Potential New York State Legislation
The AARC has proposed a potential legislative solution aimed to reduce the adverse economic outcomes of legacy LIBOR fallbacks in contracts governed under New York law for all asset classes. (New York law is the chosen governing law for many financial agreements that use LIBOR as a reference.) Such legislative solutions proposals were discussed at certain AARC meetings in 2019, but the proposal took more detailed form recently. On March 6, 2020, the ARRC proposed legislation that would apply the ARRC-recommended benchmark replacement (SOFR) on both a mandatory and statutory basis, and contained provisions designed to limit litigation arising from the benchmark replacement.
In summary, where a contract has no fallback provisions or falls back to a LIBOR-based rate (such as the last available LIBOR rate), the proposed legislation would impose the ARRC-recommend benchmark replacement and spread. For contracts where a party has discretion to choose a replacement benchmark, the legislation would provide a safe harbor for choosing the ARRC-recommended benchmark rate. The legislation would not impact fallback provisions in existing contracts that lead to non-LIBOR replacement benchmarks (such as a bank’s prime rate) or contracts where the parties have mutually agreed to opt out of its application.
Further, the proposed legislation, for which AARC submitted proposed statutory language, would prohibit a party from refusing to perform its contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR and provide a safe harbor from litigation for the ARRC-recommended benchmark replacement.
Potential Federal Legislation
On December 5, 2019, United States Secretary of the Treasury Steven Mnuchin stated, during testimony to the House Financial Services Committee, that a legislative solution may be needed to ensure a smooth transition away from LIBOR. Secretary Mnuchin did not identify a particular legislative solution. See: Legislation may help avoid a messy Libor transition. Here’s one option policymakers should consider, and House Financial Services Committee Hearing with Treasury Secretary Mnuchin.
Some commentators have expressed skepticism regarding a legislative solution, noting that the effect on substantive contractual rights presents a high challenge, (Anne Beaumont, “Legislative Fix For Post-Libor Issues Seems Improbable”, Law360, March 27, 2019), while still others doubt the political approach could overcome likely election-year delays.