ARR Initiatives – Why regulators are urging adoption of alternative reference rates (ARRs) in interest rate applications.

Regulators are urging the financial industry to strengthen existing benchmarks for interbank offered rates (IBORs) and to establish and voluntarily adopt  alternative reference rates (ARRs)  in interest rate applications.

Regulators are also encouraging market participants to include appropriate triggers and references to ARRs as standard LIBOR fallback contract language across asset classes.

Central banks and endorsed committees have identified ARRs for certain currencies that rely on LIBOR benchmarks. These include “near-risk free” reference rates (RFRs) like SOFR (Secured Overnight Financing Rate) for USD and SONIA (Sterling Overnight Index Average) for GBP, which are based on significant transaction volumes compared to the underlying market used in the LIBOR calculation.

Market participants are working to establish forward-looking term reference rates for certain currencies, which will become feasible once sufficient transactions develop in derivatives based on the respective ARRs. CME Group believes that a fully transactions-based reference rate consistent with the IOSCO Principles for Financial Benchmarks benefit the marketplace.

We are working closely with our customers during this transition, and we will continue to offer capital-efficient choices to manage risk via Eurodollar, 30-Day Federal Fund, SOFR, and SONIA futures, as well as SOFR- and SONIA-based cleared over-the-counter (OTC) swaps.