With continued legal uncertainty surrounding LIBOR-based contracts, private market participants and regulators are now looking to Congress to enact a legislative solution. Although market participants have increasingly been adopting language with LIBOR fallback provisions, state or federal legislation would minimize litigation and basis risk across US LIBOR contracts and provide stability and uniformity to the financial markets on this very important issue.
In March 2020, the Alternative Reference Rates Committee (“ARRC”) proposed legislation for New York that would, among other things, protect parties that adopt the Secured Overnight Funds Rate (“SOFR”) as a replacement for LIBOR under financial contracts governed by New York law. While it is not clear if, or when, New York state may vote on the proposed legislation, now that New York’s last legislative session for 2020 has ended, passing of such legislation is not likely to occur until some time in 2021.
With the LIBOR cessation date looming, there is hope that Congress may enact a legislative solution. Last week, a draft bill was circulated to members of Congress for discussion that mirrors the proposed New York legislation.
Among other things, the draft bill would:
- Prohibit a party from refusing to perform its contractual obligations or declaring a breach as a result of a LIBOR discontinuance or the use of the legislation’s recommended benchmark replacement;
- Establish that the ARRC-recommended benchmark replacement is a commercially reasonable substitute for, and a commercially substantial equivalent to, LIBOR; and
- Provide a safe harbor from litigation for the use of the ARRC-recommended benchmark replacement rate.
If presented to the floor and ultimately enacted, the proposed bill would provide clarity and protection to parties as contracts transition away from LIBOR. It remains to be seen whether Congress, potentially reshuffled after November’s elections, will take action on LIBOR related legislation, but the financial markets are keeping a close eye on any developments as we head into 2021.
If you would like further information about this or any other matter, please feel free to contact any member of the Global Bank and Institutional Finance & Restructuring Group or the LIBOR Transition Task Force