FRB Proposes Rule to Implement the Adjustable Interest Rate Act
The Federal Reserve Board ("FRB") proposed rules to implement the Adjustable Interest Rate ("LIBOR") Act. The proposed rules would establish benchmark replacements for contracts that reference certain tenors of U.S. dollar LIBOR.
The proposal follows from the LIBOR Act in setting forth circumstances in which a Board-selected replacement will generally apply for contracts that (i) contain no fallback provisions, (ii) contain fallback provisions that do not identify a specific benchmark replacement or determining person or (iii) where a determining person is specified but has not made a selection by the earlier of the replacement date or the contractual deadline. For this purpose, fallbacks that reference LIBOR or polling for interbank lending rates are disregarded.
The proposal sets forth the following rates as the "Board-selected Benchmark Replacements," in each case with relevant statutory spreads:
- Derivatives: Fallback Rate (SOFR);
- Cash Transactions - Consumer Loans: "simple" SOFR for overnight LIBOR and CME Term SOFR for other tenors;
- Cash Transactions - GSE Contracts: "simple" SOFR for overnight LIBOR and 30-day Average SOFR for other tenors; and
- Cash Transactions (other than Consumer Loans and GSE contracts): "simple" SOFR for overnight LIBOR and CME Term SOFR for other tenors.
The proposal does not include any additional required "conforming" changes to address issues, but clarifies that for non-consumer loans, a "calculating person" retains the ability to make relevant changes, consistent with the LIBOR Act.
Comments on the proposal are due 30 days after publication of the proposal in the Federal Register.
Commentary
Given the directives of the statute, the proposal largely follows what might have been expected based on ARRC recommendations. (The section of the proposal outlining the statute is worth reading - and relatively brief - for those unfamiliar with the LIBOR Act.)
Two areas of discretionary authority are notable. First, the FRB declined to provide any specific recommendations for conforming changes. Calculating persons will continue to have discretion as provided for in the statute, but there will be no governmental "baseline" to look to for this purpose. Second, the Board raises questions, but makes no formal proposal, as to whether to address the circumstance in which publication of "synthetic" SOFR could result in certain contracts using that rate before moving to a specified fallback. (Also highlighted in the recently-published ARRC playbook.) This could arise, primarily, if a contract specified fallbacks, but did not have a trigger based on "representativeness." The Board indicated that it is considering whether to provide for LIBOR replacement for these contracts even if synthetic LIBOR is published. While the Board indicated that such a rule "may promote the purposes of the LIBOR Act," it also said that it "may be prudent. . . to leave these contracts unaffected."