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Investor insights 22 July 2022

LIBOR transition: 12 month term SOFR

We previously communicated that the Alternative Reference Rates Committee (ARRC), the group tasked with ensuring a successful transition from USD LIBOR to SOFR, had endorsed the use of CME Term SOFR rates for one, three and six-month tenors in July 2021. At the time of the endorsement of the one, three and six month tenors, CME did not provide a 12 month term SOFR tenor.

The successful SOFR First convention change (a phased initiative for switching trading conventions from LIBOR to SOFR) that commenced in 2021, along with the continued growth in SOFR cash and derivatives markets liquidity, enabled CME to launch a 12 month term SOFR at the end of September 2021. The ARRC has now conducted its evaluation of this 12-month term SOFR rate in a manner consistent with the principles and indicators it had established, and on 19 May 2022, endorsed 12 month term SOFR. This endorsement effectively means that this rate is now available for use by market participants, in line with the ARRC’s published best practice recommendations for use of term rates.  

In its endorsement announcement, the ARRC indicated its expectation that 12-month term SOFR would be used less frequently than other CME term SOFR tenors, noting that 12-month LIBOR rates were also 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. Should you wish to read the full endorsement announcement,  it can be accessed here

As a reminder, the USD LIBOR settings that remain available (overnight, 1 month, 3 months, 6 months and 12 months tenors) are due for cessation in just under 1 year, by 30 June 2023. The ARRC's formal recommendation of the CME 12-month term SOFR rate is the latest step taken by the ARRC to facilitate a smooth transition away from these remaining USD LIBOR settings, and the availability of this replacement rate brings market participants another step closer to reducing any lingering dependencies on USD LIBOR.

The Standard Bank Group remains committed to supporting our customers through an orderly transition, and we encourage customers to reach out to your usual sales and relationship managers to discuss the options available for referencing alternative rates in contracts.

We urge all customers who have not yet done so, to assess their remaining USD LIBOR referencing exposures and to develop a strategy for transition as soon as possible.