On 29 July 2021, the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York in 2014 to lead the LIBOR transition in the United States, announced its decision formally to recommend CME Group’s forward-looking Secured Overnight Financing rate (SOFR) and term rates (SOFR Term Rates).

As regards the recommended use case scenarios for SOFR Term Rates, the ARRC announced in July that it:

(a) 

supports the use of SOFR Term Rates for business loan activities given adapting to an overnight rate could be more difficult for the loan market; 

(b) 

does not support the use of SOFR Term Rates for the vast majority of the derivatives markets, except for end users to hedge cash products using the SOFR Term Rates; and 

(c) 

continues to recommend using other forms of overnight and averages of SOFR where possible.

The recent announcements by the ARRC represent a major step towards market preparedness for transitioning away from LIBOR settings (all but 1-month, 3-month, 6-month and 12-month USD Libor) by 31 December 2021.

For more details on the formal recommendation of SOFR Term Rates by the ARRC, please see here.