On July 19, the Federal Reserve Board (the “Board”) issued a press release inviting comment on a proposal related to the Adjustable Interest Rate (LIBOR) Act, which Congress passed on March 15, 2022.

This important implementation proposal:

• Addresses LIBOR contracts governed by U.S. law that remain outstanding after the planned cessation of LIBOR on June 30, 2023, and
  
  
• Directs the Board to publish the regulations (the “proposal” or the “proposed rule”) required for its successful implementation.

What Is the Fed Asking?
The Fed seeks input on a proposal that provides default rules for certain contracts that use the LIBOR reference rate. In effect, the proposed rule would establish benchmark replacements for contracts that reference LIBOR and that do not have terms that provide for the use of a clearly defined and practicable replacement rate following the first London banking day after June 30, 2023 (the “LIBOR replacement date”).

Comments on the Board’s proposal are due August 29, 2022. However, it should be noted that the law directs the Board to promulgate regulations not later than 180 days after the date of enactment (or September 11, 2022). As a result, the final rule's effective date should be well before the LIBOR replacement date.

Legacy Contracts and the LIBOR Act
On the LIBOR replacement date, the proposal will replace references to LIBOR in “covered contracts” with a Board-selected rate which, as required by the law, will be based on the Secured Overnight Financing Rate (SOFR). The proposal defines “covered contract” to mean a LIBOR contract that has one of the following characteristics as of the LIBOR replacement date:

1. Contains no fallback provisions;
   
   
2. Has fallback provisions that identify neither a specific benchmark replacement nor a determining person; or
   
   
3. Identifies a determining person, but the determining person fails to select a benchmark replacement.

The proposal further clarifies that a covered contract would not include any LIBOR contract that the parties have agreed in writing shall not be subject to the LIBOR Act.

Board-Selected Replacement Rates
The Board-selected benchmark replacements for the various types of covered contracts are identified in the table below.

Critically, the law also authorized the Board to require any “additional technical, administrative, or operational changes, alterations, or modifications to LIBOR contracts” (i.e., “conforming changes”) to aid in the implementation of the Board-selected benchmark replacement rates. However, the proposal states that the Board “does not believe any additional conforming changes would be needed for successful implementation of the Board-selected benchmark replacements” but that it reserves the authority, in its discretion, to “require any additional conforming changes, by regulation or order.”

This Is Important; CREFC Wants to Hear from You…
The Board indicates that, if finalized, the proposed rule will become effective on “the first day of the next calendar quarter that begins 30 days after publication of the final rule in the Federal Register.” The Board invites comments on all aspects of the proposed rule and, in addition, specific questions, including:

• What, if any, alternative SOFR-based benchmark replacements should the Board consider for covered GSE contracts instead of 30-day Average SOFR, such as SOFR term rates?
  
  
• Should the Board identify a single Board-selected benchmark replacement for all covered contracts?
  
  
• What, if any, additional clarifications should the Board consider regarding the Board-selected benchmark replacements?
  
  
• What, if any, benchmark replacement conforming changes should the Board consider?

CREFC welcomes your feedback on the proposal, and for any questions or comments, please contact Raj Aidasani or Lisa Pendergast. CREFC and other trade associations will respond to the Fed’s request for comment based on member feedback. CREFC plans to host a conference call in the coming days to discuss. The due date for comments is August 29, 2022.

On July 19, the Federal Reserve Board (the “Board”) issued a press release inviting comment on a proposal related to the Adjustable Interest Rate (LIBOR) Act, which Congress passed on March 15, 2022. The law:

• Addresses LIBOR contracts governed by U.S. law that remain outstanding after the planned cessation of LIBOR on June 30, 2023, and
  
  
• Directs the Board to publish the regulations (the “proposal” or the “proposed rule”) required for its successful implementation.

What Is the Fed Asking?
The Fed seeks input on a proposal that provides default rules for certain contracts that use the LIBOR reference rate. In effect, the proposed rule would establish benchmark replacements for contracts that reference LIBOR and that do not have terms that provide for the use of a clearly defined and practicable replacement rate following the first London banking day after June 30, 2023 (the “LIBOR replacement date”).

Comments on the Board’s proposal will be accepted for 30 days after its publication in the Federal Register (which is yet to be determined). However, it should be noted that the law directs the Board to promulgate regulations not later than 180 days after the date of enactment (or September 11, 2022). As a result, the final rule's effective date would be well before the LIBOR replacement date.

Legacy Contracts and the LIBOR Act
On the LIBOR replacement date, the proposal will replace references to LIBOR in “covered contracts” with a Board-selected rate which, as required by the law, will be based on the Secured Overnight Financing Rate (SOFR). The proposal defines “covered contract” to mean a LIBOR contract that has one of the following characteristics as of the LIBOR replacement date:

1. Contains no fallback provisions;
   
   
2. Has fallback provisions that identify neither a specific benchmark replacement nor a determining person; or
   
   
3. Identifies a determining person, but the determining person fails to select a benchmark replacement.

The proposal further clarifies that a covered contract would not include any LIBOR contract that the parties have agreed in writing shall not be subject to the LIBOR Act.

Board-Selected Replacement Rates
The Board-selected benchmark replacements for the various types of covered contracts are identified in the table below.

Critically, the law also authorized the Board to require any “additional technical, administrative, or operational changes, alterations, or modifications to LIBOR contracts” (i.e., “conforming changes”) to aid in the implementation of the Board-selected benchmark replacement rates. However, the proposal states that the Board “does not believe any additional conforming changes would be needed for successful implementation of the Board-selected benchmark replacements” but that it reserves the authority, in its discretion, to “require any additional conforming changes, by regulation or order.”

Request for Comments
The Board indicates that, if finalized, the proposed rule will become effective on “the first day of the next calendar quarter that begins 30 days after publication of the final rule in the Federal Register.” The Board invites comments on all aspects of the proposed rule and, in addition, specific questions, including:

• What, if any, alternative SOFR-based benchmark replacements should the Board consider for covered GSE contracts instead of 30-day Average SOFR, such as SOFR term rates?
  
  
• Should the Board identify a single Board-selected benchmark replacement for all covered contracts?
  
  
• What, if any, additional clarifications should the Board consider regarding the Board-selected benchmark replacements?
  
  
• What, if any, benchmark replacement conforming changes should the Board consider?

CREFC welcomes your feedback on the proposal, and for any questions or comments, please contact Raj Aidasani or Lisa Pendergast. If members have concerns or suggestions on the Board’s proposal, CREFC will be happy to submit a comment letter accordingly.