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On May 6, 2020, the Alternative Reference Rates Committee ("ARRC") issued a supplemental consultation on the spread adjustment methodologies to be used in connection with the ARRC's recommended hardwired fallback language (the "Supplemental Consultation") for cash products referencing USD LIBOR. The Supplemental Consultation requested additional feedback from market participants regarding technical aspects of the spread adjustment methodologies, building on the results of the ARRC's previous consultation on spread adjustment methodologies.
The ARRC noted in the Supplemental Consultation that the vast majority of respondents to the ARRC's prior consultation on spread adjustment methodologies favored using a methodology similar to the spread adjustment methodology adopted by ISDA, i.e., the 5-year median of the spread between LIBOR and the secured overnight financing rate ("SOFR") for each relevant tenor. However, the ARRC acknowledged in the Supplemental Consultation that the ISDA spread adjustment methodology may produce a different spread adjustment value for cash products because of variation in the fallback mechanics recommended by the ARRC (e.g., the ARRC's fallback language contemplates a fallback to term SOFR). Furthermore, the Supplemental Consultation highlighted ISDA's intention to adopt a pre-cessation fallback trigger and discussed the potential misalignment between the spread adjustment for cash and derivative products based on different fixing times caused by a pre-cessation event.
The Supplemental Consultation seeks feedback from market participants on whether the ARRC's recommended spread adjustment methodology should be further aligned with the ISDA methodology. In particular, the ARRC requested that market participants consider whether:
- the ARRC should recommend using the same spread adjustment value adopted by ISDA for each tenor of LIBOR, regardless of the term adjustment applied to cash products; and
- the ARRC should recommend fixing the spread adjustment in respect of a pre-cessation event at the same time as ISDA.
Comments must be submitted to the ARRC by June 8, 2020.
Originally published 7 May 2020
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