ARRC Updates Term SOFR Use Recommendations
The Alternative Reference Rates Committee ("ARRC") updated its recommendations on permissible usage of Term SOFR.
ARRC updated its "Term SOFR Scope of Use Best Practice Recommendations," to, among other things, provide examples and explanations of certain key defined terms, and slightly expand certain use cases, while reiterating that Term SOFR should be "limited in order to remain consistent with financial stability and a sustainable system."
As previously covered, the ARRC's best practice recommendations support the use of SOFR Term Rates in end-user facing derivatives that hedge cash instruments linked to the term rates, and certain securitizations with underlying assets that are themselves tied to SOFR Term Rates.
The revised recommendations provide for expanded use of Term SOFR in basis swap transactions with non-dealer market participants. The ARRC recognized that hedging with Term SOFR is likely to be more expensive than hedging with overnight SOFR and that the refinements to the Best Practice Recommendations do not change this. Instead, ARRC explained that the recommendations are intended to not make costs such that they would "shut[] down the availability" of Term SOFR hedging.
Commentary
The expanded recommendations are necessary reading for firms using Term SOFR. While not expansive in the way some market participants may have hoped, the examples and explanations are useful and, in some cases, effectively expand the scope of use by recognizing circumstances that arguably were not technically in line with the original recommendations but are consistent with the underlying policy aims.