On March 15th, 2022, President Biden signed into law the Consolidated Appropriations Act, 2022, which contains legislation related to the transition away from U.S. dollar (USD) LIBOR. The legislation would minimize both legal and operational risks associated with the transition and provide more certainty to many in the financial services industry, among them corporate borrowers and lenders, as well as retail and investment banking participants and consumers. The legislation would protect many products, including student loans, mortgages, and investment accounts, from any disruption caused by the transition.
The Alternative Reference Rates Committee (ARRC) welcomed the news as providing clarity at a Federal level.
What this means
On March 9th, 2022, the Houses of Representatives passed the Federal LIBOR legislation as part of the $1.5 trillion omnibus spending bill by a vote of 270 to 171. The Senate passed the bill on March 10th, 2022 by a vote of 68 to 31.
The Federal legislation targets approximately $15 trillion of “tough legacy” LIBOR contracts, where there is no specific outlined replacement rate, or where no replacement mechanism exists. These contracts were at risk of creating the possibility of litigation as they rely on a rate that would cease to exist after June 30th, 2023. The Federal legislation addresses this issue by allowing the Board of Governors of the Federal Reserve System (FED) to select the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR in these contracts by “operation of law”, and is required to complete this rule within six months of the bill’s enactment. The Federal legislation has created a “safe harbor” for those who select a SOFR based replacement, and exempts them from any legal liability in selecting a SOFR based rate.
ARRC stated that the legislation provides a targeted solution for financial contracts that mature after the cessation of LIBOR in mid 2023. The new law takes a similar approach to that proposed by the ARRC, and has since been passed by New York and several other states. The Federal legislation will now apply to all relevant contracts, and so make further state-by-state action unnecessary.
The passing of this Federal legislation seeks to provide certainty, and avert what could have been a “flood of litigation” resulting from the cessation of the widely used LIBOR benchmark.
“President Biden and lawmakers have taken a vital step to protect investors, businesses, and consumers from LIBOR related risks. By providing a solution for legacy contracts that have no workable fallbacks, and a safe harbor for lenders who chose SOFR in relevant contracts, this legislation significantly reduces risks for market participants worldwide,” said Tom Wipf, ARRC Chairman. “The passage of this legislation builds on the considerable momentum we’ve seen so far in 2022, as financial markets continue to transition to SOFR. We urge all market participants to remain focused on this vital work in this final stage of the transition.“
- ARRC Welcomes Passage of Federal LIBOR Transition Legislation in Omnibus Spending Package ARRC-Press-Release-Passage-Federal-LIBOR-Legislation.pdf (newyorkfed.org)
- Biden Signs Omnibus Bill with Banking Provisions Biden signs omnibus bill with banking provisions | American Banker
- US Federal LIBOR Legislation Summary US federal LIBOR legislation summary | Global law firm | Norton Rose Fulbright
- Congress Passes Legislation on LIBOR Fix as Part of $1.5 Trillion Spending Package Congress Passes Legislation on Libor Fix as Part of $1.5 Trillion Spending Package – WSJ
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