Summary of Federal USD Libor Discontinuance Law

This Holland & Knight alert provides a brief summary of the new federal U.S. Dollar (USD) Libor discontinuance law. The new law, known as the "Adjustable Interest Rate (LIBOR) Act" (the Law), was included as part of H.R. 2471, a larger Consolidated Appropriations Act. The Law was signed by President Joe Biden on March 15, 2022.

What Is the Purpose of the Law?

The Law's stated purposes are as follows:

• to establish a clear and uniform process, on a nationwide basis, for replacing Libor in existing contracts the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate, without affecting the ability of parties to use any appropriate benchmark rate in new contracts
• to preclude litigation related to existing contracts the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate
• to allow existing contracts that reference Libor but provide for the use of a clearly defined and practicable replacement rate, to operate according to their terms, and
• to address Libor references in federal law

Which Agreements Are Covered by the Law?

The Law covers "any contract, agreement, indenture, organizational document, guarantee, mortgage, deed of trust, lease, security (whether representing debt or equity, including any interest in a corporation, a partnership, or a limited liability company), instrument, or other obligation or asset that, by its terms, uses USD LIBOR [other than one-week or two-month USD LIBOR] as a benchmark" (collectively, Covered Agreements). 

How Will the Law Determine the Benchmark Replacement for Covered Agreements?

Covered Agreements with no fallback. If a Covered Agreement either:

• contains no fallback provisions, or
• contains fallback provisions that identify neither a) a specific benchmark replacement nor b) a determining person

then, on the first London banking day after June 30, 2023 (or an earlier date if the Board of Governors of the Federal Reserve System (the Board) determines that any Libor tenor will cease to be published or cease to be representative on a different date) (such date, the Libor Replacement Date),

• the "Board-selected benchmark replacement" shall replace Libor or any interest rate or dividend rate based on Libor as the benchmark for such Covered Agreement.
  • "Board-selected benchmark replacement" means a benchmark replacement identified by the Board that is based on Secured Overnight Financing Rate (SOFR), including any applicable tenor spread adjustment.
  • "Tenor spread adjustment" means:
    • With respect to non-consumer loans, A) 0.00644 percent for overnight Libor; B) 0.11448 percent for one-month Libor; C) 0.26161 percent for three-month Libor; D) 0.42826 percent for six-month Libor; and E) 0.71513 percent for 12-month Libor.
    • With respect to consumer loans, the tenor spread adjustments will be subject to a one-year phase-in period before becoming fixed at the adjustments set forth above.

Covered Agreements with fallback selected by a party. If a Covered Agreement contains fallback provisions that give any person (the determining person) the authority, right or obligation, including on a temporary basis (as identified by the Covered Agreement or by the governing law of the Covered Agreement, as appropriate) to determine a benchmark replacement, then:

• the determining person may, but shall not be required to, select, the Board-selected benchmark replacement as the benchmark replacement.
• If the determining person selects the Board-selected benchmark replacement as the benchmark replacement, any such selection shall be:
  • irrevocable,
  • made by the earlier of the Libor Replacement Date and the latest date for selecting a benchmark replacement according to the terms of the Covered Agreement, and
  • used in any determinations of the benchmark under or with respect to the Covered Agreement occurring on and after the Libor Replacement Date.
• If a determining person does not select a benchmark replacement by the date specified in paragraph (B) above, the Board-selected benchmark replacement, on and after the Libor replacement date, shall be the benchmark replacement for the Covered Agreement.

Covered Agreements with fallback based on Libor. If a Covered Agreement contains any fallback provisions that refer to A) a benchmark replacement that is based in any way on any Libor value (except to account for the difference between Libor and the benchmark replacement) or B) a requirement that a person (other than the benchmark administrator) conduct a poll, survey or inquiries for quotes or information concerning interbank lending or deposit rates, those provisions shall be disregarded as if not included in such Covered Agreement and shall be deemed null and void and without any force or effect.

What Is the Impact of Replacing the Benchmark with the Board-Selected Benchmark Replacement Pursuant to Any of the Above?

Conforming changes. If the Board-selected benchmark replacement becomes the benchmark replacement for a Covered Agreement pursuant to any of the above, all "benchmark replacement conforming changes" shall become an integral part of the Covered Agreement without the consent of any other person.

• "benchmark replacement conforming changes" means any technical, administrative, or operational changes, alterations, or modifications that:

  A) the Board determines, in its discretion, would address one or more issues affecting the implementation, administration and calculation of the Board-selected benchmark replacement in Covered Agreements, or

  B) solely with respect to a Covered Agreement that is not a consumer loan, in the reasonable judgment of a calculating person, are otherwise necessary or appropriate to permit the implementation, administration and calculation of the Board-selected benchmark replacement under or with respect to a Libor contract after giving due consideration to any benchmark replacement conforming changes under clause (A) above.

  • "calculating person" means any person, including the determining person, responsible for calculating or determining any valuation, payment or other measurement based on a benchmark.

No amendment or prejudice. The selection or use of a Board-selected benchmark replacement or the determination, implementation, or performance of benchmark replacement conforming changes shall not be deemed to:

• be an amendment or modification of any Covered Agreement, or
• prejudice, impair or affect any person's rights, interests or obligations under or with respect to any Covered Agreement

No impairment. Neither the selection or use of a Board-selected benchmark replacement as a benchmark replacement nor the determination, implementation or performance of benchmark replacement conforming changes may:

• be deemed to impair or affect the right of any person to receive a payment, or affect the amount or timing of such payment, under any Covered Agreement, or
• A) discharge or excuse performance under any Covered Agreement for any reason, claim or defense, including, any force majeure or other provision in any Covered Agreement; B) give any person the right to unilaterally terminate or suspend performance under any Covered Agreement; C) constitute a breach of a Covered Agreement; or D) void or nullify any Covered Agreement

General construction. A Board-selected benchmark replacement and the selection or use of a Board-selected benchmark replacement as a benchmark replacement under or with respect to a Covered Agreement, and any benchmark replacement conforming changes, shall constitute:

• a commercially reasonable replacement for and a commercially substantial equivalent to Libor
• a reasonable, comparable or analogous rate, index or term for Libor
• a replacement that is based on a methodology or information that is similar or comparable to Libor
• substantial performance by any person of any right or obligation relating to or based on Libor, and
• a replacement that has historical fluctuations that are substantially similar to those of Libor for purposes of the Truth in Lending Act and regulations promulgated thereunder

What Is the "Safe Harbor" Under the Law?

Under the Law, no person shall be subject to any claim or cause of action in law or equity or request for equitable relief, or have liability for damages, arising out of the selection or use of a Board-selected benchmark replacement, the implementation of benchmark replacement conforming changes or, other than with respect to consumer loans, the determination of benchmark replacement conforming changes. Notwithstanding the foregoing, any person (including a calculating person) shall remain subject to the terms of a Covered Agreement that are not affected by the Law and any existing legal, regulatory or contractual obligations to correct servicing or other ministerial errors under or with respect to a Covered Agreement.

How Does the Law Address Use of Other Benchmark Replacements?

No negative inference. Except as expressly set forth in the Law, nothing in the Law may be construed to create any negative inference or negative presumption regarding the validity or enforceability of:

• any benchmark replacement (including any method for calculating, determining or implementing an adjustment to the benchmark replacement to account for any historical differences between Libor and the benchmark replacement) that is not a Board-selected benchmark replacement, or
• any changes, alterations or modifications to or with respect to a Libor contract that are not benchmark replacement conforming changes

Special protection for banks.

• An institution subject to examination by a federal financial institutions regulatory agency (a bank) may, in any non-interbank offered rate (IBOR) loan, use any benchmark, including a benchmark that is not SOFR, that the bank determines to be appropriate for the funding model of the bank, the needs of the customers of the bank and the products, risk profile, risk management capabilities and operational capabilities of the bank; provided, however, that the use of any benchmark shall remain subject to the terms of the non-IBOR loan and applicable law, and
• no federal supervisory agency may take any covered action against the bank solely because that benchmark is not SOFR.
  • The term "covered action" means A) the initiation by a federal supervisory agency of an enforcement action, including the issuance of a cease-and-desist order; or B) the issuance by a federal supervisory agency of a matter requiring attention, a matter requiring immediate attention or a matter requiring board attention resulting from a supervisory activity conducted by the federal supervisory agency.
  • The term "non-IBOR loan" means any loan that, by its terms, does not use in any way Libor, any tenor of non-U.S. dollar currency rates formerly known as the London interbank offered rate as administered by ICE Benchmark Administration Limited (or any predecessor or successor administrator thereof), and any other interbank offered rates that are expected to cease, as a benchmark.

What Is Excluded from the Law?

By its terms, the Law does not alter or impair:

• any written agreement specifying that a Covered Agreement shall not be subject to the Law
• any Covered Agreement that contains fallback provisions that identify a benchmark replacement that is not based in any way on Libor, including, but not limited to, the prime rate or the federal funds rate
• any Covered Agreement as to which a determining person does not elect to use a Board-selected benchmark replacement, except as otherwise expressly stated in the Law
• the application to a Board-selected benchmark replacement of any cap, floor, modifier or spread adjustment to which Libor had been subject pursuant to the terms of a Covered Agreement
• any provision of federal consumer financial law that A) requires creditors to notify borrowers regarding a change-in-terms; or B) governs the reevaluation of rate increases on credit card accounts under open-ended (not home-secured) consumer credit plans, or
• except as provided in the "safe harbor" described above, the rights or obligations of any person, or the authorities of any agency, under federal consumer financial law

How Does the Law Interact with Similar State Laws Addressing Libor Discontinuation?

The Law and regulations promulgated under the Law supersede any provision of any state or local law, statute, rule, regulation or standard 1) relating to the selection or use of a benchmark replacement or related conforming changes; or (2) expressly limiting the manner of calculating interest, including the compounding of interest, as that provision applies to the selection or use of a Board-selected benchmark replacement or benchmark replacement conforming changes.

Further Rulemaking Under the Law

The Law specifies that the Board shall promulgate regulations to carry out the Law not later than 180 days after the enactment of the Law.

Conclusion

The Law, which received bipartisan support, provides a basic framework for addressing the discontinuation of USD Libor under federal law. It provides automatic fallbacks to Board-recommended SOFR-based benchmarks under certain circumstances, to address "tough legacy" contracts that may not be able to be amended prior June 30, 2023, the anticipated discontinuation date for the remaining tenors of USD Libor. It also provides specific safe harbors for entities with the contractual right to choose a replacement benchmark, subject to certain conditions. The Law supersedes similar state laws that have been enacted in New York and Alabama and are in process elsewhere, creating a uniform, nationwide solution.

The Law includes additional amendments to the Trust Indenture Act of 1939 and Higher Education Act of 1965. Those amendments are outside the scope of this alert.

For more information on the Law and how it could impact your organization, please contact the author.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.