Alternative Reference Rates Committee (ARRC)

By

Greg Daugherty

Updated January 28, 2023

Reviewed by

Thomas Brock

Fact checked by

Ryan Eichler

What Is the Alternative Reference Rates Committee (ARRC)?

The Alternative Reference Rates Committee (ARRC) is a group established by the Federal Reserve Board and the New York Fed. Its members include private-sector banks, asset managers, insurers, and financial industry trade organizations. The committee’s goal is to "ensure a successful transition
from USD LIBOR to a more robust reference rate," specifically the secured overnight financing rate, or SOFR.

Key Takeaways

The London Interbank Offered Rate, or LIBOR, used to be a key benchmark for setting global interest rates.
In 2012, a rate-rigging scandal was disclosed, and banking regulators began phasing out LIBOR.
The Alternative Reference Rates Committee (ARRC) was established by the Federal Reserve Board and the New York Fed to determine a new benchmark to supplant the LIBOR.

Understanding the Alternative Reference Rates Committee (ARRC)

LIBOR, the London Interbank Offered Rate, was once a key benchmark for setting interest rates worldwide, but after a rate-rigging scandal became public in 2012, banking regulators moved to phase it out and replace it.

In the United States, the Federal Reserve Board and the New York Fed established the Alternative Reference Rates Committee (ARRC) to recommend and help implement a new benchmark to supplant the LIBOR.

The AARC currently consists of private-sector members, including the American Bankers Association, Bank of America, Goldman Sachs, JPMorgan Chase, MetLife, and Wells Fargo. Governmental entities, such as the Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Federal Reserve Board, National Association of Insurance Commissioners, and U.S. Securities and Exchange Commission, serve as ex-officio members.

The History of the Alternative Reference Rates Committee (ARRC)

The Alternative Reference Rates Committee (ARRC) began its work in 2014. Its first task was to recommend a new benchmark rate to replace the LIBOR. In 2017 it recommended the adoption of the secured overnight financing rate (SOFR) in LIBOR's place.

The SOFR is based on the rate that financial institutions pay each other to borrow cash overnight in transactions collateralized by U.S. Treasury securities. Because these transactions are observable, the SOFR is considered less prone to manipulation than the LIBOR, which often relied on estimates. The SOFR is also based on a much greater transaction volume than the LIBOR, making it more robust.

In choosing SOFR over other possible benchmarks, the AARC noted, "Moving the financial system off of LIBOR is a very challenging and costly process, so it was extremely important to the ARRC to avoid the need for another transition in the future." In addition to meeting its other selection criteria, the AARC said SOFR "stood out for having the most underlying transactions. It is also the broadest measure of the market it covers, making it best placed to remain robust even if its underlying market evolves. That market—the Treasury repo market—is very durable, since the ARRC expects it to exist as long as the U.S. Treasury is issuing debt."

In 2018, the AARC published a timeline for making the transition from LIBOR to SOFR. In accordance with that plan, the Federal Reserve Board of New York, working with the Treasury Department's Office of Financial Research, published its first SOFR rate data on April 3, 2018. It also released data projecting SOFR rates backward to August 2014, based on modeling.

The AARC’s timeline called for a complete phase out of LIBOR by Dec. 31, 2021. As SOFR was in the process of being adopted, LIBOR was gradually winding down. The ICE Benchmark Administration, which oversees LIBOR, announced that it would stop publishing most LIBOR rates as of Dec. 31, 2021, and the remaining ones by June 2023. (LIBOR wasn’t a single rate but as many as 35 separate rates based on five national currencies and seven bank loan tenors, or maturities.) The June 2023 deadline includes two USD LIBOR rates: overnight and 12 months. At that point, the SOFR rate will stand alone.

The New York Fed publishes the latest SOFR on its website each business day at 8 a.m. Besides the overnight rate, it also publishes three compounded averages of the SOFR, with tenors of 30, 90, and 180 days, as well as an SOFR index that can calculate compounded average rates over other time periods.

With the elimination of the LIBOR, other nations' central banks have also had to decide on new benchmarks and formed committees like AARC to help guide the process. In Great Britain, for example, the Sterling Overnight Index Average, or SONIA, which is administered by the Bank of England, was chosen to replace LIBOR in 2017.

The AARC website notes that "to the extent possible," the committee "seeks to coordinate its plans with these other groups."

How Is the Secured Overnight Financing Rate (SOFR) Used?

The secured overnight financing rate (SOFR), like the LIBOR before it, is used by lenders to set interest rates for commercial and consumer loans. For an adjustable-rate mortgage (ARM), for example, the lender will take the current SOFR and add a margin in the form of additional percentage points to set the ARM's interest rate.

What Was the LIBOR Scandal?

The LIBOR scandal involved the manipulation of interest rates by more than a dozen major banks across the world to raise or lower the reported London Interbank Offered Rate and increase their traders' profits in the derivatives market. The scandal came to light in 2012, but the practices went back to at least 2003. In the years since the scandal was exposed, the banks have been fined billions of dollars, and a number of the people involved have been sentenced to prison.

The Bottom Line

The Alternative Reference Rates Committee (ARRC) is a group of private-sector financial institutions that has been working with government agencies since 2014 to help the United States transition from the London Interbank Offered Rate (LIBOR) benchmark to the secured overnight financing
rate (SOFR) benchmark. Much of the transition has already been completed as of early 2022, with the LIBOR largely phased out as of Dec. 31, 2021.

Article Sources

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Alternative Reference Rates Committee. "About."
Council on Foreign Relations. "Understanding the Libor Scandal."
Federal Reserve Bank of New York. "Secured Overnight Financing Rate Data."
Federal Reserve Bank of New York. "An Updated User's Guide to SOFR," Page 3.
Alternative Reference Rates Committee. "How SOFR Works," Page 2.
Federal Reserve System. "Historical Proxies for the Secured Overnight Financing Rate."
Intercontinental Exchange (ICE). “ICE Benchmark Administration LIBOR.”
Federal Reserve Bank of New York. "Secure Overnight Financing Rate Data."
Federal Reserve Bank of New York. "Calculation Methodology for the SOFR Averages and Index."
UK Finance. "Discontinuation of LIBOR," Page 6.
Freddie Mac. "LIBOR Is Being Phased Out. How Will My Mortgage Be Affected?"
Federal Deposit Insurance Corporation. "Joint Statement on Managing the LIBOR Transition."

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