How is the issue of overnight RFRs being adapted to deal with forward-looking interest tenors? Next in the Series On April 25, 2019, the Alternative Reference Rates Committee (ARRC) published the document “ARRC Recommendations Regarding More Robust Fallback Language for New Originations of LIBOR Syndicated Loans” which sets out the ARRC recommendations for provisions to be added to new loan facility documentation. In our next installment, we will consider the ARRC’s recommendations. (For additional information on this topic, contacts the authors or Daniel Budofsky, Joseph Fastiggi, Michael Reese or Russell DaSilva.)
One of the main challenges of shifting from term is the switch from forward- to backward - looking rates . Industry groups are weighing up the merits of simple versus compound averaging to determine the best way to make the overnight RFRs work for products that previously relied on a term rate . Once the preferred rate has been established , the operational issues of when and how interest is paid needs to be addressed . Conventions being developed include a payment delay , delay / suspension period , lookback / lag and other hybrid models . The industry working group for RFRs uses the lag convention .