ARRC approves best practices document for Term SOFR use

The Alternative Reference Rates Committee has approved a document containing best practice recommendations for using the CME Group’s Term SOFR rates, which the ARRC endorsed in 2021. The ARRC recommended that use of these rates “be limited to certain particular areas,” including as a fallback rate for legacy Libor cash products, for new use in business loans and certain securitizations, and for use in derivatives only if issued to end-users to hedge cash products that reference the Term SOFR rate. The document provides details and examples of these use cases.

The committee noted that its “recommended scope of use promotes a more stable financial system and will help to ensure that market participants do not again create a situation in which interest rate benchmarks are used in ways that are ultimately unstable,” and that its best practice recommendations “are meant to apply as permanent recommendations for the market.”