US ARRC Formally Recommends Term SOFR

In a move it says marks the final step in its transition plan, the Alternative Reference Rates Committee (ARRC) is now formally recommending CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates to complete the transition from Libor.

The statement follows the completion of a key change in interdealer trading conventions on July 26, 2021 under the SOFR First initiative. ARRC says the successful convention change, along with the continued growth in SOFR cash and derivatives markets, has allowed it to recommend SOFR Term Rates, consistent with the principles and indicators it established to do so.

“This formal recommendation of SOFR Term Rates is an achievement for the USD Libor transition specifically and for financial stability overall. This concludes the ARRC’s Paced Transition Plan and market participants now have all the tools they need as we enter the transition’s homestretch,” says Tom Wipf, ARRC chairman and vice chairman of institutional securities at Morgan Stanley. “With just five months until no new Libor, significant work remains and I urge everyone with Libor exposures to immediately take action and base their new contracts on forms of SOFR.”

Randal Quarles, vice chair for supervision of the Federal Reserve Board and chair of the Financial Stability Board, adds, “With this step, market participants now have every tool they need to transition from Libor. All firms should be moving quickly to meet our supervisory guidance advising them to end new use of Libor this year.”

The formal recommendation follows the ARRC’s July 21 announcement of conventions and recommended best practices for the use of the SOFR Term Rates. Market participants can now employ these materials when using the SOFR Term Rates in legacy fallbacks and new contracts to prepare for Libor’s end.

In conjunction with this development, the ARRC also released a factsheet outlining key steps leading to this point, SOFR’s strengths, and upcoming milestones.

“We are seeing great momentum in the transition toward SOFR and today’s recommendation will undoubtedly accelerate that progress,” says John Williams, president of the Federal Reserve Bank of New York and co-chair of the Financial Stability Board’s Official Sector Steering Group. “Keep in mind: the end of 2021 and of new Libor is coming quickly, so take action now to build a solid SOFR foundation and ensure you are ready.”

Introduced just over three years ago, participation in CME SOFR futures has developed with more than 600 participants globally trading the product. A record 118,000 SOFR futures contracts traded on average each day during Q2 2021, up 200% year over year, and including a single-day trading volume record of 342,000 contracts on June 18. At the same time, open interest, a measure of the total number of outstanding contracts not yet settled, is up 122% to 828,000 contracts, with a record 858,000 contracts open on July 1.

“The ARRC’s formal recommendation of CME Term SOFR Reference Rates is an important milestone for the industry and the continued development of the broader SOFR ecosystem,” says Sean Tully, CME Group’s global head of financial and OTC products. “Today’s decision provides the market with greater clarity and ensures CME Term SOFR Reference Rates are widely available for use alongside other forms of SOFR. We look forward to continued collaboration with the ARRC and market participants.”