ARRC issues recommendations for contracts linked to USD Libor ICE swap rate

The Alternative Reference Rates Committee today issued recommendations for contracts linked to U.S. dollar Libor Intercontinental Exchange Swap Rates. These recommendations include a suggested fallback formula that can be used for USD Libor ISR fixings after three-month USD Libor has been discontinued or becomes non-representative. The ARRC noted that these contracts “are not covered by federal [Libor] legislation and . . . counterparties may need to take proactive steps to address the end of USD [Libor] ISR.”

Specifically, the ARRC recommended that market participants inventory their contracts, identify the existing fallback provisions, and, where necessary, take proactive steps to address the Libor cessation by: converting these positions to their SOFR or SOFR ISR equivalent; incorporating hardwired fallbacks consistent with the approach suggested by the ARRC and included in the prevailing version of the International Swaps and Derivatives Association definitions; or considering calling or buying back debt instruments with problematic fallback provisions.

If a legacy position cannot be proactively converted or amended, “the ARRC believes that, once three-month USD LIBOR has ceased to be published as a representative rate, the fallback formula suggested would accurately represent the at-the-money rates of standard interest rate swaps which are tied to it and which incorporate the fallback provisions introduced in the ISDA 2020 IBOR Fallbacks Protocol,” the committee noted. “As a result, if the contractual fallbacks involve calculation agent determination, the ARRC recommends that calculation agents consider the ARRC’s suggested fallback formula in determining a successor rate.”