On April 8th, 2020, the Alternative Reference Rates Committee (ARRC) agreed on a recommendation for spread adjustment methodology for cash products referencing U.S. Dollar (USD) LIBOR.1 The ARRC made this recommendation after conducting a public consultation, during which more than 60 responses were received from participants across the financial services industry, including consumer advocacy groups, asset managers, corporates, banks, industry groups and government entities, among others.2
What this means
The spread adjustment methodology the ARRC is recommending is based on a historical median over a five- year lookback period calculating the difference between USD LIBOR and the Secured Overnight Financing Rate (SOFR).3 This spread adjustment methodology is aligned with the recommendation from the International Swaps and Derivatives Association (ISDA) for derivatives and would make the spread adjusted version of SOFR equivalent to USD LIBOR, and compatible with ISDA’s fallbacks for derivatives markets.4
Furthermore, the ARRC is recommending a one-year transition period to this methodology for consumer products, which was supported by many respondents to the public comments, including consumer advocacy groups.5
The ARRC’s recommended methodology is for market participants’ voluntary use, however Tom Wipf, ARRC chair, stated, “This announcement of a recommended spread adjustment methodology provides important clarity that should encourage those who have not already done so to begin using the ARRC’s fallback language,”6 and “The ARRC believes that the use of hardwired language that clearly sets out the replacement for LIBOR is best practice and I urge everyone to use ARRC’s recommended fallback language in their contracts now.”7
In the near future the ARRC is expected to release a final recommendation concerning the spread adjustment methodology for cash products and has committed to making sure these spreads and spread adjusted rates are made publicly available.8
- “ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products,” Alternative Reference Rates Committee, April 8, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Methodology.pdf
Newsletter Contact Person: Venetia Woo
This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.
Accenture is a leading global professional services company, providing a broad range of services in strategy and consulting, interactive, technology and operations, with digital capabilities across all of these services. We combine unmatched experience and specialized capabilities across more than 40 industries—powered by the world’s largest network of Advanced Technology and Intelligent Operations centers. With 509,000 people serving clients in more than 120 countries, Accenture brings continuous innovation to help clients improve their performance and create lasting value across their enterprises. Visit us at: https://www.accenture.com/us-en
Copyright © 2020 Accenture. All rights reserved.
Accenture, its logo, and New Applied Now are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances.
If you require advice or further details on any matters referred to, please contact your Accenture representative.