LIBOR Fallbacks Bill Introduced into New York State Senate | Practical Law

LIBOR Fallbacks Bill Introduced into New York State Senate | Practical Law

A bill designed to facilitate the market-wide transition away from the use of LIBOR in financial contracts was introduced into the New York State Senate.

LIBOR Fallbacks Bill Introduced into New York State Senate

Practical Law Legal Update w-028-1772 (Approx. 4 pages)

LIBOR Fallbacks Bill Introduced into New York State Senate

by Practical Law Finance
Published on 03 Nov 2020 • USA (National/Federal)
A bill designed to facilitate the market-wide transition away from the use of LIBOR in financial contracts was introduced into the New York State Senate.
On October 28, 2020, in order to facilitate the market-wide transition away from the use of LIBOR in financial contracts, the New York Senate introduced a bill that would mandate the use of replacement benchmark interest rates in contracts referencing LIBOR that are subject to New York law where the contract either:
  • Does not include benchmark fallback language; or
  • Includes language that "falls back" to LIBOR.
The bill itself only defines benchmark replacement as any benchmark recommended by a "relevant recommending body," including the Federal Reserve Board, Federal Reserve Bank of New Yrok, or the Alternative Reference Rate Committee (ARRC).
The proposal largely tracks an ARRC proposal issued earlier this year.
The bill:
  • Sets out the following events that would constitute LIBOR discontinuance events:
    • a public statement or publication of information by LIBOR administrators that LIBOR has been or will be discontinued (and no successor administrator will be providing LIBOR going forward);
    • a public statement or publication of information by the regulatory supervisor for the administrator of LIBOR, the US Federal Reserve System, or an insolvency official or resolution authority (or court or entity with similar insolvency or resolution authority) that LIBOR has been or will be discontinued (and no successor administrator will be providing LIBOR going forward); or
    • a public statement or publication of information by relevant regulatory supervisors for the administrator of LIBOR that LIBOR is no longer representative of any particular form of contract, security, or instrument.
  • Would allow a benchmark replacement to be used by operation of law in cases where LIBOR is used as a benchmark with no fallback provision or where the fallback provision provides for a fallback to LIBOR.
  • Would create a litigation safe harbor for contracts, securities, and instruments that would be subject to benchmark replacement under the bill. Under this safe harbor:
    • benchmark conforming changes would not be deemed to be amendments to the contract and would be deemed not to have a material or adverse effect on any person's rights or obligations under the related contract, security, or instrument. Benchmark conforming changes are defined as modifications associated with a recommend benchmark replacement that have been selected or recommended by a relevant recommended body or that would not, in the reasonable judgment of a "determining person" result in the disposition of the underlying contract, security, or instrument for US federal income tax purposes;
    • the occurrence of a LIBOR discontinuance event, use of a replacement benchmark, or implementation of benchmark conforming changes would not have the effect of discharging or excusing performance under the related contract, security, or instrument; and
    • the use of a recommended benchmark replacement would constitute a commercial reasonable substitute for LIBOR and substantial performance of any person's rights or obligations based on LIBOR under the contract, security, or instrument.
Also, under the bill:
  • Fallback provisions that in any way reference LIBOR would be overridden.
  • In circumstances where a contract, security, or instrument has a "determining person" (one that has rights to select a benchmark replacement), the bill would permit (but not require) such person to determine the successor rate so long as the fallback provision does not itself reference LIBOR and such recommendation is made within the timeframe of the original agreement or 60 days following a LIBOR replacement date.
For further information on LIBOR replacement and benchmark fallback, see LIBOR Replacement Toolkit.