Fed Issues Final Rule on LIBOR Act
December 16, 2022
On December 16, the Federal Reserve Board (FSB or the “Board”) adopted a final rule that implements the Adjustable Interest Rate (LIBOR) Act, which Congress enacted earlier this year to address LIBOR contracts that:
- Are governed by U.S. law;
- Lack fallback provisions for a clearly defined and practicable replacement for LIBOR; and
- Remain outstanding after the planned cessation of LIBOR on June 30, 2023 (the “LIBOR replacement date”).
Market participants had been waiting for the final rule as the legislation stipulated that the central bank put a final rule into effect 180 days after its enactment, which should have been around mid-September. The Board first sought comment on the final rule on July 19. The final rule will be effective 30 days after publication in the Federal Register.
Overview of the Final Rule
The final rule identifies different SOFR-based Board-selected benchmark replacements for different categories of LIBOR contracts. In addition, the final rule:
- Identifies certain benchmark replacement conforming changes related to the implementation, administration, and calculation of the Board-selected benchmark replacement;
- Indicates that a determining person may select the Board-selected benchmark replacement for the relevant type of LIBOR contract, with any applicable benchmark replacement conforming changes;
- Provides that the LIBOR Act’s protections related to the selection or use of the Board-selected benchmark replacement shall apply to any LIBOR contract for which the Board-selected benchmark replacement becomes the benchmark replacement (whether by operation of law or by the selection of a determining person); and
- Indicates that, under the LIBOR Act, the Board’s final rule preempts any state or local law or standard relating to selecting or using a benchmark replacement or conforming changes.
Synthetic LIBOR and the Final Rule
On November 23, the UK’s Financial Conduct Authority (FCA) announced it would compel LIBOR’s administrator, the ICE Benchmark Administration (IBA), to publish USD LIBOR on a synthetic basis for 1-, 3-, and 6-month tenors after the LIBOR replacement date. The FCA aimed to provide a temporary, unrepresentative solution for tough legacy contracts referencing USD LIBOR outside the United States. The FCA proposed that synthetic USD LIBOR be published for 15 months after June 30, 2023, permanently ceasing at the end of September 2024.
Market participants expressed concern about the potential for synthetic USD LIBOR to interfere with certain tough legacy U.S. contracts and, in particular, older loans (generally originated before 2018) that designate a specific, non-LIBOR fallback rate (such as prime) if LIBOR is unavailable. In the final rule, the Board:
- States that LIBOR contracts that identify a specific benchmark replacement (e.g., the prime rate) are outside of the scope of the LIBOR Act, even if these fallback provisions lack an express non-representativeness trigger;
- Clarifies that if a “determining person” can select a benchmark replacement when LIBOR is unavailable, such determining person has a statutory right under the LIBOR Act to choose the Board-selected benchmark replacement.
It should be noted that CREFC submitted a comment letter to the Board regarding its proposed rule for the LIBOR Act. CREFC is analyzing the final rule and will publish additional analysis next week. If you have any questions, please get in touch with Lisa Pendergast or Raj Aidasani.
Contact
Raj Aidasani
Senior Director, Research
646.884.7566
raidasani@crefc.org
Market participants expressed concern about the potential for synthetic USD LIBOR to interfere with certain tough legacy U.S. contracts and, in particular, older loans (generally originated before 2018) that designate a specific, non-LIBOR fallback rate (such as prime) if LIBOR is unavailable.
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