The Alternative Reference Rates Committee ("ARRC") issued guiding principles to working groups on "fallback language for new financial contracts" in order to address risks and "minimize disruptions associated with a possible end to [U.S. dollar] LIBOR" ("LIBOR"). The principles build on the ARRC's Paced Transition Plan, which detailed the steps for a smooth transition to the ARRC's alternative reference rate, the Secured Overnight Financing Rate.
The ARRC released the principles to the public so that market participants can get exposure to them while the ARRC works toward reaching a consensus on fallback language in new contracts that reference LIBOR. The principles are aimed at "newly issued cash products including business loans, securitizations, and floating rate notes referencing LIBOR."
Among other guiding principles, the ARRC indicated that (i) market participants should not wait until "more robust contract language is widely incorporated," but should instead be willing to change language over time and (ii) discretion or flexibility in language may be necessary to facilitate transitions when more specific language is developed but should be limited to avoid disputes.
The ARRC further articulated that suggested contract language should:
- share similarities with contract language in other asset classes when appropriate;
- take into account feedback from a diverse set of market participants in order to guarantee fairness; and
- expressly allow "for a spread adjustment to minimize valuation changes."
The guiding principles will comprise one of the topics to be discussed at a public roundtable hosted by the ARRC on July 19, 2018.
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