On March 25, 2021, the New York State Legislature addressed the expected discontinuance of LIBOR by establishing that New York law-governed contracts without LIBOR fallback provisions will be deemed to use the replacement rate recommended by the Alternative Reference Rates Committee (ARRC). The legislation will take effect immediately once signed into law by Governor Cuomo, which is expected to take place in the coming days.
The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has made clear that publication of most LIBOR settings will cease immediately after December 31, 2021, and in the case of the overnight and 12-month USD LIBOR settings, immediately after June 30, 2023. Accordingly, official sector bodies have been strongly urging the industry to make progress in transitioning away from LIBOR.
In the U.S., following multiple consultations, the ARRC has proposed fallback language for LIBOR that references an adjusted version of the Secured Overnight Financing Rate (SOFR), which is published by the Federal Reserve Bank of New York, following certain triggering events. Last year, the ARRC released a proposal for New York legislation, which governs a substantial number of commercial contracts, to incorporate recommended fallbacks into existing so-called “legacy” contracts. For more background regarding the initial New York legislative proposal, please see our earlier update, ARRC Releases NY Law Proposal To Amend Transactions Referencing USD LIBOR
The New Legislation
The budget approved by the New York State Legislature on March 25, once signed into law, amends New York’s General Obligations Law to add a new article to address LIBOR discontinuance. The new article is consistent with the ARRC’s updated proposed legislation. It requires the use of the recommended benchmark replacement (or any successor) on the LIBOR “replacement date” in any contract, security or instrument that uses LIBOR as a benchmark and that does not contain its own appropriate fallback provision.
The “LIBOR replacement date” under the legislation is: (a) the later of the date of (i) a public statement from the LIBOR administrator or relevant authority that LIBOR has ceased or will cease and there is no successor administrator and (ii) the date on which LIBOR ceases in connection with such announcement; or (b) the date of a public statement by the regulator of the LIBOR administrator that LIBOR is no longer representative. Based on statements of the LIBOR administrator, the FCA and other regulators, it is expected that the LIBOR replacement date for most tenors of USD LIBOR will be the business day following June 30, 2023 and for most other (i.e., non-USD) LIBOR tenors will be the business day following December 31, 2021.
The recommended benchmark replacement would apply, on a mandatory basis, where the relevant contract does not have a fallback provision that would apply following discontinuation of LIBOR, or where the existing fallback provision itself references a LIBOR rate (such as the last LIBOR rate before discontinuation) or would provide for determination of the rate based on polling of market participants as to interbank lending rates. In addition, where the underlying contract permits one of the parties (referred to as a “determining party”) to determine a fallback rate (as may be the case for the lender under some loan agreements, for example), the legislation expressly permits (but does not require) the determining party to choose the recommended benchmark replacement, and provides certain protections from claims against the determining party where it does so.
The recommended benchmark replacement is based upon SOFR and includes any spread adjustment and reasonably applicable conforming changes recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC (or any successor), for any contract, security or instrument that uses LIBOR as a benchmark. In certain cases, if the person responsible under the contract for calculating the rate determines that the recommended conforming changes are not applicable or are insufficient, it may make other conforming changes as necessary to permit calculation of the benchmark replacement in a manner consistent with market practice for similar contracts, provided that the changes would not result in a contract disposition for tax purposes.
Parties to a contract may, by agreement, opt out of the recommended benchmark replacement under the legislation. The legislation also would not override existing fallbacks in agreements that reference a rate other than LIBOR and that are not based on polling of market participants as to interbank lending rates (and so the legislation would not affect existing contractual fallbacks to the prime rate or similar rate).