On August 7th, 2020, the Alternative Reference Rates Committee (ARRC) released its “SOFR Starter Kit,” being a set of informational factsheets to inform the public about the transition from USD LIBOR to the Secured Overnight Funding Rate (SOFR).1 The SOFR Starter Kit includes History and Background, Key Facts about SOFR, and SOFR Next Steps, and aims to encourage market readiness for the transition to SOFR as the 2021 deadline for the cessation of LIBOR approaches.2
What this means
These factsheets are a conclusion of the ARRC’s Summer Series, a selection of educational panel discussions with individuals of various ARRC member firms, to inform industry professionals, the media and the general public on the replacement of LIBOR by SOFR.3
- History and Background:4
This section outlines the history of LIBOR, the reasons for its replacement, its lack of sustainability, and the reaffirmation of the 2021 timeline for its cessation by the Financial Conduct Authority (FCA) in the United Kingdom. It details the ARRC’s criteria to select alternative rates, the evaluation and consultation process, and the ultimate selection of SOFR. It emphasizes that SOFR is produced daily by the New York Fed and is based on a deep active market with a diverse set of lenders, and is not at risk of being discontinued due to any scarcity of underlying transactions.
- Key Facts About SOFR:5
In this section, the ARRC identifies why SOFR was selected as the preferred alternative to LIBOR as it is a true representation of overnight cash borrowing and is collateralized by U.S. Treasury securities in the repurchase (Repo) market. The fact sheet emphasizes that there is a wide range of financial market participants directly involved in the Treasury Repo market, including banks, broker dealers, asset managers, corporate treasurers, insurance companies, money market funds and others to provide sufficient liquidity.
- SOFR Next Steps:6
This section leverages the recently published ARRC Recommended Best Practices which outline recommended milestones for transitioning multiple products, such as mortgages, student loans, consumer loans, securitizations and derivatives, among others, away from USD LIBOR. The factsheet also emphasizes the use of ARRC recommended fallback language, making sure vendors have completed all necessary product enhancements to support SOFR, and deadlines for issuing new LIBOR benchmarked products.
Tom Wipf, ARRC chair stated, “Transition efforts have been underway for many years now, and this change has far reaching impacts. The SOFR Starter Kit aims to help anyone impacted by the transition quickly familiarize themselves with the history and core issues involved in transitioning.”7
- “ARRC Release the SOFR Starter Kit – Factsheet Series Provides Key Information on Transition to SOFR,” Alternative Reference Rates Committee, August 7, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_SOFR_Starter_Kit.pdf.
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