As required by state laws passed in New York and Alabama, the Alternative Reference Rates Committee published a statement today selecting and recommending forms of the Secured Overnight Financing Rate—its preferred alternative to Libor—along with associated spread adjustments and conforming changes, to replace references to 1-week and 2-month U.S. dollar Libor in certain contracts affected by the state laws. Those tenors of Libor are scheduled to sunset on Dec. 31, 2021. The ARRC also published a set of frequently asked questions on the application of the New York state law.
The ARRC’s recommendations apply only to the relatively narrow set of Libor-based contracts for those tenors and that are affected by those states’ laws. For contracts with fallbacks that give a party (such as the lender or noteholder) discretion to choose a replacement rate, the state laws also provide a safe-harbor if that party chooses the SOFR-based rate and conforming changes recommended by the ARRC. The ARRC’s recommendation lays out an approach for a breadth of products, including asset-backed securities, business loans, consumer products, floating rate notes, and more.