FRB Adopts Rules to Implement LIBOR Act

The Federal Reserve Board ("FRB") adopted a final rule, Regulation ZZ, to implement the LIBOR Act and establish benchmark replacements for contracts that reference certain tenors of U.S. dollar LIBOR.

Among other things, the final rule addresses the following:

• Scope and Applicability. The final rule applies only to existing LIBOR contracts governed by federal or state law that either (i) do not contain fallback provisions; (ii) contain fallback provisions that do not identify a specific benchmark replacement or a 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.

• Clarifications Regarding "Determining Person". The final rule clarifies and provides additional explanation relating to the term "determining person." The Fed said that the term is not limited to persons with current authority, right or obligation to select a benchmark replacement.

• Synthetic LIBOR. The FRB said that LIBOR contracts containing fallback provisions that identify a specific benchmark replacement are "outside the scope of the LIBOR Act, even if these fallback provisions lack an express non-representativeness trigger."

• Benchmark Replacements. The final rule's benchmark replacements are based on SOFR and incorporate spread adjustments for each specified tenor of LIBOR. The final rule contains, among others, the following benchmark replacements:

  • Derivatives: Fallback Rate (SOFR)

  • Consumer Loans: "simple" SOFR for overnight LIBOR and CME Term SOFR for other tenors, with a linear transition approach for the first year following LIBOR replacement and the standard tenor spread adjustment thereafter;

  • FHFA-Regulated Entity Contracts (other than FHLB home loan advances): "simple" SOFR for overnight LIBOR and 30-day Average SOFR for other tenors, plus the standard tenor spread adjustment

    • FHLB Advances: Fallback Rate (SOFR)

    • FFELP ABS: Specified Average SOFR rates, based on relevant tenor, plus the applicable tenor spread adjustment

  • All Other Transactions: "simple" SOFR for overnight LIBOR and CME Term SOFR for other tenors, plus the standard tenor spread adjustment.

In addition, the final rule also contains provisions (i) identifying certain benchmark replacement conforming changes; and (ii) codifying certain continuity-of-contract and safe harbor provisions of the LIBOR Act.