ARRC Issues Addendum Addressing SOFR In ABS Products

The Securitization Working Group of the Alternative Reference Rates Committee ("ARRC") issued an addendum to a white paper on options for using the Secured Overnight Financing Rate in new asset-backed securities products. In the addendum the SWG describes how an "in arrears" methodology can be used as the reference rate in new U.S.-issued ABS products.

In the white paper, the SWG described a process for using a 30-day average of SOFR for ABS products, with a monthly reset that was set in advance of the accrual period, but did not discuss using SOFR set in arrears for ABS products. The ARRC sought to provide additional guidance to determine how ABS products could employ in-arrears payment structures. In the addendum, SWG reviewed and suggested methodology adjustments, including the use of (i) rate lockouts, (ii) payment delays and (iii) lookback rates.