Agencies – Spoke on LIBOR replacement, fallbacks, and related legislation

April 15, 2021

US Treasury Remarks
Stated that legislation is necessary for tough legacy contracts that do not specify a workable fallback rate, not feasible for private-sector actors to modify on their own. Relayed legislation could ensure Treasury has the authority to address tax consequences.

Additionally, legislation could amend the higher education act’s reference to LIBOR for special allowance payments under legacy guaranteed federal student loan program. Further relayed the need to make progress on transitioning legacy contracts, referencing alternative rates, and engage with consumers so that they are not caught by surprise.

OCC Remarks
Stated that the agency wanted to ensure banks have the flexibility to determine LIBOR’s successor rates, rather than endorse any specific replacement rate, including SOFR.

Referenced joint statement with Fed and FDIC which reiterated a bank may use any reference rate determined appropriate for its business model and customers. Recently released an OCC self-assessment tool on LIBOR preparedness. Said that legislation could be helpful in contracts without any fallback provisions. Could address systemic risks associated with LIBOR cessation by incentivizing financial counterparties to agree to appropriate reference rate or otherwise designating SOFR.

BPI Coalition Letter
Industry coalition joined by BPI wrote in support of federal legislation to address tough legacy contracts utilizing LIBOR. Cited draft legislation developed by the alternative reference rates committee (ARRC). Draft language recommended fallbacks to take effect when LIBOR ceases publication, created safe harbor from litigation for parties that choose ARRC-recommended rates. Would not affect contracts that have effective fallbacks that do not reference LIBOR. Said only federal legislation could uniformly address all States, address issues such as need for narrow relief certain federal laws, also cited consumer, business, and investor benefits. Benefits included certainty on outcome of transition; all parties having same outcome, would avoid litigation gridlock, and market stability and liquidity would be preserved.

SIFMA Letter
SIFMA submitted testimony to support federal legislation to assist on LIBOR transition. Noted large stock of existing contracts that cannot be amended to use alternative rates. Stated their belief legislation benefits all market participants, provides four key benefits.

Four benefits were certainty of outcomes, fairness, and equality of outcomes, avoidance of years of paralyzing litigation, and the preservation of liquidity and market resilience. Strongly recommended Congress enact legislation aligned with alternative interest rate calculation (ARRC) approach, would create a safe harbor from litigation, and make fallbacks based on SOFR.

For more information, visit www.federalreserve.gov.

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