Accept All Cookies
On December 16, 2022, the Board of Governors of the Federal Reserve System (the “Board”) adopted a final rule (the “Final Rule”) to implement the Adjustable Interest Rate (LIBOR) Act1 (the “LIBOR Act”). The Final Rule follows the Board’s publication of a proposed rule (the “Proposed Rule”) in July 2022 and invitation for public comment. The Final Rule addresses many of the comments received on the Proposed Rule and sets forth the Board’s final decision on a number of substantive and technical issues related to the planned cessation of USD LIBOR on a representative basis. The Final Rule will become effective 30 days after publication in the Federal Register.
A discussion of the Final Rule is set forth below.
A. Categorization of Legacy Contracts
The Proposed Rule used the terms “covered contract” and “non-covered contract” to describe LIBOR contracts that would be subject to the Proposed Rule and those that generally would not be subject to the Proposed Rule. Several commenters indicated that this bifurcation did not fully align with the LIBOR Act and was confusing. Therefore, the Board did not include these terms in the Final Rule. Instead, in the Final Rule the Board identified three categories of contracts encompassing legacy LIBOR contracts.
The first category of LIBOR contracts includes those contracts that contain fallback provisions identifying a specific benchmark replacement not based in any way on LIBOR values2 and that do not require the conducting of a poll, survey, or inquiries for quotes to determine the replacement rate. Contracts in this first category are generally expected to transition to the contractually agreed-upon benchmark replacement as provided in their fallback provisions on or before the LIBOR replacement date.3
The second category of LIBOR contracts includes (i) contracts that contain no fallback provisions and (ii) contracts that do not identify a determining person4 and that only (A) identify a benchmark replacement that is based on LIBOR or (B) require the conducting of a poll, survey, or inquiries for quotes to determine the replacement rate. Contracts in this second category are expected to transition on the LIBOR replacement date to the “Board-selected benchmark replacement” for the particular type of LIBOR contracts as described below.
The third category of LIBOR contracts includes contracts that contain fallback provisions authorizing a determining person to determine a benchmark replacement. The application of the LIBOR Act to these contracts will depend on the benchmark replacement selection, if any, made by the determining person. Contracts in this third category are expected to transition to the benchmark replacement selected by the determining person, or to the Board-selected benchmark replacement if no benchmark replacement is selected by the determining person.
The description of these categories in the Board’s commentary provides a helpful roadmap for implementation of the LIBOR Act and the Final Rule.
B. Board-selected Benchmark Replacement
The central feature of the Final Rule is the selection of the “board-selected benchmark replacement” that will be applicable to various types of LIBOR contracts. The Board-selected benchmark replacement identifies what benchmark replacement certain legacy LIBOR contracts will transition to on the LIBOR replacement date, the benchmark replacement that certain contracts with a “determining person” may transition to, and the benchmark replacement that, if used, will receive the benefit of protective provisions in the LIBOR Act such as a safe harbor. The Board-selected benchmark replacement varies based on the type of LIBOR contract.
The Final Rule sets forth the following benchmark replacements for the following types of contracts:
C. Synthetic LIBOR
With the recent publication of a proposal by the United Kingdom’s Financial Conduct Authority (“FCA”), the regulator of the ICE Benchmark Administration (“IBA”), LIBOR’s administrator, to require publication of 1-, 3-, and 6-month USD LIBOR settings on a “synthetic” basis through end-September 2024, it appears likely that these tenors of USD LIBOR will continue to exist on a synthetic, or non-representative, basis for some period after June 30, 2023. The Board recognizes that this could have an impact on a number of legacy contracts, including those that contain fallbacks that are not expressly triggered where a benchmark called “LIBOR” is available but is not representative, and has included in the Final Rule a few provisions and clarifications to address this point, while declining to incorporate other suggestions relating to synthetic LIBOR.
D. Determining Persons
The Final Rule clarifies two potential ambiguities in the interpretation of the term “determining person” raised by commenters to the Proposed Rule.
E. Technical Revisions and Notice Requirements
The Final Rule includes a number of technical changes, including clarification of certain language commonly used in legacy LIBOR contracts. Many legacy LIBOR contracts used the wording “Eurodollar deposit and lending rates” or similar phrases, oftentimes interchangeably with “interbank lending or deposit rates.” The Final Rule clarifies that “Eurodollar deposit and lending rates” are “interbank lending or deposit rates” for purposes of the LIBOR Act and the Final Rule.
In the Proposed Rule, the Board also invited comment as to whether the Final Rule should require a determining person to provide notice regarding the selection of a replacement benchmark. Consistent with the comments received, the Final Rule does not impose any notice requirements.
G. Conforming Changes
The LIBOR Act allows the Board to determine, in its discretion, conforming changes that would address issues affecting the implementation, administration and calculation of the Board-selected benchmark replacement. These conforming changes will become an integral part of any LIBOR contract for which the Board-selected benchmark replacement becomes the benchmark replacement pursuant to the LIBOR Act and the Final Rule. The conforming changes addressed by the Final Rule are as follows:
The conforming changes listed above are not exclusionary. The Final Rule clarifies that, with respect to any LIBOR contract that is not a consumer loan, a calculating person may make additional technical, administrative, or operational changes, alterations, or modifications that, in that person’s reasonable judgment, would be necessary or appropriate to permit the implementation, administration, and calculation of the Board-selected benchmark replacement without consent from any other person.
The Board has reserved the right to publish, in its discretion, additional conforming changes.
H. Scope of Section 105 of the LIBOR Act
The LIBOR Act provides for certain statutory protections related to the selection and use of the Board-selected benchmark replacement. In response to comments on the Proposed Rule, the Board included a new section in the Final Rule expressly stating that the provisions of Section 105(a)-(d) of the LIBOR Act shall apply to any LIBOR contract for which the Board-selected benchmark replacement becomes the benchmark replacement pursuant to Section 253.3(a) or (c) of the Final Rule.
Under Section 105(a)-(d), the selection of a Board-selected benchmark replacement and implementation of related benchmark conforming changes in the circumstances described below:
Sections 253.3(a) and (c) of the Final Rule, which align with Sections 104(a) and 104(c) of the LIBOR Act, address situations where the applicable Board-selected benchmark replacement replaces the existing benchmark (i) automatically as a result of a LIBOR contract containing no fallback language or containing neither a specific benchmark replacement nor a determining person, (ii) automatically as a result of a determining person having not selected a benchmark replacement by the applicable benchmark replacement date, or (iii) as a result of the selection of such rate by the determining person.
The Final Rule also separately provides that nothing in the Final Rule is intended to alter or modify Section 105(e) of the LIBOR Act, which states that subject to certain specific provisions in the LIBOR Act, nothing in the LIBOR Act may be construed to create any negative inference or negative presumption regarding the selection of a benchmark replacement or changes related thereto that is different than the Board-selected benchmark replacement.
1 Pub. L. 117-103, div. U, codified at 12 U.S.C. 5801 et seq., https://www.congress.gov/117/plaws/publ103/PLAW-117publ103.pdf (pp. 777-786).
2 This does not include references to LIBOR values used to account for the difference between LIBOR and the selected benchmark replacement.
3 “LIBOR replacement date” means the first London banking day after June 30, 2023, unless the Board determines that any LIBOR tenor will cease to be published or cease to be representative on a different date.
4 A “determining person” means, with respect to any LIBOR contract, any person with the sole authority, right, or obligation, including on a temporary basis (as identified by the LIBOR contract or by the governing law of the LIBOR contract, as appropriate) to determine a benchmark replacement, whether or not the person’s authority, right, or obligation is subject to any contingencies specified in the LIBOR contract or by the governing law of the LIBOR contract.
5 Refinitiv Limited will publish and provide rates for consumer loans that sum (i) CME Term SOFR and (ii) the transition spread adjustment.
6 In response to comments to the Proposed Rule suggesting that the terms “GSE” and “Covered GSE contract” used in the Proposed Rule were too broad, the Final Rule replaced those terms with “FHFA-regulated entity” and “FHFA-regulated-entity contract”.
7 “30-day Average SOFR” is defined in Section 253.2 of the Final Rule.