ARRC Announces Spread Adjustment Methodologies, Issues New Fallback Language

The Alternative Reference Rates Committee today outlined how it will implement its methodologies for calculating spread adjustments on financial products that reference the London Interbank Offered Rate. These adjustment methodologies 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 for Libor.

Based on public feedback and in order to maintain consistency, the ARRC noted that it would largely align its practices with those used by the International Swaps and Derivatives Association. For cash products other than consumer products, the ARRC said it would match its recommended spread adjustment methodology to that of ISDA’s spread adjustments to U.S. dollar Libor. Given the special considerations due to consumer products and the fact that the ARRC will include a one-year transition period as part of its recommended spread adjustments for consumer products, the ARRC said it would also consider the most appropriate approach to the issue of methodology versus value for these specific products.

In its latest announcement, the ARRC also said that, for all cash products, in the event that a pre-cessation event is operative, the ARRC’s recommended five-year historical median spread adjustments will be determined at the same time as the ISDA’s spread adjustments. These determinations will be made at the time of any announcement that Libor has been or will be ceased or become no longer representative.

Separately, the ARRC today also released updated recommended contractual fallback language for syndicated business loans, contractual fallback language for new variable rate private student loans and conventions for how market participants can voluntarily use SOFR in new student loan products.