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Major reference rates are widely used in the global financial system as benchmarks for a large volume and broad range of financial products and contracts. In response to concerns regarding the reliability and robustness of these reference rates, The Financial Stability Oversight Council and Financial Stability Board called for the development of alternative interest rate benchmarks. In 2014, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee in order to identify best practices for alternative reference rates, identify best practices for contract robustness, develop an adoption plan, and create an implementation plan with metrics of success and a timeline.
The ARRC accomplished its first set of objectives and has identified the Secured Overnight Financing Rate (SOFR) as the rate that represents best practice for use in certain new U.S. dollar derivatives and other financial contracts. It also published its Paced Transition Plan, with specific steps and timelines designed to encourage adoption of the SOFR. The ARRC was reconstituted in 2018 to help to ensure the successful implementation of the Paced Transition Plan and serve as a forum to coordinate and track planning across cash and derivatives products and market participants currently using U.S. dollar LIBOR. To that end, the ARRC will endeavor to deliver recommendations for addressing risks in contract language, orderly transitions on a voluntary basis, and actions that would facilitate such transitions as it deems appropriate in order to meet these objectives.