This paper builds on the ARRC’s work developing the Paced Transition Plan and addresses a range of topics, including differences between using simple or compound averages of SOFR and differences between calculating payments using in arrears or in advance conventions. In order to help explain how market participants can use SOFR in cash products, the ARRC released A User’s Guide to SOFR. Treasury repo market means that, unlike LIBOR, it’s not at risk of disappearing. Also, the fact that it’s derived from the U.S. This makes it a transparent rate that is representative of the market across a broad range of market participants and protects it from attempts at manipulation. The volumes underlying SOFR are far larger than the transactions in any other U.S. The transaction volumes underlying SOFR regularly are around $1 trillion in daily volumes. As an overnight secured rate, SOFR better reflects the way financial institutions fund themselves today. SOFR is a much more resilient rate than LIBOR because of how it is produced and the depth and liquidity of the markets that underlie it. The New York Fed publishes SOFR each business day at approximately 8:00 a.m Eastern Time. It is produced by the New York Fed in cooperation with the Office of Financial Research. This rate is robust, is not at risk of cessation, and it meets international standards. Treasury securities in the repurchase agreement (repo) market. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. In 2017, the ARRC selected SOFR as the rate that represents best practice for use in certain new USD derivatives and other financial contracts, representing the ARRC's preferred alternative to USD LIBOR. About SOFR (Secured Overnight Financing Rate) To learn more about fallback contract language, visit here. To protect against this risk, the ARRC has released final recommended language on USD LIBOR fallback contract language for cash products. In addition to the Paced Transition Plan and the recommended transition milestones, the ARRC is also working to address the fact that many contracts for products referencing USD LIBOR do not adequately account for the possibility that LIBOR may no longer be usable. These best practices build on the ARRC’s 2020 Objectives, which aim to advance the ARRC’s work and mission. The best practices outline recommended timelines for when robust fallback language should be incorporated, and dates after which no new USD LIBOR-based activity should be conducted. The ARRC published recommended best practices that outline key transition milestones that market participants should aim to meet across floating rate notes, business loans, consumer loans, securitizations, and derivatives. In order to develop sufficient liquidity, the ARRC is focused on supporting the launch and usage of SOFR-based financial products in the market and creating a forward-looking term rate based on SOFR. To support the transition to SOFR, the ARRC developed the Paced Transition Plan, with specific steps and timelines designed to encourage adoption of SOFR. The ARRC has identified the Secured Overnight Financing Rate (SOFR) as the rate that represents best practice for use in certain new USD derivatives and other financial contracts. This is a very low number compared to the $200 trillion of financial contracts referencing USD LIBOR. While the precise volume of transactions in markets underlying LIBOR is unknown, estimates show that, on a typical day, the volume of three-month wholesale funding transactions by major global banks was about $500 million. The transition from LIBOR is important because the potential disruption or cessation of LIBOR poses a financial stability risk as well as a risk to the individual firms with LIBOR exposures. FCA Chief Executive Andrew Bailey has made clear that the publication of LIBOR is not guaranteed beyond 2021, so time is of the essence to prepare for the possibility that the production and availability of LIBOR might cease permanently. The UK’s Financial Conduct Authority (FCA) is responsible for regulating LIBOR. This transition is essential to a more sound and resilient financial system and requires a significant, coordinated effort.
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