Fed Adopts LIBOR Benchmark Replacement Rule | Practical Law

Fed Adopts LIBOR Benchmark Replacement Rule | Practical Law

The Federal Reserve Board (FRB) adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act, which establishes benchmark replacements for contracts governed by US law that reference certain USD LIBOR tenors and do not have terms that provide for a clearly defined and practicable replacement benchmark rate following the first London banking day after June 30, 2023.

Fed Adopts LIBOR Benchmark Replacement Rule

Practical Law Legal Update w-038-0535 (Approx. 5 pages)

Fed Adopts LIBOR Benchmark Replacement Rule

by Practical Law Finance
Published on 30 Dec 2022 • USA (National/Federal)
The Federal Reserve Board (FRB) adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act, which establishes benchmark replacements for contracts governed by US law that reference certain USD LIBOR tenors and do not have terms that provide for a clearly defined and practicable replacement benchmark rate following the first London banking day after June 30, 2023.
On December 16, 2022, the Federal Reserve Board (FRB) adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act, 12 U.S.C. §5801 et seq. (LIBOR Act), enacted by Congress and signed into law by President Biden on March 15, 2022 (see Legal Updates, Adjustable Interest Rate (LIBOR) Act of 2021 Introduced to Assist with LIBOR Transition and Legacy LIBOR Transition Measure Signed into Law by President Biden as Part of Omnibus Spending Bill) that identifies benchmark replacement rates based on the Secured Overnight Financing Rate (SOFR).
The final rule establishes benchmark replacements for contracts governed by US law that:
  • Reference the overnight and one-, three-, six-, and 12-month tenors of US dollar LIBOR.
  • Lack terms providing for the use of a clearly defined and practicable replacement benchmark rate for LIBOR following the cessation of LIBOR on the first London banking day after June 30, 2023.
Consistent with the LIBOR Act, all FRB-selected benchmark replacements are SOFR-based and incorporate spread adjustments for each specified tenor of LIBOR. The static spread adjustments cited in the final rule are intended to address certain differences between SOFR and LIBOR, such as the fact that LIBOR embeds a measure of bank credit risk since it is intended to reflect the average current rate at which certain panel banks can obtain unsecured funding in the London Interbank Market.
The static spread adjustments are based on the tenor of LIBOR referenced in the relevant contract and set out the number of basis points (bps) added to the benchmark replacements to achieve a new comparable rate. Specifically:
  • 0.644 bps for overnight LIBOR.
  • 11.448 bps for one-month LIBOR.
  • 26.161 bps for three-month LIBOR.
  • 42.826 bps for six-month LIBOR.
  • 71.513 bps for 12-month LIBOR.
The final rule also provides additional definitions and clarifications consistent with the LIBOR Act, such as:
  • Restating safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected by the FRB.
  • Clarifying who would be considered a "determining person" able to choose to use the replacement benchmark rate selected by the FRB under certain LIBOR contracts.
The FRB's final rule identifies SOFR-based FRB-selected benchmark replacements for LIBOR contracts that will not mature prior to the LIBOR replacement date. Consistent with the LIBOR Act, the final rule ensures that LIBOR contracts adopting a benchmark rate selected by the FRB will not be interrupted or terminated following LIBOR's replacement.
The FRB issued a press release and memorandum on the final rule.
The final rule becomes effective 30 days after publication in the Federal Register.