October 21, 2020
The financial industry is bracing itself both for the coming LIBOR transition and for the litigation that is likely to follow. In March of this year, 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 from LIBOR, proposed legislation in New York that would protect parties that adopt ARRC’s recommended replacement for LIBOR, the Secured Overnight Funds Rate (“SOFR”). While not all dollar-denominated agreements referencing LIBOR are governed by New York law, a majority are. A legislative “fix” in New York could, therefore, go a long way toward providing clarity to parties facing LIBOR uncertainty. However, with this year’s legislative session having ended, the New York legislature is unlikely to enact a “fix” -- if at all -- until well into 2021. With the LIBOR cliff looming, the question now is whether Congress can address the problem on a national basis.
Last week, a draft bill mirroring ARRC’s proposed New York legislation was circulated in Congress. This discussion draft indicates that the proposed federal legislation would expressly preempt state law concerning the LIBOR transition and would:
On a mandatory basis, the proposed legislation would:
On a permissive basis, the proposed legislation would:
Although the proposed legislation, if enacted, would provide considerable clarity and protection as parties transition away from LIBOR, it would not eliminate entirely the prospect of litigation. For example, because the US legislation may differ in approach from “fixes” ultimately adopted by the UK, the EU, or others, disputes may well arise regarding the choice of law to apply. Further, an aggrieved party may challenge the statute as an impairment of contract that violates the Due Process clause of the Constitution. A challenge might also be made under the Trust Indenture Act (“TIA”), which provides that the rights of holders of certain securities to receive interest payments cannot be “impaired or affected” without the consent of the holders. The discussion draft of the federal bill attempts to address the TIA by deeming that adoption of the bill’s benchmark replacement and related benchmark-conforming changes would not impair any person’s rights under any affected contract. Despite this, affected parties would likely be willing to litigate the effectiveness of such an attempt to override the protections afforded by the TIA.
Join us on November 10 at 1pm ET for the next installment of Hunton Andrews Kurth’s Leading the LIBOR Transition series, Letting Go of LIBOR: Evaluating Fallbacks and Mitigating Litigation Risk. During this program, moderated by Amy Williams and Tina Locatelli, Sirisha Gummaregula (QuisLex), Kristi Leo (Structured Finance Association), and Brian Otero (Hunton Andrews Kurth) will discuss litigation risks associated with the LIBOR transition and how parties can take action now to evaluate and mitigate them.