On May, 27, the Alternate Reference Rate Committee (ARRC) that works under the auspices of the Federal Reserve Bank of New York issued a set of “Best Practices for Completing Transition Away from LIBOR.” The Best Practices reinforce the ARRC’s position that markets should cease using the London Inter-bank Offered Rate (LIBOR) as a reference rate in financial transactions well before the December 31, 2021 end date identified by UK regulators by providing specific dates by which specific products should be LIBOR-free.
The key best practices identified by the ARRC are:
To the extent not already utilized, new USD LIBOR cash products should include ARRC-recommended, or substantially similar, fallback language as soon as possible.
As previously announced, third-party technology and operations vendors relevant to the transition should complete all necessary enhancements to support the Secured Overnight Financing Rate (SOFR) by the end of this year.
New use of USD LIBOR should stop, with timing depending on specific circumstances in each cash product market. Specifically, the ARRC recommends that LIBOR not be used in floating rate notes issues after December 31, 2020, and not be used in derivatives after June 30, 2021.
For contracts specifying that a party will select a replacement rate at their discretion following a LIBOR transition event, the determining party should disclose their planned selection to relevant parties at least six months prior to the date that a replacement rate would become effective.
The ARRC materials make no mention of market issues such as the concern that some financial structures will not remain viable without the introduction of forward-looking risk-free rates.
The ARRC press release is available here.
The ARRC Best Practices are available here.
A summary of the Best Practices are available here.
A graphical time line of LIBOR transition is available here.