Investment Operations

ARRC Announces Best Practices for Completing Transition From LIBOR

Provides Date-Based Guidance, Including When No New LIBOR Activity Should Be Conducted

The Alternative Reference Rates Committee, a group of private-market participants convened by the Federal Reserve Board and Federal Reserve Bank of New York, has published recommended best practices to assist market participants as they prepare for the cessation of U.S. dollar (USD) LIBOR.

According to an AARC statement, particularly in the current context of market uncertainty, the recommended best practices are intended to clarify the timelines and interim milestones that the ARRC believes are appropriate for transitioning away from USD LIBOR in a way that will minimize market disruption and support a smooth transition through the broad voluntary adoption of the Secured Overnight Financing Rate (SOFR), the ARRC’s recommended alternative reference rate. In conjunction with this, the ARRC also updated its graphical timeline of key transition dates.

With 19 months remaining until LIBOR could become unusable, the ARRC’s best practices outline datebased guidance on near-term transition steps that market participants should aim to take across floating rate notes, business loans, consumer loans, securitizations, and derivatives. These best practices include dates after which no new LIBOR activity should be conducted.

“As evidenced by this set of best practices and recommended transition milestones, it is critical that market participants continue to make progress on executing a complete transition away from LIBOR by the end of 2021, which remains the target date that all participants should aim to meet,” said Tom Wipf, ARRC Chair and Vice Chairman of Institutional Securities at Morgan Stanley. “These best practices build on the ARRC’s 2020 objectives and are designed to support all market participants in meaningful and practical ways as they prepare for this fundamental change in the global market infrastructure.”

These milestones, as well as the internal planning recommendations that the ARRC suggests for all relevant organizations, are grounded in the ARRC’s core guidance for preparing for the transition:

  1. To the extent not already utilized, new USD LIBOR cash products should include ARRCrecommended, or substantially similar, fallback language as soon as possible.
  2. As previously announced, third-party technology and operations vendors relevant to the transition should complete all necessary enhancements to support SOFR by the end of this year.
  3. New use of USD LIBOR should stop, with timing depending on specific circumstances in each cash product market.
  4. 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’s complete best practices are available here.