The Alternative Reference Rates Committee today issued “A User’s Guide to SOFR,” a handbook to help market participants understand the Secured Overnight Financing Rate, its preferred alternative to the London Interbank Offered Rate, and how it can be used in cash products.
In addition to outlining key differences between SOFR and Libor, the guide covers how financial products can use an overnight rate like SOFR. It addresses questions of using a simple or compound average of SOFR and using an “in advance” or an “in arrears” timeframe for averaging SOFR. It also explains the interaction between SOFR and the type of forward-looking term rates intended to be developed once SOFR’s derivative markets achieve sufficient depth.
With Libor guaranteed to be sustained only through 2021, the ARRC is currently developing fallback language for bilateral business loans, securitizations, syndicated business loans and floating-rate notes that reference Libor. As an ARRC member, ABA is supporting the transition efforts. For more information, contact ABA’s Hu Benton.
