July 28 -- The Board is inviting comment on a proposed regulation that would implement the Adjustable Interest Rate (LIBOR) Act. The proposed rule would establish benchmark replacements for contracts governed by U.S. law that reference certain tenors of U.S. dollar LIBOR (the overnight and one-, three-, six-, and 12-month tenors) and that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate following the first London banking day after June 30, 2023. The proposed rule also would provide additional definitions and clarifications consistent with the Adjustable Interest Rate (LIBOR) Act. Comments must be submitted by August 29, 2022.
LIBOR, formerly known as the London Interbank Offered Rate, is an interest rate benchmark that was the dominant reference rate used in financial contracts in recent decades and remains in extensive use today, serving as the benchmark rate in more than $200 trillion worth of contracts worldwide. While over-the-counter and exchange-traded derivatives account for the vast majority of this estimated exposure to LIBOR, LIBOR is also referenced in trillions of dollars' worth of business and consumer loans, bonds, securitizations, and nonfinancial corporate contracts.
LIBOR is intended to reflect the rate at which large banks can borrow wholesale funds on an unsecured basis. LIBOR is calculated based on submissions contributed by a panel of large, globally active banks (LIBOR panel banks). Until December 31, 2021, LIBOR's administrator calculated and published LIBOR each London business day for five currencies (USD, GBP, EUR, CHF, and JPY) and seven borrowing periods, known as tenors (overnight, one week, one month, two months, three months, six months, and twelve months).
Over the past decade, financial regulators have expressed growing concern regarding the structural vulnerabilities and robustness of LIBOR. . . . Despite increased regulatory oversight and efforts to improve LIBOR, confidence in LIBOR continued to wane, and financial regulators and market participants began to search for alternative reference rates and develop plans for a transition away from LIBOR. In the United States, this effort has been led by the Alternative Reference Rates Committee (ARRC), a group of private-sector firms convened jointly by the Board and the Federal Reserve Bank of New York (FRBNY) in 2014. . . .
In July 2017, following the departure of some panel banks, the FCA announced that the remaining LIBOR panel banks had voluntarily agreed to sustain LIBOR through the end of 2021 to facilitate an orderly transition away from LIBOR. On March 5, 2021, the FCA announced that, after December 31, 2021, IBA would cease publishing 24 currency and tenor pairs (known as settings). The discontinued LIBOR settings included one-week and two-month USD LIBOR, as well as all EUR and CHF LIBOR tenors and most GBP and JPY LIBOR tenors. However, the FCA required IBA to continue publishing, on a temporary basis, certain GBP and JPY LIBOR tenors on a “synthetic” basis, stating that any such synthetic LIBOR settings “will no longer be representative of the underlying market and economic reality the setting is intended to measure.”
To allow most legacy USD LIBOR contracts to mature without disruption, the FCA also announced that the panels for the remaining five tenors of USD LIBOR would continue through, but cease after, June 30, 2023. The FCA has signaled that it could consider whether to require IBA to continue publishing one-, three-, or six-month USD LIBOR on a synthetic basis for some period after June 30, 2023 (synthetic LIBOR). As with synthetic GBP or JPY LIBOR settings, the FCA has announced that synthetic LIBOR, if published, would “no longer be representative of the underlying market and economic reality the setting is intended to measure.”
In response to the planned cessation of USD LIBOR, U.S. financial regulators have encouraged market participants to transition away from USD LIBOR as a reference rate as soon as practicable. . . .
Notwithstanding governmental and private-sector efforts to encourage market participants to prepare for the cessation of USD LIBOR, there are a significant number of existing contracts that reference USD LIBOR, will not mature by June 30, 2023, and cannot be easily amended. Of particular concern are so-called “tough legacy contracts,” which are contracts that reference USD LIBOR and will not mature by June 30, 2023, but which lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of USD LIBOR. To address these tough legacy contracts, multiple states adopted legislation, initially proposed by the ARRC, to provide a statutory remedy for financial contracts governed by the laws of the enacting states that reference USD LIBOR, will not mature until after USD LIBOR ceases or becomes nonrepresentative, and have no effective means to replace USD LIBOR after it ceases or becomes nonrepresentative. While these state laws provided a solution for a large number of tough legacy contracts, further legislative action was needed to address tough legacy contracts governed by the laws of other states.
Recognizing the need for a uniform, nationwide solution for replacing references to USD LIBOR in tough legacy contracts, on March 15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (the “Act”) as part of the Consolidated Appropriations Act, 2022. Among other things, the Act lays out a set of default rules that apply to tough legacy contracts subject to U.S. law.
Section 104 is the main operative provision of the Act. Section 104 generally distinguishes between three categories of LIBOR contracts with different types of fallback provisions. For these purposes, the Act defines “LIBOR contract” broadly to include any obligation or asset that, by its terms, uses the overnight, one-month, three-month, six-month, or 12-month tenors of USD LIBOR as a benchmark. . . .
The first category of LIBOR contracts encompasses contracts that contain fallback provisions identifying a specific benchmark replacement that is not based in any way on any of the Act's USD LIBOR values (except to account for the difference between LIBOR and the benchmark replacement) and that do not require any person (other than a benchmark administrator) to conduct a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates. . . .
The second category of LIBOR contracts encompasses contracts that contain no fallback provisions, as well as LIBOR contracts with fallback provisions that do not identify a determining person (as described below) and that only (i) identify a benchmark replacement that is based in any way on any of the Act's USD LIBOR values (except to account for the difference between LIBOR and the benchmark replacement) or (ii) require that a person (other than a benchmark administrator) conduct a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates. . . .
The third category of LIBOR contracts encompasses LIBOR contracts that contain fallback provisions authorizing a determining person to determine a benchmark replacement. . . .
Section 110 of the Act directs the Board to promulgate regulations to carry out the Act not later than 180 days after enactment. Pursuant to this authority, the Board is proposing a new regulation to implement the Act.
FRN:
https://www.federalregister.gov/d/2022-15658