ARRC Outlines Approach for Using SOFR in New Issuances of Securitized Products

With the publication of all tenors of London Interbank Offered Rate set to cease after June 30, 2023, the Alternative Reference Rates Committee today outlined a model for using the Secured Overnight Financing Rate—the ARRC’s preferred Libor alternative—in asset-backed securities products, including non-collateralized loan obligation asset-backed securities, mortgage-backed securities and commercial mortgage-backed securities products.

In a white paper, the ARRC outlines how new issuance of ABS products could use 30-day average SOFR, with a monthly reset, set in advance of the interest accrual period. This methodology—which was developed by the ARRC’s Securitization Working Group—uses the actual SOFR rates from the 30-day period before the applicable reset date, which the ARRC determined to be preferable to the alternatives for operational ease.

“The SWG believes that the use of 30-day average SOFR aligns well with current market practices and will meet market participants’ expectations for a vibrant and well-functioning market for the foreseeable future,” the ARRC said. The paper also noted that “although this paper sets forth one option for how ABS, MBS, and CMBS products could use 30-day average SOFR, market participants may select appropriate adjustments to the methodologies described herein in connection with any particular ABS issuance based on the unique attributes of the collateral backing the applicable securitization as well as the desired terms of the related securities.”

The paper does not address how asset-backed securities products could use SOFR set in arrears, nor does it include considerations for how new issuance of corporate CLOs could use SOFR.