ARRC Recommends Five-Year Lookback for Cash Product Spread Adjustment Methodology

The Alternative Reference Rates Committee today recommended a spread adjustment methodology for cash products referencing the London Interbank Offered Rate. The ARRC’s initial recommendation—aligned with a recommended methodology for derivatives—is a methodology based on a median over a five-year lookback period calculating the difference between U.S. dollar Libor and the Secured Overnight Financing Rate, the ARRC’s preferred Libor alternative.

Meanwhile, for consumer financial products, the ARRC also recommended a one-year transition period for the spread adjustment methodology. The ARRC said it would release more details on its methodology for cash products in the coming weeks.

The recommendation is part of the ARRC’s efforts to minimize any expected changes in the value of financial contracts that might result from a sudden reference rate shift. The ARRC—a group of market participants, including the American Bankers Association, 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.