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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.

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FCA Compels Publication of Synthetic USD LIBOR

November 29, 2022

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 June 30, 2023. The FCA’s aim is to provide a temporary, unrepresentative solution for tough legacy contracts referencing USD LIBOR outside of the United States. The FCA is proposing that synthetic USD LIBOR be published for 15 months, permanently ceasing at the end of September 2024.

• The publication of a synthetic USD LIBOR is intended to address tough legacy non-US contracts not covered by the Adjustable Interest Rate (LIBOR) Act, enacted by Congress earlier this year.
• The Federal Reserve Board (FRB) has been tasked with implementing the LIBOR Act but has not yet issued its final rulemaking.
• The use of synthetic USD LIBOR will be limited solely to legacy contracts. The FCA also designated the rate as a “permanently unrepresentative benchmark,” allowing it to change its methodology.
• Synthetic USD LIBOR will be calculated as CME Term SOFR plus the relevant ISDA fixed spread adjustment (i.e., the same formulation used in the ARRC fallback language).
• The FCA considers this calculation to be “a fair and reasonable approximation… and one that is consistent with the replacement rates recommended by the FRB in its proposed rule.”
• It is important to note that while IBA has its own version of term SOFR, the calculation of synthetic USD LIBOR will only use the CME version.

Market participants are concerned about the potential for synthetic USD LIBOR to interfere with certain tough legacy US contracts. In particular, the concern lies with older loans (generally originated before 2018) that designate a specific, non-LIBOR fallback rate (such as Prime) if LIBOR is unavailable.

• These loans could potentially move to synthetic USD LIBOR, which fully aligns with the ARRC fallback language (i.e., term SOFR plus a spread adjustment).
• Moving to synthetic USD LIBOR would benefit borrowers as they would avoid the (generally) higher Prime Rate, while lenders and servicers would benefit by using the same LIBOR screen after June 2023.

It should be noted that CREFC, in its comment letter to the FRB regarding its proposed rule for the LIBOR Act, specifically asked for clarification on the treatment of synthetic USD LIBOR. As mentioned earlier, the final rule was expected by mid-September but has yet to be released.

Please reach out to Raj Aidasani with any questions.

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CREFC LIBOR Playbook

November 21, 2022. 

CREFC has been working diligently with its members to address the implications and operational issues related to transitioning individual floating rate loans from a LIBOR index to the recommended SOFR index.

Why it matters: LIBOR will cease to be published beyond June 30, 2023.  In light of that impending deadline, many market participants will be impacted by LIBOR cessation and the transition to SOFR, including but not limited to master servicers, primary servicers, special servicers, trustees, certificate administrators, rating agencies, investors and borrowers. 

• The CREFC community through the Servicers Forum compiled guidance via a “LIBOR Playbook” tailored to our servicers’ role in the transitioning of floating rate loans from a LIBOR index to a SOFR index.

These general guidelines seek to address a three-step process which provides guidance on:

1. Identifying all LIBOR benchmarked loans in servicing platforms,
2. Remediating any loans with deficient replacement language, and
3. Providing consistent and timely notices to borrowers and transaction parties.

What’s Next: CREFC expects to finalize and distribute the playbook in the coming weeks. A webinar is also planned to introduce the playbook and delve into the nuances of legacy LIBOR loans.

Contact Kathleen Olin (kolin@crefc.org) for more information.

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CREFC has been working diligently with its members to address the implications and operational issues related to transitioning individual floating rate loans from a LIBOR index to the recommended SOFR index.

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