April 7, 2021
The financial industry is bracing itself both for the looming transition away from LIBOR and for the litigation that may follow. The transition is likely to be smoother thanks to the passage in New York of a new statute, which was signed into law by Governor Cuomo last night.
The new law is based on a proposal presented by the Alternative Reference Rates Committee (“ARRC”), a group of private-market participants and regulators convened by the Federal Reserve Board and the New York Fed to oversee the transition away from LIBOR.
The New York legislation is directed principally at contracts, securities, and instruments that do not already include a “fallback” provision for replacing LIBOR as a reference interest rate. The legislation provides, among other things, that when LIBOR is discontinued, references to LIBOR-based benchmarks in such contracts, securities, and instruments will automatically be replaced by a “recommended benchmark replacement” to be selected by the Federal Reserve Board, the New York Fed, or the ARRC. Under the new statute, the cessation of LIBOR will not excuse the performance of any party, nor allow any party to terminate or void any contract, security, or instrument based on the cessation of the publication of LIBOR. It also creates a “safe harbor” that prevents any person from being held liable for claims arising out of the use of any “recommended benchmark replacement.”
Given that New York law governs many types of financial instruments and agreements that currently reference LIBOR, New York’s new law should provide significant reassurance to financial sector participants. Nonetheless, there are many instruments and contracts—including millions of mortgage notes—that are not governed by New York law, and so will likely not be covered by the New York legislation. A federal analogue of New York’s LIBOR fix that applies nationwide would, therefore, be of considerable value in allaying concerns about the risks posed by the transition away from LIBOR. Federal legislation would also likely be required to reconcile the Trust Indenture Act’s prohibition on the “impairment” of rights to payment for certain securities with a general LIBOR fix. While no federal legislation has yet been introduced, a draft bill similar to ARRC’s proposed legislation and New York’s legislation was developed in October 2020. The contents of that draft bill were described in our October 2020 alert.