ARRC Formally Recommends Term SOFR
As expected, on July 28, 2021, the Alternative Reference Rates Committee (ARRC) formally recommended the CME’s SOFR Term Rate. The SOFR Term Rate is known in advance of the related interest period and provides an indicative, forward-looking measurement of SOFR based on market expectations implied from leading derivatives markets. In this respect, the SOFR Term Rate functions in a manner similar to today’s LIBOR rates. In contrast, the Daily Simple SOFR or Daily Compounded SOFR used for interest periods beyond overnight can only be determined in arrears. The SOFR Term Rate thus facilitates in a significant way the transition away from the current LIBOR markets.
The ARRC’s recommendation of the SOFR Term Rate for derivatives is limited to end-user facing derivatives intended to hedge cash products referencing the SOFR Term Rate. The ARRC does not support the use of the SOFR Term Rate for the “vast majority” of the derivatives market.