Following up on our past posts on the transition away from the London Interbank Offering Rate (“LIBOR”), and other interbank offering rates (“IBOR”) denominated in other currencies, we discuss the proposal from the Alternative Reference Rates Committee (“ARRC”) for New York legislation, which was published on March 6, 2020.
The ARRC is a group of private sector market participants organized by the Board of Governors of the Federal Reserve System (“FRB”) and the New York Federal Reserve Bank (“FRBNY”) to help facilitate a successful transition from LIBOR to its recommended alternative, the Secured Overnight Financing Rate (“SOFR”). The ARRC had begun exploring potential legislative solutions to address deficient contract fallback language for existing loans, which we covered in our previous post, “The LIBOR Transition – Potential New York State Legislation.”
Since then, ARRC has crafted a comprehensive proposal for New York State legislation, which intends to address the uncertainties surrounding the LIBOR transition, which has been published as ARRC’s proposed legislative solution.
The key components of the proposed legislation include:
- Prohibiting a party from backing out or using the LIBOR transition as a breach of contract;
- Stating definitively that the recommended benchmark replacement is a commercially reasonable substitute for LIBOR; and
- Providing a safe harbor from litigation for the use of the recommended benchmark replacement.
It is important to note the scope of this proposed legislation. First, this legislation would only govern New York law contracts that reference LIBOR. Therefore, contracts that are governed by the laws of other jurisdictions would not be affected by this legislation. Second, this legislation would only impact contracts where the replacement rate language for LIBOR is silent or the fallback provisions reference LIBOR. Where contracts already have fallback provisions to a non-LIBOR replacement rate (such as prime rate), the legislation would not apply.
There are mandatory and permissive applications of the statute. As mentioned above, if the legacy contract is silent or references LIBOR in the fallback language (such as the last-quoted LIBOR), the application of the statute is mandatory. If the fallback language gives a party the right to exercise discretion or judgment regarding the fallback, the legislation’s application is permissive, but not mandatory.
The legislation would work in practice by the statute becoming applicable or available based upon the occurrence of statutory trigger events, such as, a “LIBOR Discontinuance Event” or “LIBOR Replacement Date” as defined in the legislation. Upon the statutory trigger event, the “Recommended Benchmark Replacement” (as decided by the “Relevant Recommending Body” defined as the FRBNY, FRB or ARRC, or any successor to them) shall by operation of law be the “Benchmark Replacement” for such contract.
The ARRC participants are hopeful that the proposal will provide clarity to New York contract participants because “New York has long encouraged clarity and stability in commercial transactions and, for that reason, is widely preferred as the law that governs commercial transactions and securities . . . [therefore] disputes arising out of these transactions will burden New York’s courts.”
The ARRC plans to host a webinar to provide more details on the proposed legislation in the upcoming weeks.
“The LIBOR Transition” is a periodic series of updates discussing reference interbank offering rates, such as LIBOR, and the challenges involved in navigating a successful transition from their use as reference rates of choice in the market. Norton Rose Fulbright has assembled a group of its lawyers from around the globe to stay on top of these issues and assist clients in the transition to new reference rates. More information can be found on our Norton Rose Fulbright web site.