ARRC Updates Its Recommendations For Use Of Term SOFR

The Alternative Reference Rates Committee (ARRC) announced three updates to its recommendations for the use of Term SOFR.

First, the ARRC clarified the scope of "business loans" that may be hedged with Term SOFR swaps. Second, the revised recommendations recognize that end users may enter into Term SOFR basis swaps even when they do not have exposure on Term SOFR cash assets. Third, the ARRC clarified when the liabilities (i.e., the securities) issued in a securitization could use Term SOFR.

The announcement first differentiated between "business loans" (for which Term SOFR may be appropriate) and intercompany loans (for which the recommendation remains 30- or 90-day SOFR in advance). A Term SOFR swap may be used to hedge a business loan that is primarily for a business or commercial purpose. The announcement gives several itemized examples, including a syndicated loan or trade finance transaction. The recommendation does not include business loans that are