on top of these issues and assist clients in the transition to new reference rates. More information can be found here.
* Special thanks to Mary Kate LeViness for her assistance in preparing this post