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 LIBOR 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 approach to make the overnight RFRs work for products that previously relied on a term rate. The Bank has been working with banks and other financial institutions since last year in an effort to improve their ability to manage interest rates over longer periods of time. Conventions being developed include a payment delay, lockout/suspension period, lookback/lag and other hybrid models. The BoE working group for RFRs prefers the lag convention.