Lawmakers from both parties and senior federal regulatory officials said federal legislation is needed to provide a replacement framework for outstanding financial contracts tied to LIBOR, the predominant derivatives and fixed-income valuation benchmark.
New LIBOR-based contracts will cease at the end of 2021, but the most-utilized U.S. dollar LIBOR tenors will stop in June 2023, giving more time for outstanding contracts to mature, thereby reducing the chance of potential disruptions.
But some of the outstanding contracts do not have sufficient "fallback" language in the event of LIBOR's cessation.
Rep. Brad Sherman, D-Calif., has circulated draft legislation of a proposal — the Adjustable Interest Rate (LIBOR) Act of 2021 — that would establish a process for certain financial contracts that do not contain sufficient fallback language to instead reference the Federal Reserve's recommended alternative reference — the secured overnight financing rate, or SOFR — or an appropriately adjusted form of SOFR without the need to be amended or subject to litigation.
Lawmakers in New York passed a similar bill last month.
At a House Financial Service subcommittee hearing Thursday, officials from the Securities and Exchange Commission, Treasury Department, Fed, Office of the Comptroller of the Currency and Federal Housing Finance Agency said federal legislation is needed to smooth the transition from LIBOR.
"The draft legislation will be helpful in addressing systemic risks associated with the LIBOR cessation by permitting financial counterparties to agree to an appropriate reference rate or otherwise designate SOFR as the replacement rate," Kevin Walsh, deputy comptroller, market risk policy at Office of the Comptroller of the Currency, wrote in his prepared testimony.
The draft legislation directs the Federal Reserve Board to issue regulations regarding the appropriate SOFR or adjusted SOFR replacement reference interest rate that should be used for specific categories of LIBOR-based contracts that fall within the scope of the legislation.
Mr. Sherman, who led the hearing as chairman of the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, is working with Rep. Bill Huizenga, R-Mich., the subcommittee's ranking member, to spearhead the legislative efforts.
"We need federal legislation and I look forward to working with the members of this committee to achieve it," Mr. Sherman said.
Industry groups like the Securities Industry and Financial Markets Association, have welcomed New York's bill, but say a federal solution is needed. "Federal legislation can address all contracts governed by a state or federal law," SIFMA said in written testimony provided to the subcommittee. "There are, after all, 49 other states."
Mark Van Der Weide, general counsel for the Fed board, said during the hearing that it's important to pass legislation soon in order to give regulators sufficient time to write the rules.
Mr. Sherman agreed."My hope is we have this signed into law hopefully before Halloween," he said. "Otherwise it starts to get scary on financial markets."