On July 29, 2021, the Alternative Reference Rates Committee (“ARRC”) of the Federal Reserve formally announced and recommended1 CME Group’s forwardlooking Term Secured Overnight Financing Rate (“Term SOFR”) rates.2 Important to this announcement were the ARRC’s previously published Conventions3 and Scope of Use Cases,4 and a subsequently published FAQ on Best Practices.5 As noted by the ARRC in their Scope of Use Cases, one significant element to this announcement relates to the ARRC’s preferred fallback language for bilateral and syndicated loans, which provides that the initial fallback rate is a forward-looking SOFR-based term rate (provided one has been recommended in the appropriate tenor). This announcement provides such recommendation, thus crystalizing the result that loans that include the ARRC’s recommended fallback language should transition from LIBOR to a Term SOFR rate with the same tenor.

Another critical step forward in LIBOR transition relates to the fact the ARRC also endorsed the use of Term SOFR for the derivative markets in the limited case of end-user-facing derivatives intended to hedge cash products that reference the SOFR Term Rate.6 Here, the ARRC recommended the use of Term SOFR swaps, caps, swaptions and similar derivatives to hedge exposure to a single loan or other cash product, or a portfolio of such exposures.

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