United States: Compare And Contrast: SFIG's And ARRC's Differing Approaches To Benchmark Transition In Securitizations

Last Updated: January 9 2019
Article by Locke R. McMurray, Jason Jurgens, George J. Cahill and Jayant W. Tambe
Most Read Contributor in United States, September 2019

The Situation: SFIG's LIBOR Task Force has released the first of a planned series of "green papers" on benchmark transition in the US securitization market.

The Result: The Green Paper contains proposed recommendations that differ in certain ways from the ARRC Consultation on the same topic.

Looking Ahead: Feedback to the ARRC Consultation is due February 5, which should inform the SFIG in future iterations of the Green Paper, which are intended to culminate in a "White Paper."

The LIBOR Task Force ("Task Force") of the Structured Finance Industry Group ("SFIG") released its "Green Paper, First Edition, A Set of Recommended Best Practices for LIBOR Benchmark Transition," on December 14, 2018, exactly one week after the Alternative Reference Rates Committee ("ARRC") released its market consultation ("AARC Consultation") on the same topic. As the Green Paper frankly acknowledges, and notwithstanding SFIG's role as co-chairman of the ARRC's Securitization Working Group, the Task Force's recommendations ultimately "may differ" from ARRC's recommendations. The purpose of this Commentary is to identify and summarize the subtle but potentially important distinctions between the current recommendations of the Task Force and those of ARRC Securitization Working Group.

The Green Paper Process

The Task Force's mission is to develop a set of "industry-recognized best practices" in the securitization markets for managing the expected transition away from LIBOR to rates based upon "(nearly) risk-free rates" ("RFRs"), which in the case of the U.S. dollar appears likely to be the "Secured Overnight Financing Rate" or "SOFR."

The Green Paper itself is the first of an envisioned series of publications recommending best practices, and is designed to be iterative in nature as the market develops and issues arise or are revisited. SFIG foresees the evolution of its green paper(s) into a "white paper," which may differ from prior green paper iterations and will itself be subject to further review and modification as warranted by market developments. The Green Paper also acknowledges the myriad but as yet largely unexplored complexities of benchmark transition under consumer receivables.

Like the ARRC Consultation, the Green Paper is directed at "new" transactions only, although the Green Paper hints that future iterations may cover "legacy" transactions. The Green Paper also adopts the conventional "three step" approach to RFR transition (i.e., identification of "trigger events" and determining a new RFR rate and "credit spread adjustment"). The Green Paper, however, differs from the ARRC Consultation in potentially important ways and is peppered with concerns of trustees and other deal parties over who will bear responsibility for monitoring the occurrence of a trigger event and determining and calculating successor rates.

Trigger Events

The first four "Benchmark Discontinuance Events" outlined in the Green Paper conform to those that appear in the ARRC Consultation. The first two consist of the two "ISDA cessation events" (i.e., an announcement by the benchmark administrator that it has ceased or will cease to publish the applicable benchmark or an announcement by the regulator or insolvency official for the administrator that it has ceased or will cease to publish the applicable benchmark). There are also benchmark discontinuance events for non-publication of LIBOR for five business days and the date on which the asset replacement percentage (i.e., the portion of the underlying assets originally denominated in LIBOR that have converted from LIBOR) exceeds 50 percent.

Paragraph 5 of the definition of benchmark discontinuance event is unique to the Green Paper. It consists of a statement by the benchmark administrator or its regulator that the applicable benchmark is "no longer representative or may no longer be used as a benchmark reference rate in new transactions." This appears to be an amalgam of clauses 4 and 5 in the ARRC Consultation but expands upon the narrow reference in the ARRC Consultation to the invocation by the administrator of its policy on insufficient submissions.

The Green Paper contemplates that the "Sponsor/Servicer/Independent Third Party" will have the ability to accelerate the transition date only upon an ISDA cessation event, whereas the ARRC Consultation contemplates that the "Designated Transaction Representative" will have this ability upon the occurrence of any benchmark discontinuance event.

Like the ARRC Consultation, the Green Paper recommends no "early opt-in" feature based on the existence of other transactions in the market being issued with comparable fallback language. However, the Green Paper notes the existence of this feature in the CLO market and specifically requests comment for future iterations as to whether this feature should be extended to other market segments.

Replacement Base Rates

The operation of the "waterfall" for selecting the replacement base rate operates quite differently under the Green Paper as opposed to the ARRC Consultation, although the first fallback under both is the "Relevant Tenor SOFR" (or "term SOFR") that has been selected, endorsed or recommended by the relevant governmental sponsor.

Where the next fallback under the ARRC Consultation was a form of compounded SOFR (either set in advance or in arrears), the Green Paper offers up alternatives based upon compounded SOFR or average SOFR, each set in advance of a given interest period.

The next fallback does not appear in the ARRC Consultation and consists of the spot or "Overnight" SOFR rate as of the commencement of each interest period and remaining fixed throughout that interest period. A noteworthy feature of the Green Paper is that the check for term SOFR is to be run quarterly when the replacement base rate for the time being is being determined by means of compounded/average or Overnight SOFR.

The Green Paper also requests feedback on whether Overnight SOFR is implicitly duplicative of compounded/average SOFR. We would expect most market participants to respond "yes", but only in the context of advance determinations of compounded/average SOFR.

The Green Paper and ARRC Consultation converge again with the next two fallbacks, which relate to the alternate, substitute or successor rate selected, endorsed or recommended by the relevant government sponsor and the fallback rate defined under the ISDA Definitions (which will be the " compounded setting in arrears rate").

If the entire waterfall is exhausted, the rate under both the Green Paper and the ARRC Consultation will remain fixed at the last benchmark fixing until one of the fallbacks becomes available.

Moreover, if the replacement benchmark is the ISDA fallback, the "Sponsor" (or other entity to be determined) has the right to propose a "Substitute Replacement Rate" (inclusive of any credit spread adjustment, as detailed below), which will become the replacement rate upon various permutations for noteholder approval/negative consent etc. This is similar to the right of the "Designated Transaction Representative" under the ARRC Consultation, except that there is no requirement for a determination that the ISDA fallback is "not an industry-accepted rate" under the Green Paper.

Credit Spread Adjustment

As already noted, both the Green Paper and the ARRC Consultation contain an additional component in the fallback for the credit spread that had been implicit in LIBOR but will cease to exist in an RFR environment. Under the Green Paper, the "Replacement Floating Rate Spread" will be the "base rate modifier . . . selected, endorsed or recommended by the relevant governmental sponsor" in all replacement base rate scenarios other than the ISDA fallback scenario, in which case the replacement floating rate spread will be the credit spread adjustment recommended by ISDA. This differs from the ARRC Consultation in which these two "Replacement Benchmark Spreads" were treated as serial fallbacks that are applicable in all cases.

Regardless of whether a replacement floating rate spread is determined pursuant to the foregoing, the "Sponsor" (or other entity to be determined) has the right to propose a "Substitute Spread," which will become the replacement floating rate spread upon various options for noteholder approval/negative consent etc. Pending implementation of the substitute spread, the replacement floating rate spread will be determined in accordance with the relevant governmental sponsor base rate modifier or the ISDA credit spread adjustment as applicable, and if the relevant fallback credit spread adjustment is not capable of determination, the replacement floating rate spread will be deemed to be zero.

Three Key Takeaways

  1. There are subtle but potentially important distinctions between the ARRC Consultation and the Green Paper that the structured finance industry will need to consider during the expected transition away from LIBOR approaches.
  2. Future Green Paper iterations may converge toward or diverge further from the ARRC Consultation as SFIG constituents further explore and attempt to address their occasionally competing interests.
  3. Future iterations may also delve into "legacy" transactions and the largely unexplored LIBOR transition implications for securitizations that contain consumer receivables.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions