(Bloomberg) -- Officials overseeing the U.S. transition away from the London interbank offered rate have formally endorsed a series of forward-looking term benchmarks tied to the Secured Overnight Financing Rate, a move many anticipate will propel its wider adoption across markets.

The Federal Reserve-backed Alternative Reference Rates Committee on Thursday ratified CME Group Inc.’s term rates for one-, three- and six-month tenors based on SOFR futures traded. The recommendation comes following the completion of a key change in interdealer trading conventions on July 26, the first phase under the ‘SOFR First’ initiative.

The announcement is expected to pave the way for SOFR’s usage in markets including syndicated corporate loans and collateralized loan obligations, which have been hesitant to embrace the benchmark due the lack of a term structure.

The recommendation comes with just five months until the year-end deadline to ditch Libor for new deals, and amid increasing competition from a slew of new reference-rate providers seeking to carve out their own slice of the post-Libor landscape.

“This concludes the ARRC’s Paced Transition Plan and market participants now have all the tools they need as we enter the transition’s homestretch,” said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley.

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The decision is something of a reversal from the ARRC’s position earlier this year. In March, the group said that it couldn’t recommend a forward-looking term rate by mid-year as initially planned, and it couldn’t even guarantee one even by year-end because of insufficient liquidity in derivatives tied to SOFR.

But the roll out in late July of the Commodity Futures Trading Commission’s so-called SOFR First initiative, which recommended financial institutions switch from Libor to SOFR for all linear swap trades in the interdealer market, boosted volumes enough for the ARRC to feel comfortable with the recommendation.

Key Insights

  • “With this step, market participants now have every tool they need to transition from Libor,” said Randal Quarles, vice chair for supervision of the Federal Reserve Board and chair of the Financial Stability Board. “All firms should be moving quickly to meet our supervisory guidance advising them to end new use of Libor this year.”
  • After the launch of the ‘SOFR First,’ SOFR derivative transactions have increased to 20% of the market on July 27 from just under 4% before the initative took effect, according to Clarus Financial Technology
  • CME Group has published term SOFR reference rates since April. In May, the ARRC selected the exchange as the recommended administrator of a forward-looking term SOFR.
  • The leveraged loan market has yet to see a single loan use SOFR, and instead companies have continued to use Libor for billions of new loans issued in recent months.
  • In revolving credit facilities - a special type of loan provided to companies by banks - only Ford Motor Co. so far has said it plans to use SOFR.

Get More

  • A link to the Alternative Reference Rate’s best practices for use of term SOFR rate
  • A story on the SOFR First initiative and efforts to establish a forward-looking term structure

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