LIBOR transition updates: New York passes key USD LIBOR transition legislation
On April 6, 2021, New York Governor Andrew Cuomo ratified Senate Bill 297B-Assembly Bill 164B[1] (the New York LIBOR Bill), a long-awaited and well received[2] legislative fix to address the planned cessation of the US Dollar LIBOR (USD LIBOR). Both the US and global financial institutions continue to struggle with handling the USD LIBOR’s eventual demise, currently scheduled for the summer of 2023.[3]
Largely tracking the legislation proposed by the Alternative Reference Rates Committee[4], the New York LIBOR Bill will ease the LIBOR transition by creating statutory remedies for so called "tough legacy" contracts. These are long-term financial agreements that reference USD LIBOR as a benchmark interest rate but lack any fallback provisions in the event the USD LIBOR ceases to be published.
The New York LIBOR Bill is designed to fill in these interest rate gaps by providing that all “tough legacy” contracts governed by New York law be transitioned to a “recommended benchmark replacement” rate. The replacement rate is to be based on the Secured Overnight Finance Rate (SOFR) as selected by the relevant recommending financial bodies of the respective financial contracts, securities, or instruments. The replacement rate will also include applicable spread adjustments and other conforming changes recommended by the ARRC, the Federal Reserve Board, or the Federal Reserve Bank of New York.
Notably, the New York LIBOR Bill also creates a safe harbor shielding parties to tough legacy contracts from liability for switching to SOFR. The bill further renders nonactionable any claims brought by parties to legacy contract that allege a breach of the contract based on another party’s use of SOFR.
Although the legislation is comprehensive, it is key to note that it applies only to contracts governed by New York law. And while the legislation provides a legal fallback for legacy contracts, it does not override any existing fallbacks in such agreements and does not preclude parties from agreeing to other fallback rates. Because of this, parties to legacy agreements should continue to take a proactive approach in amending their agreements well in advance of the USD LIBOR cessation.
[1] See New York Senate Bill 297B-Assembly Bill 164 (signed April 6, 2021) https://www.nysenate.gov/legislation/bills/2021/S297.
[2] See ARRC Welcomes Passage of LIBOR Legislation by the New York State Legislature, Alternative Reference Rates Committee (March 24, 2021) available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210324-arrc-press-release-passage-of-libor-legislation
[3] FCA Announcement on Future Cessation and Loss of Representativeness of the LIBOR Benchmarks, Financial Conduct Authority (March 5, 2021) available at https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf.
[4] New York LIBOR Legislation including ARRC proposed technical changes to FY 2022 New York State Executive Budget, (Introduced January 19, 2021) available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/libor-legislation-with-technical-amendments.
