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.”