Legacy LIBOR Transition Measure Signed into Law by President Biden as Part of Omnibus Spending Bill | Practical Law

Legacy LIBOR Transition Measure Signed into Law by President Biden as Part of Omnibus Spending Bill | Practical Law

President Biden signed into law an omnibus spending bill that includes a measure addressing LIBOR replacement for existing financial contracts.

Legacy LIBOR Transition Measure Signed into Law by President Biden as Part of Omnibus Spending Bill

by Practical Law Finance
Published on 16 Mar 2022 • USA (National/Federal)
President Biden signed into law an omnibus spending bill that includes a measure addressing LIBOR replacement for existing financial contracts.
On March 15, 2022, President Biden signed into law H.R. 2471, the Consolidated Appropriations Act, 2022. Among other things, the Act addresses issues created for certain financial contracts that reference LIBOR as a benchmark, as USD LIBOR is scheduled to cease publication on June 30, 2023. The LIBOR-related provisions of the Act ease uncertainty regarding how legacy (or existing) contracts that reference LIBOR but lack adequate fallback language would be treated.
The Act provides that the Board of Governors (Board) of the Federal Reserve System will select the replacement rate for such legacy contracts in the event that the contracts:
  • Contain no fallback provision.
  • Lack specificity as to the:
    • replacement benchmark rate; or
    • determining person or body.
The Act provides a Board-selected benchmark replacement rate will be based on the secured overnight financing rate (SOFR), published by the Federal Reserve Bank of New York (see Legal Update, Federal Reserve Board Releases Additional LIBOR Transition FAQs). Under the Act, the LIBOR replacement date is the first London banking day after June 30, 2023, unless the Board determines a different date. The Act also provides safe harbor for lenders that may choose SOFR for contracts where there is discretion as to the choice of a successor rate.
The stated purpose of these provisions of the Act are to:
  • Establish a clear and uniform process for replacing LIBOR in existing contracts without affecting the ability of parties to use any appropriate benchmark rate in new contracts.
  • Preclude litigation related to existing contracts whose terms do not provide for a replacement benchmark rate.
  • Allow existing contracts that reference LIBOR but provide for the use of a replacement rate to operate according to their terms.
  • Address LIBOR references in federal law.
Note that these provisions of the Act are likely to impact securitization transactions, as securitization indentures are difficult to amend and often require the consent of noteholders with conflicting interests. US loan markets and most major swaps and derivatives markets have already addressed LIBOR transition, so the Act is unlikely to impact those areas significantly.
The Alternative Reference Rates Committee (ARRC) issued a press release on March 15, 2022 welcoming the new law.
For more information on the LIBOR transition, see Practice Note, What's Market: LIBOR Interest Rate Provisions and LIBOR Replacement Toolkit.