On July 19, 2022, the Federal Reserve Board (the “Fed”) issued a notice of proposed rulemaking that would implement provisions of the federal “LIBOR Act”, which is formally known as the “Adjustable Interest Rate (LIBOR) Act”. The LIBOR Act was passed and enacted into law this past March (2022) as part of a group of bills, together called the Consolidated Appropriations Act, 2022. The purpose of the Act is to provide a uniform approach to handling LIBOR-based contracts which did not include adequate fallback provisions (called a “tough legacy contract”) for choosing an alternative index as a result of the discontinuance of LIBOR last year (2021).
The proposed rules would put in place acceptable alternatives to LIBOR when a contract either provides insufficient fallback provisions which do not identify a method for determining an alternative index, or contain no fallback provisions at all. Under the rules, for most contracts using a 1-, 3-, 6- or 12-month LIBOR, the index would be replaced with a comparable Term SOFR rate; for contracts and securities issued by the GSEs, Fannie Mae and Freddie Mac, the 30-day average SOFR would be used and other consumer contracts would also use a comparable Term SOFR, each with an added spread adjustment specified by the Act. The proposal also requests comments on a proposed “Synthetic LIBOR”, which is not representative of the underlying market, and possible rules to not allow its use as a fallback index for existing LIBOR contracts.
The rules would be effective after June 30, 2023, the final day of any publication of the existing LIBOR. Comments must be received by the Fed no later than August 29, 2022.
