Legislative Solutions to the Removal of US Dollar LIBOR – Finance and Banking

Contractual solutions to the removal of US dollar LIBOR are essential. These include the use of the Alternative Reference Rates Committee (ARRC) “amendment approach” or “hardwired” fallback language for lending and counterparty adherence to the IBOR fallback protocol. International Swaps and Derivatives Association (ISDA) 2020 and related IBOR Fallbacks Supplement to ISDA 2006 Definitions (or entry of their bilateral equivalent) for Derivatives. But while contractual solutions are essential, they may not be sufficient. Indeed, there are an enormous number of contracts referencing US dollar LIBOR – including mortgages, securitizations, floating rate notes and commercial contracts – with inadequate, ambiguous or non-existent US dollar LIBOR fallbacks, and as to modification which may not be possible. Enter the possible legislative solutions.

New York State Bill

On January 19, 2021, Governor Andrew Cuomo introduced a New York State bill to end US dollar LIBOR as part of the broader state budget bill.1The legislation closely mirrors the bill proposed by the ARRC in March 2020.2 3 The New York State budget is expected by March 31, 2021, the end of the state’s fiscal year. The US dollar LIBOR termination legislation proposed as part of the budget bill would be implemented through a new section 18-400 of the New York General Obligations Act and would take effect immediately upon passage of the bill. budget law.

The legislation provides for the replacement in contracts, securities and instruments of US dollar LIBOR with the “recommended benchmark replacement” – essentially defined as the rate, based on the guaranteed overnight funding rate (SOFR) and including spread adjustment and any changes consistent with the benchmark, which will have been selected or recommended by the Federal Reserve Board, the Federal Reserve Board of New York or the ARRC with respect to this type of contract, security or instrument.

Key highlights of the bill include that it:

  • apply to contracts, securities and instruments governed by New York law, although the parties are entitled to opt out;

  • ipso jure (request required) to replace US dollar LIBOR with the recommended benchmark replacement when a contract, security or instrument does not contain a US dollar LIBOR fallback or reverts to a US dollar LIBOR rate ;

    • (note that loans usually return at a prime rate, so
      the legislation would generally not apply to loans; whereas the legislation would apply to floating rate bonds that fall back to the last quoted US dollar LIBOR, as is generally the case for such bonds);

  • provide litigation protection to a party that has the discretion to override US dollar LIBOR and elect the recommended benchmark override as the override (permissive enforcement);

  • prohibit a party from refusing to perform its contractual obligations or declaring a breach of contract due to the removal of US dollar LIBOR or the use of recommended benchmark replacement;

  • establish that the recommended benchmark replacement is a commercially reasonable substitute and substantial commercial equivalent to US dollar LIBOR;

  • override US dollar LIBOR dips based on dealer surveys, such as those in the 2006 ISDA definitions (eg, before supplementation via the IBOR Dip Supplement);

  • become applicable (mandatory) or available (discretionary) upon the occurrence of declared trigger events – namely, a permanent or indefinite cessation of US dollar LIBOR or a determination of non-representativeness, being essentially the same trigger events recommended by the ARRC and adopted by ISDA.4

Since New York law (along with English law) is widely preferred as the law governing contracts referencing US dollar LIBOR, the enactment of this legislation would be an important legislative addition to contractual solutions to the cessation of US dollar LIBOR. Americans. Its enactment would also serve as a model for other states.

US federal bill

On October 13, 2020, a discussion bill5closely mirroring the ARRC’s March 2020 legislative bill (and therefore, by definition, also closely mirroring the New York proposed legislation described above) has been circulated to the United States Congress. This bill, sponsored by Brad Sherman, Democratic Representative of the 30and District and Chairman of the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, was not addressed in the 2020 session of Congress. However, a version of the bill is expected to be formally presented to Congress in the second quarter of 2021. It is important to note that the congressional bill for discussion would expressly override state law.

Legislative solutions or litigation of another kind?

In the absence of legislative solutions (along with contractual solutions), the discontinuation of US Dollar LIBOR could result in significant economic disruption and litigation resulting from inadequate, ambiguous or non-existent fallbacks. While legislation dealing with the removal of US dollar LIBOR would provide considerable relief, it would not necessarily eliminate litigation. The ARRC-proposed bill that formed the basis of the New York and federal bill was described as “carefully crafted to pass constitutional scrutiny”;6 nevertheless, commentators have pointed out that the legislation could be challenged on the following grounds, among others:

  • under the Contracts Clause or the Due Process Clause of the United States Constitution;

  • in the case of securities issued pursuant to a trust indenture subject to the United States Trust Indenture Act of 1939, as a violation of rights under Section 316(b) of that Act;7 Where

  • in the case of the New York bill, as a violation of the non-delegation clause of the New York State Constitution.8


1. See https://www.budget.ny.gov/pubs/archive/fy22/ex/artvii/ted-bill.pdf Part PP pages 233-242.

2. https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Proposed-Legislative-Solution.pdf Governor Cuomo’s Proposed Legislation Follows Substantially Similar Supplementary Assembly Bills of the State of New York and the Senate (AB A11098 and S9070, respectively) introduced towards the end of the 2020 legislative session, themselves closely mirroring the bill proposed by the ARRC in March 2020. These bills Complementary statutes would implement the legislation via proposed new Section 12 of the New York Uniform Commercial Code.

3. On March 1, 2021, the ARRC published an updated version of its bill, reflecting the technical changes: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/libor- legislation-with-technical-amendments

4. See https://www.osler.com/en/resources/cross-border/2021/libor-endgame-announced. Note that the “unrepresentative” trigger in the ARRC’s proposed bill, and in the legislation discussed in this update, only considers a declaration of
gift non-representativeness, whereas the non-representativeness trigger adopted by ISDA also includes a declaration of to come up non-representativeness.

5. https://cmbs.informz.net/cmbs/data/images/LIBOR%20Transition%20Assistance%20Act_Discussion%20Draft.pdf

6. https://www.sifma.org/resources/submissions/joint-letter-on-alternative-reference-rates-committees-legislative-proposal/

7. Section 316(b) of the United States Trust Indenture Act of 1939 (TIA) provides in relevant part that “the right of any holder of a conventional security to receive payment of principal and interest on such contractual security, on or after the respective due dates expressed in such conventional security, or to sue for the execution of such payment from such respective dates, shall not be altered or affected without the consent of such holder…” State law generally cannot abrogate rights under federal law. The New York bill and the federal law attempt to respond to Section 316(b) of the TIA by whereas the use of the Recommended Credential Replacement does not affect the rights or obligations of anyone with respect to any contract, title, or instrument; it remains to be seen whether it will be effective in the context of state law claiming to deny rights under federal law.

8. For example, based on an impermissible delegation of state legislative authority to determine recommended benchmark replacement.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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