Alternative Reference Rates Committee

Alternative Reference Rates Committee
Name	Alternative Reference Rates Committee
Type	Financial working group
Founded	2014
Founder	Federal Reserve Board and Federal Reserve Bank of New York
Location	United States
Purpose	Benchmark rate transition

Alternative Reference Rates Committee

The Alternative Reference Rates Committee (ARRC) is a financial industry working group convened to identify robust interest rate benchmarks to replace the London Interbank Offered Rate, coordinate transition planning, and promote liquidity in alternative reference rates. It was established by the Federal Reserve Board and the Federal Reserve Bank of New York to support market participants across banking, asset management, derivatives, and capital markets during the LIBOR reform. The ARRC's work intersects with regulators, global standard setters, and market infrastructures in the United Kingdom, European Union, Switzerland, Japan, and Singapore.

History and formation

The ARRC was announced in 2014 amid concerns arising from the Libor scandal, the 2007–2008 financial crisis, and reforms following the W principios? reforms—driven by the Financial Stability Board, the International Organization of Securities Commissions, and the Bank for International Settlements. It built on consultations with the U.S. Department of the Treasury, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation as part of a broader response alongside the UK Financial Conduct Authority and the Financial Services Authority successor arrangements. The ARRC's lifecycle has included public consultations, white papers, and coordination with the International Swaps and Derivatives Association, the Chicago Mercantile Exchange, and the Depository Trust & Clearing Corporation.

Membership and governance

Membership has spanned large banking groups, regional banks, asset managers, hedge funds, insurance companies, pension funds, and market utilities including the JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, BlackRock, Vanguard Group, State Street Corporation, BNP Paribas, Barclays, Deutsche Bank, UBS, Credit Suisse, HSBC, Santander, ING Group, Credit Agricole, Nomura Holdings, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, Royal Bank of Canada, and Toronto-Dominion Bank. Governance arrangements involved the Federal Reserve Board, the Federal Reserve Bank of New York, and working groups with representatives from the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Office of Financial Research. The ARRC established liaison relationships with the Bank of England, the European Central Bank, the Swiss National Bank, and the Bank of Japan.

Recommended alternative rates

The ARRC recommended a secured overnight financing rate derived from overnight repo markets, aligning with benchmarks such as the Secured Overnight Financing Rate produced in the United States, comparable to the Sterling Overnight Index Average, the Euro Short-Term Rate, the Swiss Average Rate Overnight, and the Tokyo Overnight Average Rate. Recommendations also touched on compounded in arrears conventions, fallback language, and credit spread adjustments informed by methodologies from the International Swaps and Derivatives Association and pricing models used by the Chicago Board Options Exchange and Intercontinental Exchange. The ARRC published consultations on compounded rates, forward-looking term rates, and recommended conventions for cash products, derivatives cleared at LCH, and bilateral swaps cleared at CME Group.

Transition planning and implementation

Transition planning included outreach to operations teams at The Depository Trust & Clearing Corporation, documentation workstreams with the International Swaps and Derivatives Association protocols, and outreach to treasury departments at multinational firms such as Apple Inc., General Electric, and ExxonMobil. The ARRC coordinated fallback language adoption, creation of spread adjustment methodologies, and the development of forward-looking term rates by market makers including Refinitiv, Bloomberg L.P., and ICE Benchmark Administration. Project milestones aligned with regulatory guidance from the Financial Stability Board, the Bank for International Settlements, and national authorities such as the UK Financial Conduct Authority and the European Securities and Markets Authority. Infrastructure changes involved payment-versus-payment arrangements at CLS Group and collateral management updates in systems used by DTCC.

Market impact and adoption

Adoption affected cash products including syndicated loans arranged by banks like Lloyds Banking Group, Santander, and Barclays, as well as mortgage markets influenced by lenders such as Quicken Loans and Nationwide Building Society. Derivatives migration impacted clearing at LCH, CME Group, and bilateral OTC markets facilitated by dealers including Deutsche Bank, Societe Generale, and Mizuho Financial Group. Asset managers including BlackRock and Fidelity Investments reconfigured portfolio benchmarks and risk management systems, while pension funds like the California Public Employees' Retirement System and insurance firms such as Allstate and AXA updated liability hedging strategies. Market liquidity, term rate development by Refinitiv and ICE Benchmark Administration, and secondary market trading volumes at venues such as the New York Stock Exchange and NASDAQ reflected the transition dynamics.

Criticism and challenges

Critics pointed to insufficient volume in underlying overnight repo markets, operational complexity for small banks and credit unions such as National Association of Federal Credit Unions members, legal risks in legacy contracts governed by state courts including those in New York (state), and cross-border differences involving the European Union and United Kingdom frameworks. Commentators from academic institutions such as Harvard University, Stanford University, and London School of Economics noted challenges in term rate construction, basis risk in exotic derivatives, and potential concentration risks among major dealers. Other stakeholders including law firms with expertise in ISDA documentation, accounting firms like PricewaterhouseCoopers and Deloitte, and market infrastructure providers raised concerns about governance, transition costs, and the timetable for cessation of legacy benchmarks administered by entities like ICE Benchmark Administration.

Category:Benchmarks