A bill to provide a replacement framework for outstanding financial contracts tied to LIBOR passed in the House Wednesday in a 415-9 vote.
New contracts based on LIBOR, the predominant derivatives and fixed-income valuation benchmark, 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.
The Adjustable Interest Rate (LIBOR) Act of 2021 sponsored by Rep. Brad Sherman, D-Calif, would establish a process for certain financial contracts that do not contain sufficient fallback language to instead reference the Federal Reserve's recommended alternative — the secured overnight financing rate, or SOFR — or an appropriately adjusted form of SOFR without the need to be amended or subject to litigation.
This bill will not affect LIBOR-based contracts that contain provisions that allow them to easily transition to a pre-agreed-upon alternative interest rate.
"The passage of this bill represents an instance of Congress proactively moving to fix an impending crisis," Mr. Sherman, chairman of the House Financial Services Subcommittee on Capital Markets and Investor Protection, said in a statement. "Failure to transition away from LIBOR will leave parties unable to calculate the interest due on an estimated $16 trillion of debt instruments, a systemic risk to the economy."
Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association, commended the House vote in a statement. He said the legislation will benefit all market participants, including LIBOR's end users who range from investors to companies to consumers, by providing four key benefits: "certainty of outcomes; fairness and equality of outcomes; avoidance of years of paralyzing litigation; and preservation of liquidity and market resilience."
The bill will head to the Senate for consideration.
