Following requests from industry, New York State incorporated legislative language addressing the expected discontinuance of LIBOR in its recently released draft budget. The draft language amends the General Obligations Law to require New York law-governed contracts without LIBOR fallback provisions to use the replacement rate recommended by the Alternative Reference Rates Committee (ARRC).1
The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has made clear that it will not compel banks to make LIBOR submissions beyond 2021. Together with other official sector bodies, it has strongly advised industry to transition away from reliance upon LIBOR. The ICE Benchmark Administration, LIBOR's administrator, has recently issued consultations to cease publishing the most commonly used USD LIBOR settings on June 20, 2023. Despite the potential extension of the timeline for certain settings, the official guidance to industry to transition away from LIBOR remains.2
In the U.S., following multiple consultations, the ARRC proposed fallback language for LIBOR that references an adjusted version of the Secured Overnight Financing Rate (SOFR) published by the New York Fed following certain triggering events. Through its consultations, the ARRC found that amending existing agreements to remove LIBOR-based fallback language was proving to be challenging in many instances. Last year, the ARRC released a proposal for legislation in New York State-where a substantial number of commercial contracts are governed-to incorporate recommended fallbacks into existing ("legacy") contracts. Due to COVID-19, the proposal was not incorporated into the New York State budget in June 2020. For more background regarding the initial New York legislative proposal, please see our earlier update ARRC Releases NY Law Proposal To Amend Transactions Referencing USD LIBOR.3
The incorporation of the proposal into the current budget follows a recent request letter from members of the ARRC and multiple other market participants to Governor Cuomo, as well as the New York State Senate Majority Leader and Assembly Speaker, to support the adoption of the ARRC-drafted legislative proposal. The letter explained that the proposal is intended to reduce the potential adverse economic impact and burden on New York courts that could result from the legal uncertainty arising upon the cessation of LIBOR.4 Concurrent with this request, the ARRC also provided an updated version of its proposed legislation.5
Pursuant to the draft budget, New York's General Obligations Law would be amended to add a new article to address LIBOR discontinuance. The new article is consistent with the ARRC's updated proposed legislation. It would require the use of the recommended benchmark replacement (or any successor) on the LIBOR replacement date in any contract, security or instrument that uses LIBOR as a benchmark and that does not contain a fallback provision or contains a fallback provision resulting in a benchmark replacement based on LIBOR that is not a recommended benchmark replacement.
The recommended benchmark replacement would be based upon SOFR and includes any spread adjustment and reasonably applicable conforming changes recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC (or any successor), for any contract, security or instrument that uses LIBOR as a benchmark. If the recommended conforming changes are not considered applicable or sufficient to a reasonable calculating person, conforming changes that are necessary in such person's reasonable judgment, that would not result in a contract disposition for tax purposes, would be made instead. A determining person would have the authority, but would not be required, to select the recommended benchmark replacement. Such person could be any person specified as a "determining person," or any person with the authority to determine the benchmark replacement, to determine a valuation or other measurement based on a benchmark or to notify other persons of the occurrence of the discontinuation of LIBOR. This person's selection would be (a) irrevocable, (b) made by the earlier of either the LIBOR replacement date or the latest date for selecting a benchmark replacement pursuant to the contract and (c) used in any benchmark determination under that contract after the LIBOR replacement date.
The LIBOR replacement date would be: (a) the later of the date of (i) a public statement from the LIBOR administrator or relevant authority that LIBOR has ceased or will cease and there is no successor administrator or (ii) the date on which LIBOR ceases in connection with such announcement; or (b) the date of a public statement by the regulator of the LIBOR administrator that LIBOR is no longer representative.
The legislation would not alter or impair: (a) a written agreement that a contract not be subject to this legislation; (b) a contract with fallback provisions that are not based on LIBOR; (c) a contract where a determining person does not elect to use recommended benchmark replacement or elects to use such replacement prior to the occurrence of a LIBOR discontinuance event; or (d) the application of any cap, floor, modifier or spread adjustment applicable to LIBOR pursuant to the contract terms.
Comparison to the Legislative Approach in the EU and UK
The legislative approach being taken in New York contrasts with the approach taken to date in the U.K. and the EU, which empowers regulators to enact similar measures in appropriate circumstances, but which would not immediately impose fallback language on legacy contracts. In the U.K., the government has proposed the Financial Services Bill which would grant new powers to the FCA in circumstances where LIBOR is no longer representative, including powers to: (a) designate a critical benchmark (such as LIBOR) as unrepresentative and then require its administrator to amend its rules or methodology; (b) prohibit certain uses of a designated benchmark by U.K. regulated firms; (c) make an exception for continued use of a prohibited benchmark by U.K. regulated firms to address tough legacy contracts that cannot easily transition away from LIBOR; or (d) increase the maximum time benchmark administrators can be compelled by the FCA to continue publishing a critical benchmark from five to ten years.6
In the European Union, the Benchmarks Regulation (2016/1011) was recently amended to give the European Commission the power to adopt implementing acts to replace critical and other benchmarks, including third-country benchmarks, if their termination would significantly disrupt or impact EU financial market functioning. The acts would set out the replacement benchmark, spread adjustment, date on which to apply the benchmark and other conforming changes, taking into account recommendations of the relevant central bank or alternative reference rate working group. The Commission may exercise this power upon a cessation event defined similarly to the cessation events set out in the proposed New York legislation. Acts enacted under this power would cover contracts or financial instruments referencing a benchmark (a) subject to the law of an EU member state or third country that does not provide for the wind-down of a benchmark and (b) that has no suitable fallback provided.7
Between now and March 1, the legislature is expected to analyze the proposal through a conference committee process between the Assembly and Senate with any changes reflected in amended versions. The amended budget will be sent back to the governor, who may veto or disapprove certain items added by the legislature while approving the remainder of the proposal.8
The proposed legislation is not expected to be controversial and, if passed, would take effect immediately after the passage of the budget, which is expected to take place on March 31.9
1. U.K. Legislative Bill Drafting Commission, FY 2022 New York State Executive Budget, Transportation, Economic Development and Environmental Conservation Article VII Legislation, Part PP
2. ICE Benchmark Administration, LIBOR.
3. Shearman & Sterling LLP, ARRC Releases NY Law Proposal to Amend Transactions Referencing USD LIBOR (April 1, 2020).
4. ARRC Letter of Support to New York State (December 2020)
5. ARRC, ARRC Proposal for New York State Legislation for U.S. Dollar LIBOR Contracts (December 17, 2020).
6. U.K. Parliament, Financial Services Bill, Bill 200 (October 21, 2020).
7. Official Journal of the European Union, Regulation (EU) 2021/168 of the European Parliament and of the Council of 10 February 2021 amending Regulation (EU) 2016/1011 as regards the exemption of certain third-country spot foreign exchange benchmarks and the designation of replacements for certain benchmarks in cessation, and amending Regulation (EU) No 648/2012 (February 12, 2021).
8. Structured Finance Association, Structured Finance Association Welcomes LIBOR Proposal in Governor Cuomo's Budget Proposal (January 20, 2021).
9. Note also that there is pending federal companion legislation being reviewed, which will be important to address possible conflict between state legislation and federal laws, notably provisions of the Trust Indenture Act, which require unanimous consent in certain cases, including changes in interest rates. The need for federal legislation to address the LIBOR transition was also acknowledged by Federal Reserve Chairman Jerome Powell in recent Congressional testimony. Structured Finance Association, Structured Finance Association Supports Federal Legislation to Ease LIBOR Transition (February 24, 2021).
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