A bipartisan group of senators has introduced a bill to provide a replacement framework for outstanding financial contracts tied to LIBOR, the predominant derivatives and fixed-income valuation benchmark.
The Economic Continuity and Stability Act was introduced Wednesday by Sens. Jon Tester, D-Mont.; Thom Tillis, R-N.C.; Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee; and Sen. Pat Toomey, R-Pa., the committee's ranking member.
New contracts based on LIBOR, or London interbank offered rate, ceased 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.
The bill would establish a process for certain financial contracts that do not contain sufficient fallback language. It would direct the Federal Reserve to determine replacement rates that can be used for contracts lacking fallback language, by providing a safe harbor should the contract not specify a non-LIBOR replacement rate following the end of LIBOR.
The bill would allow parties to contracts that already have effective fallback provisions to opt out of the legislation and would apply only to tough legacy contracts so that new or future business will not be affected.
"We need to address this issue pre-emptively to make sure Montanans are protected from rising costs and legal expenses," Mr. Tester said in a news release. "That's why I'm proud to have introduced this bipartisan legislation, and it's why we need to get this bill passed in the Senate immediately."
Added Mr. Tillis, "The LIBOR rate underpins roughly $200 trillion worth of contracts worldwide. With the phaseout of new LIBOR contracts beginning this year and the overall termination of the rate scheduled for 2023, it is critically important that Congress acts to provide a smooth transition away from LIBOR for financial institutions and consumers alike."
A group of 23 financial trade associations, including the Securities Industry and Financial Markets Association, U.S. Chamber of Commerce's Center for Capital Markets Competitiveness and Investment Company Institute endorsed the bill in a letter to Senate leadership Monday.
The House in December overwhelmingly passed a similar bill — the Adjustable Interest Rate (LIBOR) Act of 2021, sponsored by Rep. Brad Sherman, D-Calif. — in a 415-9 vote.
