On March 15, 2022, President Biden signed the Consolidated Appropriations Act of 2022 into law, which includes the Adjustable Interest Rate (LIBOR) Act. This legislation establishes a uniform benchmark replacement process for financial contracts that mature after the cessation of the London Interbank Offered Rate (LIBOR) (scheduled for June 30, 2023) which do not contain clearly defined or practicable fallback provisions. The legislation also establishes a safe harbor for lenders, shielding them from litigation for choosing a replacement rate recommended by the Board of Governors of the Federal Reserve, such as the Secured Overnight Financing Rate (SOFR). Importantly, parties may continue to use any appropriate benchmark rate in new contracts.
The passage of the Adjustable Interest Rate (LIBOR) Act is significant for the financial services industry and worldwide markets in general, as LIBOR underpins over $200 trillion worth of contracts around the world. The transition from LIBOR to alternate benchmark rates has been ongoing for several years and has picked up steam in recent months, as the sunset date of LIBOR is just over a year away. However, there is a significant subset of contracts that do not have adequate benchmark fallback or transition provisions, the amendment of which may not be feasible. The new federal law aims to address this problem.
The Alternative Reference Rates Committee (ARRC) welcomed the news of the Act’s passage, stating that “President Biden and lawmakers have taken a vital step to protect investors, businesses, and consumers from LIBOR-related risks. By providing a solution for legacy contracts that have no workable fallbacks and a safe harbor for lenders who choose SOFR in relevant contracts, this legislation significantly reduces risks for market participants worldwide.” The federal law is similar to legislation passed in New York and several other states in 2021, which was initially proposed by the ARRC.
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