ARRC Seeks Feedback on Spread Adjustment Methodologies for Libor Transition

To help minimize any expected changes in the value of financial contracts that might result from a sudden reference rate shift, the Alternative Reference Rates Committee today sought public feedback on methodologies for calculating spread adjustments on financial products that reference the London Interbank Offered Rate.

These adjustments are designed for financial institutions to use in contracts that incorporate the ARRC’s recommended fallback language or for other contracts where a spread-adjusted Secured Overnight Financing Rate, the ARRC’s preferred Libor replacement, can be selected as a fallback. Specifically, the ARRC outlined a static spread adjustment to be implemented at a specific time when or before Libor ceases that would make the spread-adjusted version of SOFR comparable to U.S. dollar Libor.

The ARRC consultation covers its parameter choices for spread adjustments, and it includes analysis of spread methodologies for a variety of cash products for which it has already issued draft fallback language, including floating-rate notes, securitizations, business loans and consumer products. Feedback on the consultation is due by March 6.

The ARRC—a group of market participants, including ABA, that was convened by the Fed—continues to develop resources to assist financial institutions with the transition to SOFR from Libor, which is not guaranteed to be sustained beyond 2021.