ARRC endorses CME 12-month Term SOFR

On May 19, 2022, the Alternative Reference Rates Committee (the ARRC) unanimously endorsed the use of CME 12-month Term SOFR. CME Term SOFR is a benchmark published by the CME Group Benchmark Administration Limited, a registered Benchmark Administrator authorized and supervised by the UK Financial Conduct Authority, that provides forward-looking interest rate estimates based on market expectations implied from derivatives markets for one-month, three-month, six-month and 12-month tenors.

Previously, in July of 2021, the ARRC recommended the use of CME Term SOFR rates for one, three and six-month tenors. At that time, 12-month CME Term SOFR was not yet available, and the derivatives markets underlying the 12-month rate were still underdeveloped. Since then, however, the 12-month CME Term SOFR tenor has come online, and the related underlying derivatives markets have sufficiently matured to warrant the ARRC's recommendation of 12-month CME Term SOFR.

In practice, the ARRC's formal recommendation of 12-month Term SOFR will put it on par with the other previously recommended Term SOFR tenors—all of which are recommended by the ARRC to be used in a manner consistent with its previously promulgated Best Practice Recommendations. While the Best Practice Recommendations suggest that market participants use overnight SOFR or SOFR averages where practical, it also recommends the use of SOFR Term Rates for circumstances in which overnight SOFR or SOFR averages would be difficult to apply. Specifically, the Best Practice Recommendations endorsed the use of SOFR Term Rates for business loan activities.1

Despite the ARRC's formal recommendation of 12-month Term SOFR, the ARRC indicated in its May 19, 2022 announcement that it expected 12-month CME Term SOFR to be used less frequently than other CME Term SOFR tenors. Noting that 12-month LIBOR rates were less common than other LIBOR tenors, the ARRC predicted that 12-month Term SOFR will be used primarily as a fallback to legacy LIBOR contracts with a 12-month LIBOR tenor or in trade or receivables finance.

The ARRC's formal recommendation of CME 12-month Term SOFR is the latest step taken by the ARRC to facilitate the transition away from LIBOR. Market participants will now be able to use CME 12-month Term SOFR in a manner consistent with other previously endorsed Term SOFR tenors. This development represents another important stepping stone in the path to a post-LIBOR world.