Lawmakers in New York passed a bill Wednesday 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.
In the U.S., the Federal Reserve's recommended alternative reference rate is the Secured Overnight Financing Rate, or SOFR. The transition to SOFR is being led by the Alternative Reference Rate Committee, an industry group established by the Fed. However, getting to SOFR from LIBOR isn't a simple process because LIBOR is based on an average of bank lending rate estimates, while the SOFR and other replacement rates are based on actual overnight money market transactions.
In January, New York Gov. Andrew Cuomo proposed legislation to provide for a statutory replacement benchmark rate for outstanding LIBOR-linked contacts that contain no fallback provisions or contain fallback provisions that result in a benchmark replacement that is based on LIBOR.
The bill now heads to Mr. Cuomo for signature.
Although the bill isn't a federal solution, it is helpful because New York law governs many of the financial products and agreements referencing LIBOR, the Alternative Reference Rate Committee said in a statement. The legislation will provide legal clarity for these contracts and will lessen the burden on New York courts, as legal uncertainty surrounding the transition likely would have prompted disputes, it added.
"The ARRC applauds the passage of its proposed legislation, which marks a major milestone in the transition away from LIBOR," said Tom Wipf, ARRC chairman and vice chairman of institutional securities at Morgan Stanley. "Especially as we enter the home stretch for USD LIBOR, this legislation will address a key risk in the transition by providing a targeted solution for market participants who hold legacy contracts that have no effective fallbacks when LIBOR is discontinued."
Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, also welcomed the bill's passage. "SIFMA supports market, legislative and regulatory efforts to ensure a smooth transition while avoiding market disruption and legal uncertainty, and to that end we encourage Congress to pass a federal law similar to the one passed in New York to address these issues on a national level," he said in a statement.
