Proposed Rule2022-15658
Regulation Implementing the Adjustable Interest Rate (LIBOR) Act
Primary source
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Published
July 28, 2022
Issuing agencies
Federal Reserve System
Abstract
The Board is inviting comment on a proposed regulation that would implement the Adjustable Interest Rate (LIBOR) Act. The proposed rule would establish benchmark replacements for contracts governed by U.S. law that reference certain tenors of U.S. dollar LIBOR (the overnight and one-, three-, six-, and 12-month tenors) and that do not have terms that provide for the use of a clearly defined and practicable replacement benchmark rate following the first London banking day after June 30, 2023. The proposed rule also would provide additional definitions and clarifications consistent with the Adjustable Interest Rate (LIBOR) Act.
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<title>Federal Register, Volume 87 Issue 144 (Thursday, July 28, 2022)</title>
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[Federal Register Volume 87, Number 144 (Thursday, July 28, 2022)]
[Proposed Rules]
[Pages 45268-45281]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15658]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 87, No. 144 / Thursday, July 28, 2022 /
Proposed Rules
[[Page 45268]]
FEDERAL RESERVE SYSTEM
12 CFR Part 253
[Regulation ZZ; Docket No. R-1775]
RIN 7100-AG34
Regulation Implementing the Adjustable Interest Rate (LIBOR) Act
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board is inviting comment on a proposed regulation that
would implement the Adjustable Interest Rate (LIBOR) Act. The proposed
rule would establish benchmark replacements for contracts governed by
U.S. law that reference certain tenors of U.S. dollar LIBOR (the
overnight and one-, three-, six-, and 12-month tenors) and that do not
have terms that provide for the use of a clearly defined and
practicable replacement benchmark rate following the first London
banking day after June 30, 2023. The proposed rule also would provide
additional definitions and clarifications consistent with the
Adjustable Interest Rate (LIBOR) Act.
DATES: Comments must be submitted by August 29, 2022.
ADDRESSES: You may submit comments, identified by Docket No. R-1775,
RIN 7100-AG34, by any of the following methods:
<bullet> Agency website: <a href="https://www.federalreserve.gov">https://www.federalreserve.gov</a>. Follow the
instructions for submitting comments at <a href="https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a>.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#37455250441954585a5a52594344775152535245565b4552445245415219505841"><span class="__cf_email__" data-cfemail="9ae8fffde9b4f9f5f7f7fff4eee9dafcfffeffe8fbf6e8ffe9ffe8ecffb4fdf5ec">[email protected]</span></a>. Include docket
and RIN numbers in the subject line of the message.
<bullet> Fax: (202) 452-3819 or (202) 452-3102.
<bullet> Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments are available from the Board's website at
<a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a> as
submitted. Accordingly, comments will not be edited to remove any
identifying or contact information. Public comments may also be viewed
electronically or in paper in Room M-4365A, 2001 C Street NW,
Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. during Federal
business weekdays. For security reasons, the Board requires that
visitors make an appointment to inspect comments. You may do so by
calling (202) 452-3684. Upon arrival, visitors will be required to
present valid government-issued photo identification and to submit to
security screening in order to inspect and photocopy comments. For
users of TTY-TRS, please call 711 from any telephone, anywhere in the
United States.
FOR FURTHER INFORMATION CONTACT: David Bowman, Senior Associate
Director, 202-452-2334, Division of Monetary Affairs; Lucy Chang,
Special Counsel, 202-475-6331, or Cody Gaffney, Attorney, 202-452-2674,
both of the Legal Division; or Lesley Chao, Lead Financial Institution
Policy Analyst, 202-974-7063, Division of Supervision and Regulation.
For users of TTY-TRS, please call 711 from any telephone, anywhere in
the United States.
SUPPLEMENTARY INFORMATION:
I. Background
A. LIBOR
LIBOR, formerly known as the London Interbank Offered Rate, is an
interest rate benchmark that was the dominant reference rate used in
financial contracts in recent decades and remains in extensive use
today, serving as the benchmark rate in more than $200 trillion worth
of contracts worldwide.\1\ While over-the-counter and exchange-traded
derivatives account for the vast majority of this estimated exposure to
LIBOR, LIBOR is also referenced in trillions of dollars' worth of
business and consumer loans, bonds, securitizations, and nonfinancial
corporate contracts.
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\1\ Adjustable Interest Rate (LIBOR) Act, Public Law 117-103,
div. U, section 102(a)(1).
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LIBOR is intended to reflect the rate at which large banks can
borrow wholesale funds on an unsecured basis. LIBOR is calculated based
on submissions contributed by a panel of large, globally active banks
(LIBOR panel banks). Until December 31, 2021, LIBOR's administrator
calculated and published LIBOR each London business day for five
currencies (USD, GBP, EUR, CHF, and JPY) and seven borrowing periods,
known as tenors (overnight, one week, one month, two months, three
months, six months, and twelve months).
Over the past decade, financial regulators have expressed growing
concern regarding the structural vulnerabilities and robustness of
LIBOR.\2\ Following the financial crisis of 2007-2009, other forms of
borrowing have largely replaced short-term unsecured wholesale
borrowing as a source of funds for most banks, resulting in far fewer
market transactions on which LIBOR panel banks can base their
submissions. At the same time, weaknesses in the governance of LIBOR
created the opportunity for LIBOR panel banks to manipulate LIBOR, and
numerous high-profile examples of such manipulation were exposed.\3\
Following these scandals, in 2013, the administration of LIBOR was
transferred to a new administrator, ICE Benchmark Administration
Limited (IBA), which is regulated by the U.K.'s Financial Conduct
Authority (FCA).
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\2\ See, e.g., Financial Stability Oversight Council, 2013
Annual Report at 137-42.
\3\ See, e.g., U.S. Dep't of Justice, Barclays Bank PLC Admits
Misconduct Related to Submissions for London Interbank Offered Rate
and the Euro Interbank Offered Rate and Agrees to Pay $160 Million
Penalty (June 27, 2012), <a href="https://www.justice.gov/opa/pr/barclays-bank-plc-admits-misconduct-related-submissions-london-interbank-offered-rate-and">https://www.justice.gov/opa/pr/barclays-bank-plc-admits-misconduct-related-submissions-london-interbank-offered-rate-and</a>; U.S. Dep't of Justice, Rabobank Admits Wrongdoing
in Libor Investigation, Agrees to Pay $325 Million Criminal Penalty
(Oct. 29, 2013), <a href="https://www.justice.gov/opa/pr/rabobank-admits-wrongdoing-libor-investigation-agrees-pay-325-million-criminal-penalty">https://www.justice.gov/opa/pr/rabobank-admits-wrongdoing-libor-investigation-agrees-pay-325-million-criminal-penalty</a>; U.S. Dep't of Justice, Deutsche Bank's London Subsidiary
Agrees to Plead Guilty in Connection with Long-Running Manipulation
of LIBOR (Apr. 23, 2015), <a href="https://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation">https://www.justice.gov/opa/pr/deutsche-banks-london-subsidiary-agrees-plead-guilty-connection-long-running-manipulation</a>.
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Despite increased regulatory oversight and efforts to improve
LIBOR, confidence in LIBOR continued to wane, and financial regulators
and market participants began to search for alternative reference rates
and develop plans for a transition away from LIBOR. In the United
States, this effort has been led by the Alternative Reference Rates
[[Page 45269]]
Committee (ARRC), a group of private-sector firms convened jointly by
the Board and the Federal Reserve Bank of New York (FRBNY) in 2014.\4\
Among other work, the ARRC identified the Secured Overnight Financing
Rate (SOFR) as its recommended replacement for USD LIBOR and developed
a Paced Transition Plan to support the transition from USD LIBOR to
SOFR.\5\ SOFR is a broad measure of the cost of borrowing cash
overnight collateralized by U.S. Treasury securities.\6\ Similar groups
were convened in other jurisdictions and identified comparable risk-
free rates as recommended replacements for the other LIBOR currencies.
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\4\ See ARRC, About, <a href="https://www.newyorkfed.org/arrc/about">https://www.newyorkfed.org/arrc/about</a> (last
visited July 7, 2022).
\5\ ARRC, The ARRC Selects a Broad Repo Rate as its Preferred
Alternative Reference Rate (June 22, 2017), <a href="https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf">https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf</a>; ARRC, Second Report (Mar. 2018) at
17, <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report</a>.
\6\ SOFR is published daily by the FRBNY in cooperation with the
U.S. Department of the Treasury's Office of Financial Research. See
Fed. Res. Bk. of New York, Secured Overnight Financing Rate Data,
<a href="https://www.newyorkfed.org/markets/reference-rates/sofr">https://www.newyorkfed.org/markets/reference-rates/sofr</a> (last
visited July 7, 2022). SOFR is calculated as a volume-weighted
median of transaction-level tri-party repurchase agreement (repo)
data collected from the Bank of New York Mellon, as well as general
collateral financing repo transaction data and data on bilateral
Treasury repo transactions cleared through the Fixed Income Clearing
Corporation's delivery-versus-payment service, which are obtained
from the U.S. Department of the Treasury's Office of Financial
Research. Id.
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In July 2017, following the departure of some panel banks, the FCA
announced that the remaining LIBOR panel banks had voluntarily agreed
to sustain LIBOR through the end of 2021 to facilitate an orderly
transition away from LIBOR.\7\ On March 5, 2021, the FCA announced
that, after December 31, 2021, IBA would cease publishing 24 currency
and tenor pairs (known as settings). The discontinued LIBOR settings
included one-week and two-month USD LIBOR, as well as all EUR and CHF
LIBOR tenors and most GBP and JPY LIBOR tenors.\8\ However, the FCA
required IBA to continue publishing, on a temporary basis, certain GBP
and JPY LIBOR tenors on a ``synthetic'' basis, stating that any such
synthetic LIBOR settings ``will no longer be representative of the
underlying market and economic reality the setting is intended to
measure.'' \9\
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\7\ See Andrew Bailey, Chief Executive, FCA, The Future of LIBOR
(July 27, 2017), <a href="https://www.fca.org.uk/news/speeches/the-future-of-libor">https://www.fca.org.uk/news/speeches/the-future-of-libor</a>.
\8\ See FCA, FCA Announcement on Future Cessation and Loss of
Representativeness of the LIBOR Benchmarks (Mar. 5, 2021), <a href="https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf">https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf</a>.
\9\ Id.
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To allow most legacy USD LIBOR contracts to mature without
disruption, the FCA also announced that the panels for the remaining
five tenors of USD LIBOR would continue through, but cease after, June
30, 2023. The FCA has signaled that it could consider whether to
require IBA to continue publishing one-, three-, or six-month USD LIBOR
on a synthetic basis for some period after June 30, 2023 (synthetic
LIBOR).\10\ As with synthetic GBP or JPY LIBOR settings, the FCA has
announced that synthetic LIBOR, if published, would ``no longer be
representative of the underlying market and economic reality the
setting is intended to measure.'' \11\
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\10\ See FCA, Further Arrangements for the Orderly Wind-down of
LIBOR at End-2021 (Sept. 29, 2021), <a href="https://www.fca.org.uk/news/press-releases/further-arrangements-orderly-wind-down-libor-end-2021">https://www.fca.org.uk/news/press-releases/further-arrangements-orderly-wind-down-libor-end-2021</a>
(``The decisions to require publication of some sterling and
Japanese yen LIBOR settings on a synthetic basis are not
determinative of any future decisions in respect of US dollar LIBOR
from end-June 2023.'').
\11\ See FCA, FCA Announcement on Future Cessation and Loss of
Representativeness of the LIBOR Benchmarks (Mar. 5, 2021), <a href="https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf">https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf</a>.
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In response to the planned cessation of USD LIBOR, U.S. financial
regulators have encouraged market participants to transition away from
USD LIBOR as a reference rate as soon as practicable. For example, in
November 2020, the Office of the Comptroller of the Currency (OCC), the
Board, and the Federal Deposit Insurance Corporation (FDIC) issued an
interagency statement stating that banking organizations generally
should not enter into new contracts referencing USD LIBOR after
December 31, 2021.\12\ The ARRC and other private industry groups also
have worked to encourage an orderly transition away from USD LIBOR. For
example, as discussed further below, the International Swaps and
Derivatives Association (ISDA) has developed a contractual protocol by
which parties to derivative transactions governed by ISDA documentation
and other financial contracts can agree to incorporate more robust
contractual fallback provisions that replace references to LIBOR with
an alternative benchmark based on SOFR in the event that a given LIBOR
rate ceases publication or is found by the FCA to no longer be
representative.\13\ The ARRC has developed guiding principles for
similar fallback language for cash products such as business loans,
securitizations, floating rating notes, and consumer products,
including specific recommended language for certain cash products.\14\
ISDA's IBOR protocol and the ARRC fallback language recommendations
were both subject to numerous public consultations, and they have
received widespread adoption subsequent to their release.\15\
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\12\ See Board, FDIC, OCC, Statement on LIBOR Transition (Nov.
30, 2020), <a href="https://www.federalreserve.gov/supervisionreg/srletters/SR2027a1.pdf">https://www.federalreserve.gov/supervisionreg/srletters/SR2027a1.pdf</a>.
\13\ ISDA, ISDA 2020 IBOR Fallbacks Protocol, <a href="https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/">https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/</a>.
\14\ See, e.g., ARRC, ARRC Guiding Principles for More Robust
LIBOR Fallback Contract Language in Cash Products (July 9, 2018),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-principles-July2018">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-principles-July2018</a>; ARRC, Summary of ARRC's LIBOR Fallback
Language (Nov. 15, 2019), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/LIBOR_Fallback_Language_Summary">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/LIBOR_Fallback_Language_Summary</a>; ARRC,
ARRC Recommendations Regarding More Robust Fallback Language for New
Issuance of LIBOR Securitizations (May 31, 2019), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Securitization_Fallback_Language.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Securitization_Fallback_Language.pdf</a>; ARRC, ARRC Recommendations
Regarding More Robust LIBOR Fallback Contract Language for New
Closed-End, Residential Adjustable Rate Mortgages (Nov. 15, 2019),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARM_Fallback_Language.pdf</a>.
\15\ See, e.g., ISDA, ISDA 2020 IBOR Fallbacks Protocol List of
Adhering Parties (May 27, 2022), <a href="https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/adhering-parties">https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/adhering-parties</a>. The U.S. Department
of Justice (DOJ) also reviewed ISDA's IBOR protocol, concluded that
it is unlikely to harm competition, and stated that the DOJ would
not challenge ISDA's IBOR protocol under federal antitrust laws. See
DOJ, Justice Department Issues Favorable Business Review Letter to
ISDA for Proposed Amendments to Address Interest Rate Benchmarks
(Oct. 1, 2020), <a href="https://www.justice.gov/opa/pr/justice-department-issues-favorable-business-review-letter-isda-proposed-amendments-address">https://www.justice.gov/opa/pr/justice-department-issues-favorable-business-review-letter-isda-proposed-amendments-address</a>.
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B. Legacy Contracts and the Adjustable Interest Rate (LIBOR) Act
Notwithstanding governmental and private-sector efforts to
encourage market participants to prepare for the cessation of USD
LIBOR, there are a significant number of existing contracts that
reference USD LIBOR, will not mature by June 30, 2023, and cannot be
easily amended. Of particular concern are so-called ``tough legacy
contracts,'' which are contracts that reference USD LIBOR and will not
mature by June 30, 2023, but which lack adequate fallback provisions
providing for a clearly defined or practicable replacement benchmark
following the cessation of USD LIBOR. To address these tough legacy
contracts, multiple states adopted legislation, initially proposed by
the ARRC, to provide a statutory remedy for financial contracts
governed by the laws of the enacting states that reference USD LIBOR,
will not mature until after USD LIBOR ceases or becomes
nonrepresentative, and have no effective
[[Page 45270]]
means to replace USD LIBOR after it ceases or becomes
nonrepresentative.\16\ While these state laws provided a solution for a
large number of tough legacy contracts, further legislative action was
needed to address tough legacy contracts governed by the laws of other
states.
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\16\ See, e.g., N.Y. Gen. Oblig. Law art. 18-C; Ala. Code tit.
5, ch. 28; 2022 Fla. Laws ch. 57 (to be codified at Fla. Stat.
687.15); S. Bill No. 2133, 112th Gen. Assemb., Reg. Sess. (Tenn.
2022) (to be codified at Tenn. Code Ann. 47-33-101 et seq.); S. 371,
122nd Gen. Assemb., Reg. Sess. (Ind. 2022) (to be codified at Ind.
Code 38-10-2); Leg. Bill 707, 107th Leg., 2nd Sess. (Neb. 2022).
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Recognizing the need for a uniform, nationwide solution for
replacing references to USD LIBOR in tough legacy contracts, on March
15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act
(the ``Act'') as part of the Consolidated Appropriations Act, 2022.\17\
Among other things, the Act lays out a set of default rules that apply
to tough legacy contracts subject to U.S. law.
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\17\ Public Law 117-103, div. U.
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Section 104 is the main operative provision of the Act. Section 104
generally distinguishes between three categories of LIBOR contracts
with different types of fallback provisions. For these purposes, the
Act defines ``LIBOR contract'' broadly to include any obligation or
asset that, by its terms, uses the overnight, one-month, three-month,
six-month, or 12-month tenors of USD LIBOR as a benchmark.\18\
Consistent with this definition, the proposed rule and the remainder of
the discussion will focus on these stated tenors of USD LIBOR only. The
Act defines ``fallback provisions'' to mean the terms in a LIBOR
contract for determining a benchmark replacement, including any terms
relating to the date on which the benchmark replacement becomes
effective.\19\
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\18\ See Act section 103(16) (definition of ``LIBOR contract'');
Act section 103(15) (definition of ``LIBOR''). The Act does not
apply to contracts that use the one-week or two-month tenors of USD
LIBOR as a benchmark. Id. The Act defines ``benchmark'' to mean an
index of interest rates or dividend rates that is used, in whole or
in part, as the basis of or as a reference for calculating or
determining any valuation, payment, or other measurement. Act
section 103(1).
\19\ Act section 103(11). The Act defines ``benchmark
replacement'' to mean a benchmark, or an interest rate or dividend
rate (which may or may not be based in whole or in part on a prior
setting of LIBOR), to replace LIBOR or any interest rate or dividend
rate based on LIBOR, whether on a temporary, permanent, or
indefinite basis, under or with respect to a LIBOR contract. Act
section 103(3).
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The first category of LIBOR contracts encompasses contracts that
contain fallback provisions identifying a specific benchmark
replacement that is not based in any way on any of the Act's USD LIBOR
values (except to account for the difference between LIBOR and the
benchmark replacement) and that do not require any person (other than a
benchmark administrator) \20\ to conduct a poll, survey, or inquiries
for quotes or information concerning interbank lending or deposit
rates. These LIBOR contracts generally can be expected to transition to
the contractually agreed-upon benchmark replacement as provided by
their fallback provisions on or before the LIBOR replacement date--the
first London banking day after June 30, 2023 (unless the Board
determines that any LIBOR tenor will cease to be published or cease to
be representative on a different date).\21\
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\20\ See Act section 104(b). The Act defines ``benchmark
administrator'' to mean a person that publishes a benchmark for use
by third parties. Act Sec. 103(2).
\21\ Act sections 104(f)(2), 103(17) (definition of ``LIBOR
replacement date''). At this time, the Board does not expect to
determine a LIBOR replacement date earlier than the first London
banking day after June 30, 2023. As discussed in more detail below,
the potential publication of synthetic LIBOR on and after the LIBOR
replacement date may create ambiguity regarding the application of
the LIBOR Act to a subset of these LIBOR contracts. The Board
invites comment on whether to clarify this issue in the final rule.
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The second category of LIBOR contracts encompasses contracts that
contain no fallback provisions, as well as LIBOR contracts with
fallback provisions that do not identify a determining person (as
described below) and that only (i) identify a benchmark replacement
that is based in any way on any of the Act's USD LIBOR values (except
to account for the difference between LIBOR and the benchmark
replacement) or (ii) require that a person (other than a benchmark
administrator) conduct a poll, survey, or inquiries for quotes or
information concerning interbank lending or deposit rates.\22\ For this
second category of LIBOR contracts, the Act provides that the benchmark
replacement on the LIBOR replacement date will be the Board-selected
benchmark replacement--that is, a benchmark replacement identified by
the Board that is based on SOFR, including any tenor spread adjustments
required under the Act.\23\ Thus, any references to USD LIBOR in LIBOR
contracts in this second category will, by operation of law, be
replaced by the Board-selected benchmark replacement on the LIBOR
replacement date.
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\22\ The Act deems these types of fallback provisions to be null
and void by operation of law. Act section 104(b). To the extent a
contract contains fallback provisions that specify these types of
replacements would be applied ahead of another, separate benchmark
replacement, then under the Act, these fallback provisions would be
disregarded and the separate benchmark replacement would apply.
\23\ Act section 104(a)-(b); see also Act section 103(6)
(definition of ``Board-selected benchmark replacement'').
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For contracts that fall into this second category, the Act provides
a series of statutory protections, enumerated in section 105 of the
Act, for persons who use the Board-selected benchmark replacement,
including that no person shall be subject to any claim or cause of
action in law or equity or request for equitable relief, or have
liability for damages, arising out of the use of the Board-selected
benchmark replacement as a benchmark replacement.\24\
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\24\ Act section 105(a)-(b), (c)(1), (d).
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The third category of LIBOR contracts encompasses LIBOR contracts
that contain fallback provisions authorizing a determining person to
determine a benchmark replacement.\25\ The application of the Act to
LIBOR contracts in this third category depends on the determination, if
any, made by the determining person. Where a determining person does
not select a benchmark replacement by the LIBOR replacement date or the
latest date for selecting a benchmark replacement according to the
terms of the LIBOR contract (whichever is earlier), the Act provides
that the benchmark replacement for such LIBOR contract will be, by
operation of law, the Board-selected benchmark replacement on and after
the LIBOR replacement date.\26\ Where a determining person selects the
Board-selected benchmark replacement as the benchmark replacement, the
Act provides that such selection shall be (i) irrevocable, (ii) made by
the earlier of the LIBOR replacement date and the latest date for
selecting a benchmark replacement according to the terms of the LIBOR
contract, and (iii) used in any determinations of the benchmark under
or with respect to the LIBOR contract occurring on and after the LIBOR
replacement date.\27\
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\25\ The Act defines ``determining person'' to mean, with
respect to any LIBOR contract, any person with the authority, right,
or obligation, including on a temporary basis (as identified by the
LIBOR contract or by the governing law of the LIBOR contract, as
appropriate) to determine a benchmark replacement. Act section
103(10).
\26\ Act section 104(c)(3).
\27\ Act section 104(c)(2).
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Although the Act does not require a determining person to select
the Board-selected benchmark replacement as the benchmark replacement
for a LIBOR contract, the Act provides a series of statutory
protections, enumerated in section 105 of the Act, for any determining
person who does so, including that a determining person generally shall
not be subject to any claim or cause of action in law or equity or
request for equitable relief, or have
[[Page 45271]]
liability for damages, arising out of the selection of the Board-
selected benchmark replacement as a benchmark replacement.\28\
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\28\ Act section 105(c)(1); see also Act section 105(a)-(b),
(d). This statutory safe harbor also applies to the use of the
Board-selected benchmark replacement other than at the selection of
a determining person.
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Where the Board-selected benchmark replacement becomes the
benchmark replacement for a LIBOR contract (either by operation of law
or via the selection of a determining person), the Act contemplates
that certain conforming changes to a LIBOR contract may be necessary to
facilitate the transition from USD LIBOR to the Board-selected
benchmark replacement. These ``benchmark replacement conforming
changes'' may arise in one of two ways. First, the Act authorizes the
Board to determine benchmark replacement conforming changes that, in
its discretion, would address one or more issues affecting the
implementation, administration, and calculation of the Board-selected
benchmark replacement in LIBOR contracts.\29\ Second, for a LIBOR
contract that is not a consumer loan, a calculating person may, in its
reasonable judgment, determine that benchmark replacement conforming
changes are otherwise necessary or appropriate to permit the
implementation, administration, and calculation of the Board-selected
benchmark replacement under or with respect to a LIBOR contract after
giving due consideration to any benchmark replacement conforming
changes determined by the Board.\30\ For this purpose, the Act defines
``calculating person'' to mean, with respect to any LIBOR contract, any
person, including the determining person, responsible for calculating
or determining any valuation, payment, or other measurement based on a
benchmark.\31\
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\29\ Act section 103(4)(A).
\30\ Act section 103(4)(B). The Act defines ``consumer loan'' to
mean a consumer credit transaction, which is defined by cross-
reference to the Truth in Lending Act. Act section 103(9)
(definition of ``consumer loan); section 103(8) (definitions of
``consumer'' and ``credit'').
\31\ Act section 103(7).
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Section 104 of the Act provides that all benchmark replacement
conforming changes (whether determined by the Board or, if applicable,
a calculating person) shall become an integral part of the LIBOR
contract, and a calculating person shall not be required to obtain
consent from any other person prior to the adoption of benchmark
replacement conforming changes.\32\ In addition, the determination,
implementation, and performance of benchmark replacement conforming
changes are generally subject to the statutory protections enumerated
in section 105 of the Act, which are designed to ensure continuity of
contract.\33\ Finally, where a calculating person implements or (in the
case of a LIBOR contract that is not a consumer loan) determines
benchmark replacement conforming changes, the Act provides that the
calculating person shall not be subject to any claim or cause of action
in law or equity or request for equitable relief, or have liability for
damages.\34\
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\32\ Act section 104(d).
\33\ See Act section 105(a)-(b), (d).
\34\ Act section 105(c)(1).
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The Act includes various other provisions beyond the main operative
provisions in section 104 and the statutory protections enumerated in
section 105.\35\ Section 106 of the Act generally provides that a bank
may use any benchmark (including a benchmark that is not SOFR) in any
non-IBOR loan made before, on, or after the date of enactment of the
Act that the bank determines to be appropriate, and that no Federal
supervisory agency may take enforcement or supervisory action against
the bank solely because that benchmark is not SOFR.\36\ Sections 108
and 109 of the Act amend the Trust Indenture Act of 1939 (15 U.S.C.
77ppp(b)) and the Higher Education Act of 1965 (20 U.S.C. 1087-
1(b)(2)(I)), respectively, to facilitate the transition from USD
LIBOR.\37\ Finally, section 107 of the Act expressly preempts any
provision of State or local law relating to the selection or use of a
benchmark replacement or related conforming changes, or expressly
limiting the manner of calculating interest (including the compounding
of interest) as that provision applies to the selection or use of a
Board-selected benchmark replacement or benchmark replacement
conforming changes.\38\
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\35\ The Board views these provisions, along with the statutory
protections enumerated in section 105 of the Act, as self-executing.
\36\ Act section 106.
\37\ Act sections 108-09.
\38\ Act section 107.
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Section 110 of the Act directs the Board to promulgate regulations
to carry out the Act not later than 180 days after enactment. Pursuant
to this authority, the Board is proposing a new regulation to implement
the Act.
II. Section-by-Section Analysis
A. Section 253.1 Authority, Purpose, and Scope
Proposed Sec. 253.1 sets forth the authority for, purpose of, and
scope of the proposed rule. Significantly, and consistent with the
statute as described above, the proposal does not apply to (i)
contracts that do not reference the overnight or one-, three-, six-, or
12-month tenors of LIBOR or (ii) LIBOR contracts that have terms
providing for the use of a clearly defined and practicable replacement
benchmark for LIBOR (including LIBOR contracts where the determining
person selects a benchmark replacement other than the Board-selected
benchmark replacement), except as provided for in proposed Sec.
253.3(b), which is discussed further below.\39\ The proposed rule also
applies only to existing contracts governed by federal law or the law
of any state. In addition, proposed Sec. 253.1 states that the parties
to a LIBOR contract may by written agreement specify that a LIBOR
contract shall not be subject to the proposed rule.\40\
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\39\ Act section 104(f)(2)-(3).
\40\ See Act section 104(f)(1).
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B. Section 253.2 Definitions
Proposed Sec. 253.2 provides definitions for many of the terms
used in the proposed rule. Most of the defined terms in proposed Sec.
253.2 are substantially the same as the defined terms in the LIBOR Act.
In addition, however, proposed Sec. 253.2 includes definitions for the
terms ``CME Term SOFR,'' ``covered contract,'' ``covered GSE
contract,'' ``derivative transaction,'' ``ISDA protocol,'' and ``non-
covered contract,'' each of which is discussed below in connection with
their use in proposed Sec. 253.3 or Sec. 253.4, as applicable.
Additionally, proposed Sec. 253.2 defines ``business day'' to mean
any day except for (i) a Saturday, (ii) a Sunday, (iii) a day on which
the Securities Industry and Financial Markets Association recommends
that the fixed income departments of its members be closed for the
entire day for purposes of trading in United States government
securities, or (iv) a day on which the FRBNY, with advance notice,
chooses not to publish its Treasury repo reference rates if
participants in the Treasury repo market broadly expect to treat that
day as a holiday. This definition of ``business day'' is relevant for
purposes of proposed Sec. 253.4, discussed below, and is consistent
with the FRBNY's publication dates for SOFR.\41\
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\41\ Fed. Res. Bk. of New York, Additional Information about
Reference Rates Administered by the New York Fed, <a href="https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#treasury_repo_details_on_publication_and_revisions">https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#treasury_repo_details_on_publication_and_revisions</a> (last
visited July 7, 2022) (where section entitled ``Details on
Publication and Revisions for the Treasury Repo Reference Rates''
details publication days).
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[[Page 45272]]
Finally, proposed Sec. 253.2 defines ``state'' to mean any state,
commonwealth, territory, or possession of the United States, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth
of the Northern Mariana Islands, American Samoa, Guam, or the United
States Virgin Islands. This definition of ``state'' is relevant for
purposes of the scope of the proposed rule, and the preemption
provisions in proposed Sec. 253.6. As stated in proposed Sec.
253.1(c), the LIBOR Act and the proposed regulation apply to certain
LIBOR contracts governed by federal law or the law of any state.
Because Congress intended the LIBOR Act to apply on a nationwide
basis,\42\ the Board believes it is appropriate to define ``state''
expansively to include U.S. territories and possessions and the
District of Columbia.
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\42\ See Act section 102(b)(1).
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C. Section 253.3 Applicability
Proposed Sec. 253.3 addresses the applicability of the regulation
to LIBOR contracts. Specifically, for LIBOR contracts that do not
provide for the use of a clearly defined or practicable replacement
benchmark rate (referred to as ``covered contracts'' in the proposed
rule), the applicable Board-selected benchmark replacement indicated in
Sec. 253.4 of the proposed rule shall be the benchmark replacement for
the contract on and after the LIBOR replacement date.\43\ Proposed
Sec. 253.3 also clarifies that, consistent with Sec. 253.1 of the
proposed rule, in general, the regulation does not affect LIBOR
contracts that are not covered contracts, with one exception discussed
further below.\44\
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\43\ Section 253.3(a)(1) of the proposed rule.
\44\ Section 253.3(b) of the proposed rule; see also Act section
104(f)(1)-(3).
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Covered contracts. The proposed rule defines ``covered contract''
to mean a LIBOR contract that has one of the following characteristics
as of the LIBOR replacement date: (i) the LIBOR contract contains no
fallback provisions; (ii) the LIBOR contract has fallback provisions
that identify neither a specific benchmark replacement nor a
determining person; or (iii) the LIBOR contract contains fallback
provisions that identify a determining person, but the determining
person has failed to select a benchmark replacement by the earlier of
the LIBOR replacement date and the latest date for selecting a
benchmark replacement according to the terms of the LIBOR contract.\45\
In evaluating whether a LIBOR contract has any of these characteristics
on the LIBOR replacement date, the proposed regulation would mirror the
statute and disregard any reference in any fallback provisions of the
LIBOR contract to the following: (i) a benchmark replacement that is
based in any way on any LIBOR value, except to account for the
difference between LIBOR and the benchmark replacement; or (ii) a
requirement that a person (other than a benchmark administrator)
conduct a poll, survey, or inquiries for quotes or information
concerning interbank lending or deposit rates.\46\ The proposed rule
further clarifies that a ``covered contract'' would not include any
LIBOR contract that the parties have agreed in writing shall not be
subject to the LIBOR Act.\47\
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\45\ Section 253.3(a)(2)(i) of the proposed rule.
\46\ Section 253.3(a)(2)(ii) of the proposed rule. Under the
statute, any such references in any fallback provisions of the LIBOR
contract would be disregarded as if not included in the fallback
provisions of the contract and would be deemed null and void and
without any force or effect. Act section 104(b).
\47\ Section 253.3(a)(2)(iii) of the proposed rule; see also Act
section 104(f)(1).
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Under the proposed rule, ``covered contract'' would include, for
example, a LIBOR contract that does not specify any benchmark
replacement or identify a determining person who could select such a
benchmark replacement. Pursuant to proposed Sec. 253.3(a)(2)(i)(B), on
the LIBOR replacement date, the LIBOR contract would be a covered
contract.
Another example would be a LIBOR contract that specifies the last
published LIBOR value as the benchmark replacement. Pursuant to
proposed Sec. 253.3(a)(2)(ii)(A), this benchmark replacement would be
disregarded as of the LIBOR replacement date. As a result, on the LIBOR
replacement date, the LIBOR contract would be a covered contract
because it has no fallback provisions, as described in proposed Sec.
253.3(a)(2)(i)(A).
Non-covered contracts. As defined in the proposed rule, a LIBOR
contract would not be a covered contract if, after giving effect to
proposed Sec. 253.3(a)(2)(ii)(B) on the LIBOR replacement date, (i)
the LIBOR contract has fallback provisions that identify a specific
benchmark replacement, (ii) the LIBOR contract identifies a determining
person that has selected a benchmark replacement, or (iii) the parties
to the contract have agreed in writing that the contract shall not be
subject to the LIBOR Act.\48\ Consistent with the statute, the proposed
regulation generally would not affect LIBOR contracts that are not
covered contracts.\49\
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\48\ Section 253.3(b)(1) of the proposed rule; see also Act
section 104(a). Pursuant to the statute, any references in the
fallback provisions of a LIBOR contract to any of the following
would be disregarded and deemed null and void and without any force
or effect: (i) a benchmark replacement that is based in any way on
any LIBOR value, except to account for the difference between LIBOR
and the benchmark replacement; or (ii) a requirement that a person
(other than a benchmark administrator) conduct a poll, survey, or
inquiries for quotes or information concerning interbank lending or
deposit rates. Act section 104(b); see also Sec. 253.3(a)(2)(ii) of
the proposed rule.
\49\ Section 253.3(b)(1) of the proposed rule; see also Act
sections 102(b)(3) and 104(f).
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However, the Board's proposed rule would clarify that a determining
person may select the Board-selected benchmark replacement specified in
Sec. 253.4 of the proposed rule as the benchmark replacement for a
LIBOR contract.\50\ Consistent with the LIBOR Act, the proposed rule
would indicate that any such selection by a determining person shall be
(i) irrevocable; (ii) made by the earlier of the LIBOR replacement date
and the latest date for selecting a benchmark replacement according to
the terms of the LIBOR contract; and (iii) used in any determinations
of the benchmark under or with respect to the LIBOR contract occurring
on and after the LIBOR replacement date.
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\50\ Section 253.3(b)(2) of the proposed rule.
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Separately, the Board is aware of a potential ambiguity regarding
the application of the LIBOR Act to a subset of non-covered contracts.
Specifically, the Board is aware that some LIBOR contracts contain
fallback provisions that (i) either identify a clear and practicable
benchmark replacement or authorize a determining person to select a
benchmark replacement, but (ii) are triggered only when LIBOR is
unavailable. Significantly, the fallback provisions in these LIBOR
contracts are not triggered expressly when LIBOR is available but
nonrepresentative.
As mentioned previously, the Board understands it is possible that,
on and after the LIBOR replacement date, IBA (or any successor
administrator) may continue to publish a synthetic version of LIBOR
that, although called ``LIBOR,'' has been expressly pronounced by the
FCA as not representative of the underlying market and economic reality
LIBOR had been intended to measure--namely, the rate at which banks may
lend to, or borrow from, other banks or agents in the money
markets.\51\ If this occurs, the continued publication of synthetic
LIBOR on and after the LIBOR replacement date arguably could give
[[Page 45273]]
the impression that ``LIBOR'' remains available and, therefore, should
continue to be used for LIBOR contracts with fallback provisions that
lack an express nonrepresentativeness trigger, notwithstanding the fact
that the LIBOR contract's fallback provisions may identify a clear and
practicable benchmark replacement. In this scenario, because the LIBOR
contract contains such fallback provisions, it would not be a covered
contract for purposes of the proposed rule.\52\ Yet, to the extent
synthetic LIBOR continues to be published on or after the LIBOR
replacement date, there may be confusion as to whether references to
LIBOR in the contract should be replaced pursuant to that fallback
provision, or whether synthetic LIBOR should apply.
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\51\ FCA, FCA Announcement on Future Cessation and Loss of
Representative of the LIBOR Benchmarks par.7 (Mar. 5, 2021), <a href="https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf">https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf</a>; FCA, UK Benchmarks
Regulation, <a href="https://www.fca.org.uk/markets/benchmarks/regulation">https://www.fca.org.uk/markets/benchmarks/regulation</a>
(last visited July 7, 2022) (describing regulation).
\52\ Section 253.3(b) of the proposed rule; see also Act
104(f)(2).
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In light of this potential ambiguity, the Board is considering
whether, for clarity, the final rule should provide that, with respect
to any LIBOR contract that is not a covered contract (other than a
LIBOR contract where the parties have agreed in writing that the
contract shall not be subject to the LIBOR Act), LIBOR shall be
replaced with the benchmark replacement specified pursuant to the LIBOR
contract on the earlier of (i) the date specified pursuant to the LIBOR
contract or (ii) the LIBOR replacement date. Under such a rule, the
benchmark replacement specified pursuant to a non-covered contract
would become operative on or before the LIBOR replacement date
(depending on the contract's terms), even in the event a
nonrepresentative rate called ``LIBOR'' in the form of synthetic LIBOR
continues to be published on and after the LIBOR replacement date. The
Board believes that, for the reasons described below, such a
clarification may promote the purposes of the LIBOR Act.
First, the findings and purpose of the LIBOR Act indicates that
Congress sought to ``establish a clear and uniform process . . . for
replacing LIBOR in existing contracts the terms of which do not provide
for the use of a clearly defined or practicable replacement benchmark
rate'' based on a finding that ``the cessation or nonrepresentativeness
of LIBOR could result in disruptive litigation related to existing
contracts that do not provide for the use of a clearly defined or
practicable replacement benchmark rate.'' \53\ In addition, Congress
sought to ``allow existing contracts that reference LIBOR but provide
for the use of a clearly defined and practicable replacement rate, to
operate according to their terms.'' \54\ Considering these findings,
the Board believes that Congress intended that, in the event LIBOR
ceases to be published or becomes nonrepresentative on the LIBOR
replacement date, a LIBOR contract with a clear and practicable
benchmark replacement would replace references to LIBOR in the contract
with the specified benchmark replacement, even if synthetic LIBOR
continues to be published on and after the LIBOR replacement date.
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\53\ Act section 102(a)(3)-(b)(1).
\54\ Act section 102(b)(3).
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Second, in light of the fact that a non-covered contract would
provide for use of a clear and practicable benchmark replacement, the
Board believes a sensible and reasonable expectation of the parties at
the time of the agreement would have been that, upon the
nonrepresentativeness of LIBOR, this fallback provision would operate
to replace LIBOR, rather than binding the parties to a synthetic LIBOR
rate that may not have been anticipated to exist at the time of the
agreement. As discussed, although synthetic LIBOR would be called
``LIBOR,'' it would be a fundamentally different rate that would not be
representative of the underlying market and economic reality concerning
the setting of rates at which banks may lend to, or borrow from, other
banks or agents in the money markets.\55\
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\55\ Specifically, the Board understands that synthetic LIBOR
also would be a SOFR-based rate and, therefore, would not be
representative of the rates at which banks may lend to, or borrow
from, other banks or agents in the money markets.
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For these reasons, the Board seeks feedback on whether the final
rule should provide generally that the benchmark replacement specified
pursuant to a non-covered contract would replace references to LIBOR in
that contract on the earlier of the date specified pursuant to the
LIBOR contract or the LIBOR replacement date. If adopted, the provision
would not, however, apply to a LIBOR contract that is a non-covered
contract because the parties have agreed in writing that the contract
shall not be subject to the LIBOR Act.\56\ The Board believes such a
provision could provide a useful clarification and also may promote the
LIBOR Act's intention to preclude disruptive ligation related to
existing contracts' references to LIBOR.\57\ Alternatively, the Board
could offer no particular interpretation or clarification concerning
non-covered contracts that do not contain an express
nonrepresentativeness or similar triggering provision should synthetic
LIBOR be published on and after the LIBOR replacement date. This
position may be reasonable since the particular situation is not
expressly addressed by the LIBOR Act and non-covered contracts include
a provision for a clear and practicable replacement rate that otherwise
are generally are presumed to be unaffected by the Act. Therefore, it
may be prudent for the final rule, like the proposed rule, to leave
these contracts unaffected.
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\56\ In agreeing in writing that the contract shall not be
subject to the Act, the Board anticipates that those parties have
agreed upon a method in which to address LIBOR references in that
contract.
\57\ See Act section 102(b)(2); see also Act section 102(a)(3).
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D. Section 253.4 Board-Selected Benchmark Replacements
Proposed Sec. 253.4 identifies the Board-selected benchmark
replacements for various types of covered contracts. The Board agrees
with the ARRC's observation that different benchmark replacements may
be appropriate for derivative transactions and other transactions
(hereafter, ``cash transactions'').\58\ Therefore, under the proposed
rule, the Board would select different benchmark replacements for
derivative transactions and for cash transactions. The Board also would
select a separate benchmark replacement for certain contracts to which
government-sponsored enterprises are a party (covered GSE contracts).
Consistent with the LIBOR Act, all of the proposed replacements (i)
would be based upon SOFR and (ii) would incorporate spread adjustments
for each specified tenor of LIBOR.\59\
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\58\ ARRC, ARRC Best Practice Recommendations Related to Scope
of Use of the Term Rate (May 4, 2022), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf</a>.
\59\ See Sec. 253.4 of the proposed rule. See also Act sections
103 and 104.
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The spread adjustments specified in the Act are intended to address
certain differences between SOFR and LIBOR, including the fact that
LIBOR is unsecured and therefore includes an element of bank credit
risk which may cause it to be higher than SOFR.\60\ LIBOR also may
include term premia and reflect supply and demand conditions in
wholesale unsecured funding markets, each of which may cause LIBOR to
be higher than SOFR.\61\ The LIBOR Act prescribes static spread
adjustments based on the tenor of LIBOR referenced in the contract
(tenor spread adjustments)--specifically, 0.644
[[Page 45274]]
basis points (bps) (0.00644 percent) for overnight LIBOR, 11.448 bps
(0.11448 percent) for one-month LIBOR, 26.161 bps (0.26161 percent) for
three-month LIBOR, 42.826 bps (0.42826 percent) for six-month LIBOR,
and 71.513 bps (0.71513 percent) for 12-month LIBOR.\62\
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\60\ ARRC, ARRC Consultation on Spread Adjustment Methodologies
for Fallbacks in Cash Products Referencing USD LIBOR 7 (Jan. 21,
2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Spread_Adjustment_Consultation.pdf</a>.
\61\ Id.
\62\ See Act section 103(20) (defining ``tenor spread
adjustment''). These spread adjustments were based on a methodology
originally advanced by ISDA that uses the historical median over a
five-year lookback period calculating the difference between USD
LIBOR and SOFR. ARRC, ARRC Announces Further Details Regarding Its
Recommendation of Spread Adjustments for Cash Products (June 30,
2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf</a>.
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1. Derivative Transactions
With respect to derivative transactions, the Board observes that
many derivative market participants have adhered to the ISDA 2020 IBOR
Fallbacks Protocol (ISDA protocol) to amend their existing derivative
transaction contracts to incorporate fallback provisions that would
replace references to USD LIBOR with a SOFR-based rate.\63\
Specifically, the ISDA protocol replaces references to USD LIBOR in
adhering parties' derivative transaction contracts with a rate equal to
(i) SOFR, compounded in arrears for the appropriate tenor,\64\ plus
(ii) a stated spread adjustment based on the appropriate tenor (the
``Fallback Rate (SOFR)''). The stated spread adjustments of the ISDA
protocol are identical to the tenor spread adjustments specified in the
LIBOR Act.\65\ As of July 6, 2022, over 15,200 entities have adhered to
the ISDA protocol to amend their derivative transactions.\66\
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\63\ ISDA, ISDA 2020 IBOR Fallbacks Protocol (Oct. 23, 2020),
<a href="https://assets.isda.org/media/3062e7b4/08268161-pdf">https://assets.isda.org/media/3062e7b4/08268161-pdf</a>.
\64\ For purposes of this calculation, SOFR generally is
compounded in arrears over an accrual period corresponding to the
tenor of the LIBOR referenced in the covered contract. That
compounded rate is annualized, and the day count convention is
adjusted to match that of LIBOR. Bloomberg Professional Services,
Fact Sheet: IBOR Fallbacks (Dec. 13, 2021), <a href="https://assets.bbhub.io/professional/sites/10/Factsheet-IBOR-Fallbacks_V4_Dec2021.pdf">https://assets.bbhub.io/professional/sites/10/Factsheet-IBOR-Fallbacks_V4_Dec2021.pdf</a> (cited
in response to FAQ 3 of ISDA's ``2020 IBOR Fallbacks Protocol (IBOR
Fallbacks Protocol) FAQs''). See also Bloomberg Professional
Services, IBOR Fallback Rate Adjustments Rule Book (Dec. 13, 2021),
<a href="https://assets.bbhub.io/professional/sites/10/IBOR-Fallback-Rate-Adjustments-Rule-Book_V3_Dec2021.pdf">https://assets.bbhub.io/professional/sites/10/IBOR-Fallback-Rate-Adjustments-Rule-Book_V3_Dec2021.pdf</a> (for complete discussion of the
calculation).
\65\ ISDA based its spread adjustments on a historical median
over a five-year lookback period calculating the difference between
USD LIBOR and SOFR. ARRC, ARRC Announces Further Details Regarding
Its Recommendation of Spread Adjustments for Cash Products (June 30,
2020), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Recommendation_Spread_Adjustments_Cash_Products_Press_Release.pdf</a>.
\66\ See ISDA, ISDA 20202 IBOR Fallbacks Protocol--List of
Adhering Parties, <a href="https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/adhering-parties">https://www.isda.org/protocol/isda-2020-ibor-fallbacks-protocol/adhering-parties</a> (last visited July 7, 2022).
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The Board has reviewed the ISDA protocol and believes the rate
specified in the ISDA protocol would be a reasonable, SOFR-based
benchmark replacement for LIBOR for derivative transactions. Further,
as derivatives markets already appear to reference SOFR compounded in
arrears and there has been significant adherence to the ISDA protocol,
the Board believes it would be sensible to avoid disruption to these
markets' efforts to transition away from referencing LIBOR. Promoting
use of a consistent approach to replace LIBOR references in derivative
transactions should enhance financial stability. This approach also is
consistent with the recommendations of the ARRC.\67\ For these reasons,
the proposed rule would select the Fallback Rate (SOFR) in the ISDA
protocol as the Board-selected benchmark for derivative transactions.
For purposes of the proposed rule, a ``derivative transaction'' is
defined as ``a contract that would satisfy the criteria to be a
`Protocol Covered Document' under the ISDA protocol but for the fact
that one or more parties to such contract is not an `Adhering Party' as
such term is used in the ISDA protocol, provided that, for purposes of
this definition, `Protocol Effective Date' as such term is used in the
ISDA protocol means the LIBOR replacement date for the relevant covered
contract.'' \68\
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\67\ See ARRC, ARRC Best Practice Recommendations Related to
Scope of Use of the Term Rate (May 4, 2022), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf</a> (recommending against the use of CME Term SOFR
for the vast majority of the derivatives markets because these
markets already reference SOFR compounded in arrears).
\68\ Section 253.2 of the proposed rule. ``Protocol Covered
Documents'' include (i) master agreements incorporating certain ISDA
definitions booklets (each a ``covered ISDA definitions booklet''),
including the 2006 ISDA Definitions and the 2000 ISDA Definitions,
as published by ISDA, and referencing LIBOR or another specified
IBOR (each a ``covered master agreement''); (ii) confirmations that
supplement, form part of and are subject to, or are otherwise
governed by, a covered master agreement; and (iii) any ISDA credit
support document, including the 1994 ISDA Credit Support Annex and
the 2014 Standard Credit Support Annex, that incorporates a covered
ISDA definition booklet and references LIBOR or another specified
IBOR. ISDA, ISDA 2020 IBOR Fallbacks Protocol 14-16(Oct. 23, 2020),
<a href="https://assets.isda.org/media/3062e7b4/08268161-pdf">https://assets.isda.org/media/3062e7b4/08268161-pdf</a>.
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ISDA has selected Bloomberg Index Services Limited (Bloomberg) to
calculate and publish the Fallback Rate (SOFR) referenced in its ISDA
protocol.\69\ Similar to how IBA requires a license for certain uses of
LIBOR,\70\ the use of the Fallback Rate (SOFR) is subject to certain
licensing or other usage terms imposed by Bloomberg.\71\ Under its
present usage terms, Bloomberg waives usage fees for users with less
than $5 billion of total assets and charges one annual license fee for
use of its IBOR fallbacks data.\72\
---------------------------------------------------------------------------
\69\ ISDA, Bloomberg Selected as Fallback Adjustment Vendor
(July 31, 2019), <a href="https://www.isda.org/2019/07/31/bloomberg-selected-as-fallback-adjustment-vendor">https://www.isda.org/2019/07/31/bloomberg-selected-as-fallback-adjustment-vendor</a>.
\70\ IBA, About, <a href="https://www.theice.com/iba/about#licensing">https://www.theice.com/iba/about#licensing</a>
(last visited July 7, 2022).
\71\ See Bloomberg Prof'l Servs., IBOR Fallback Usage Terms
(Sept. 27, 2021), <a href="https://assets.bbhub.io/professional/sites/27/ISDA-IBOR-Fallbacks-Web-Terms1.pdf">https://assets.bbhub.io/professional/sites/27/ISDA-IBOR-Fallbacks-Web-Terms1.pdf</a>.
\72\ Id. The asset threshold of $5 billion applies to a user and
its affiliates as one group and can be based on assets under
management, the value of assets on its balance sheet, or another
objective measure that Bloomberg may reasonably employ. Id.
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2. Cash Transactions
a. Cash Transactions That Are Not Consumer Loans or Covered GSE
Contracts
With respect to cash transactions that are not consumer loans or
covered GSE contracts, consistent with the ARRC's recommendations,\73\
the Board believes that references to overnight LIBOR should be
replaced by SOFR plus the static spread adjustment in the LIBOR Act for
overnight LIBOR (0.644 bps). With respect to such cash transactions
that reference one-month, three-month, six-month, or 12-month LIBOR,
the Board believes that a forward-looking term rate based on SOFR,
including the applicable tenor spread adjustment specified in the LIBOR
Act, would be an appropriate replacement. For these LIBOR contracts,
the Board notes that, in July 2021, the ARRC formally recommended the
forward-looking SOFR term rates administered by CME Group Benchmark
Administration, Ltd. (CME Group).\74\ These forward-looking SOFR term
rates are calculated by first projecting a possible path of overnight
rates that is consistent with the observable averages implied by SOFR-
based derivative contracts and then creating averages over standard
tenors of that projected path of overnight rates.\75\
[[Page 45275]]
The ARRC made its recommendation after considering, among other things:
(i) the fact that CME Group's term rates were rooted in a robust and
sustainable base of derivative transactions over time; (ii) the rates'
limited scope of use that should support their stability over time;
(iii) continued growth in overnight SOFR-linked derivatives volumes;
(iv) visible progress to deepen SOFR derivative transactions'
liquidity; and (v) visible growth in offerings of cash transactions
linked to averages of SOFR.\76\ For similar reasons, the Board believes
that the forward-looking SOFR term rates administered by CME Group and
published in one-, three-, six-, and 12-month tenors (together, ``CME
Term SOFR'') generally would be an appropriate basis for a benchmark
replacement for one-, three-, six-, and 12-month LIBOR, respectively.
Therefore, for cash transactions that are not consumer loans or covered
GSE contracts, the proposed rule would replace references to one-,
three-, six-, and 12-month LIBOR with (i) the corresponding one-,
three-, six-, or 12-month CME Term SOFR, plus (ii) the applicable tenor
spread adjustment specified in the LIBOR Act.
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\73\ See ARRC, ARRC Best Practice Recommendations Related to
Scope of Use of the Term Rate (May 4, 2022), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Scope_of_Use.pdf</a>.
\74\ ARRC, ARRC Formally Recommends Term SOFR (July 29, 2021),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf</a>.
\75\ In projecting the path of overnight rates, CME Group uses a
combination of one-month and three-month SOFR futures contracts to
ensure that as many data points as possible are used to calculate
the term structure. CME Grp., CME Term SOFR Reference Rates
Benchmark Methodology (May 9, 2022), <a href="https://www.cmegroup.com/market-data/files/cme-term-sofr-reference-rates-benchmark-methodology.pdf">https://www.cmegroup.com/market-data/files/cme-term-sofr-reference-rates-benchmark-methodology.pdf</a>.
\76\ ARRC, ARRC Formally Recommends Term SOFR (July 29, 2021),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf</a>. See also ARRC, ARRC Announces Key
Principles for a Forward-Looking SOFR Term Rate (Apr. 20, 2021),
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210420-arrc-press-release-term-rate">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210420-arrc-press-release-term-rate</a>; ARRC, ARRC Identifies Market
Indicators to Support a Recommendation of a Forward-Looking SOFR
Term Rate (May 6, 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210506-term-rate-indicators-press-release">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210506-term-rate-indicators-press-release</a>.
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CME Group calculates and publishes CME Term SOFR.\77\ Similar to
how IBA requires a license for certain uses of LIBOR,\78\ the use of
CME Term SOFR is subject to certain licensing or other usage terms
imposed by CME Group.\79\ Under its present usage terms, an end user
seeking only to enter into a transaction does not need a license from
CME Group.\80\ In addition, CME Group has waived fees for users of CME
Term SOFR for cash transactions through 2026.\81\
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\77\ CME Grp., CME Term SOFR Rates, <a href="https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html">https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html</a> (last
visited July 7, 2022).
\78\ IBA, About, <a href="https://www.theice.com/iba/about#licensing">https://www.theice.com/iba/about#licensing</a>
(last visited July 7, 2022).
\79\ See CME Grp., CME Data Terms of Use, <a href="https://www.cmegroup.com/trading/market-data-explanation-disclaimer.html">https://www.cmegroup.com/trading/market-data-explanation-disclaimer.html</a>
(last visited July 7, 2022); CME Grp., CME Term SOFR Reference
Rates--Frequently Asked Questions, FAQ 8-10 (Apr. 19, 2022), <a href="https://www.cmegroup.com/articles/faqs/cme-term-sofr-reference-rates.html">https://www.cmegroup.com/articles/faqs/cme-term-sofr-reference-rates.html</a>.
\80\ CME Group defines an ``end user'' as an individual or
entity that is a counterparty or guarantor to the applicable cash
transaction or derivative transaction with the licensee of CME Term
SOFR. CME Grp., CME Term SOFR Reference Rates--Frequently Asked
Questions, FAQ 10 (Apr. 19, 2022), <a href="https://www.cmegroup.com/articles/faqs/cme-term-sofr-reference-rates.html">https://www.cmegroup.com/articles/faqs/cme-term-sofr-reference-rates.html</a>.
\81\ CME Grp., CME Group Benchmark Fee List (Dec. 2021), <a href="https://www.cmegroup.com/files/download/benchmark-data-fee-list.pdf">https://www.cmegroup.com/files/download/benchmark-data-fee-list.pdf</a>.
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b. Cash Transactions That Are Consumer Loans
Under the LIBOR Act, any Board-selected benchmark replacement
applicable to consumer loans shall, for the one-year period beginning
on the LIBOR replacement date, incorporate an amount that modifies the
otherwise-applicable tenor spread adjustment specified in the Act.\82\
Specifically, section 104(e)(2) of the LIBOR Act requires that, during
the one-year period, the Board-selected benchmark replacement for
consumer loans incorporate an amount that transitions linearly for each
business day during that period from (i) the difference between the
Board-selected benchmark replacement and the corresponding LIBOR tenor
determined as of the day immediately before the LIBOR replacement date
to (ii) the applicable tenor spread adjustment specified in the LIBOR
Act (the transition tenor spread adjustment).\83\ This transition tenor
spread adjustment is intended to prevent consumer borrowers from
experiencing significant, unexpected shifts in borrowing rates on and
immediately following the LIBOR replacement date.
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\82\ Act section 104(e)(2). See Sec. 253.2 of the proposed rule
for the definition of ``consumer loan.''
\83\ Id.
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The Board believes that a forward-looking term rate based on SOFR
would be an appropriate benchmark replacement for consumer loans.
Accordingly, for consumer loans during the one-year period beginning on
the LIBOR replacement date, the proposed rule would replace one-,
three-, six-, and 12-month LIBOR with (i) the corresponding one-,
three-, six-, or 12-month CME Term SOFR, plus (ii) the transition tenor
spread adjustment.
Refinitiv Limited has stated it will publish and provide rates for
consumer loans that sum (i) CME Term SOFR and (ii) the transition tenor
spread adjustment (for the one-year period beginning on the LIBOR
replacement date) or the tenor spread adjustment specified in the LIBOR
Act (after that one-year period), consistent with the proposed rule and
the recommendations of the ARRC.\84\ Refinitiv identifies these rates
as ``USD IBOR Cash Fallbacks'' for ``Consumer'' products. For clarity,
and particularly because calculation of the transition tenor spread
adjustment applicable to consumer loans during the one-year period
beginning on the LIBOR replacement rate may be complex, the proposed
rule indicates that these rates from Refinitiv would be deemed equal to
the rates in the proposed rule.\85\ Use of these ``USD IBOR Cash
Fallbacks'' for ``Consumer'' products may be subject to certain
licensing or other usage terms imposed by Refinitiv Limited.
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\84\ The ARRC selected Refinitiv Limited to publish its
recommended spread adjustments and spread-adjusted rates for cash
products. ARRC, ARRC Announces Refinitiv as Publisher of its Spread
Adjustment Rates for Cash Products (Mar. 17, 2021), <a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210317-press-release-Spread-Adjustment-Vendor-Refinitiv.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/20210317-press-release-Spread-Adjustment-Vendor-Refinitiv.pdf</a>. With respect
to the transition tenor spread adjustment, Refinitiv has stated it
will incorporate a two-week lookback period for SOFR (from June 19,
2023, through June 30, 2023) in determining the difference between
the Board-selected benchmark replacement and the corresponding LIBOR
tenor as of the day before the LIBOR replacement date. Refinitiv
Benchmark Servs. (UK) Ltd., USD IBOR Institutional Cash Fallbacks
Benchmark, USD IBOR Consumer Cash Fallbacks (1 Week, 2 Months)
Benchmark, USD IBOR Consumer Cash Fallbacks (1, 3, 6 Months)
Prototype Methodology 11 (Jan. 3, 2022), <a href="https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-usd-ibor-cash-fallbacks-methodology.pdf">https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-usd-ibor-cash-fallbacks-methodology.pdf</a>. The Board believes this method
of determining the difference between the Board-selected benchmark
replacement and the corresponding LIBOR tenor as of June 30, 2023,
is consistent with the provision in the Act.
\85\ See Sec. 253.4(b)(2)(iii) of the proposed rule. Refinitiv
also has stated it will publish ``USD IBOR Cash Fallbacks'' for
``Institutional'' products. These rates are expected to be
consistent with the proposed rule's benchmark replacement for cash
transactions that are not consumer loans. The Board observes that
parties to cash transactions that are not consumer loans should be
able to compute easily the proposed benchmark replacement rate and,
if needed, verify that any vendor's reported rate (including that of
Refinitiv) is consistent with that proposed replacement rate such
that no provision similar to Sec. 253.4(b)(2)(iii) is needed for
these transactions.
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c. Cash Transactions That Are Covered GSE Contracts
Under the proposed rule, a ``covered GSE contract'' would be ``a
covered contract for which a GSE is identified as a party in the
transaction documents and that is (i) a commercial or multifamily
mortgage loan, (ii) a commercial or multifamily mortgage-backed
security, (iii) a collateralized mortgage obligation, (iv) a credit
risk transfer transaction, or (v) a Federal Home Loan Bank advance.''
\86\
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\86\ See Sec. 253.2 of the proposed rule. A GSE, or government-
sponsored enterprise, would be defined as an entity established or
chartered by the U.S. government to serve public purposes specified
by the U.S. Congress but whose debt obligations are not explicitly
guaranteed by the full faith and credit of the U.S. government. Id.
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[[Page 45276]]
As with other cash transactions that are not consumer loans, the
Board believes that references to overnight LIBOR in covered GSE
contracts should be replaced by SOFR plus the static spread adjustment
in the LIBOR Act for overnight LIBOR. However, with respect to covered
GSE contracts referencing one-month, three-month, six-month, or 12-
month LIBOR, the Board notes that, since 2020, the Federal Housing
Finance Agency has worked with its supervised GSEs--the Federal
National Mortgage Association, the Federal Home Loan Mortgage
Corporation, and the Federal Home Loan Banks--generally to replace USD
LIBOR with the 30-calendar-day compounded average of SOFR (30-day
Average SOFR), as published by the FRBNY,\87\ in their newly issued
multifamily loans and other structured products that are covered GSE
contracts.\88\ To enhance liquidity for both these newly issued and
legacy LIBOR-based products, the Board's proposed rule would select as
the benchmark replacement for covered GSE contracts (i) 30-day Average
SOFR plus (ii) the applicable tenor spread adjustment specified in the
LIBOR Act. The Board invites comment as to whether selecting the same
SOFR-based replacement for LIBOR for legacy covered GSE contracts as
those used for similar, recently issued contracts would promote greater
liquidity for legacy and newly issued covered GSE contracts.
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\87\ Fed. Res. Bk. of NY, Additional Information about Reference
Rates Administered by the New York Fed, <a href="https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#sofr_ai_calculation_methodology">https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#sofr_ai_calculation_methodology</a> (last visited July 7, 2022)
(detailing the calculation methodology for the SOFR averages and
index).
\88\ Under the proposed rule, ``covered GSE contract'' would be
defined to be a contract for which a GSE is identified as a party in
the transaction documents that is (i) a commercial or multifamily
mortgage loan, (ii) a commercial or multifamily mortgage-backed
security, (iii) a collateralized mortgage obligation, (iv) a credit
risk transfer transaction, or (v) a Federal Home Loan Bank advance.
Section 253.2 of the proposed rule. ``Government-sponsored
enterprise (GSE)'' is defined consistent with the Board's capital
rule, 12 CFR 217.2, to mean an entity established or chartered by
the U.S. government to serve public purposes specified by the U.S.
Congress but whose debt obligations are not explicitly guaranteed by
the full faith and credit of the U.S. government. Section 253.2 of
the proposed rule.
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3. Determination Date for the Benchmark Replacement
As discussed, under the proposed rule, references to ``LIBOR'' in
LIBOR contracts generally would be replaced with the proposed Board-
selected benchmark replacement, without any modification of other
contractual provisions.\89\ For clarity, the proposed rule indicates
that selection and use of the Board-selected benchmark replacement
would not affect the dates on which the contractual rates are
determined.\90\ For example, if a covered contract that is a cash
transaction originally indicated that a three-month LIBOR rate would be
determined on March 31, June 30, September 30, and December 31 of each
year, then, following the LIBOR replacement date, the corresponding
Board-selected benchmark replacement rate (three-month CME Term SOFR)
also would be determined on March 31, June 30, September 30, and
December 31 of each year. Similarly, if a covered contract that is a
cash transaction originally indicated that a 12-month LIBOR rate would
be determined using the value as of a prior date (e.g., 45 days prior
to the payment date), then following the LIBOR replacement date, the
corresponding Board-selected benchmark replacement rate (12-month CME
Term SOFR) also would be determined using that benchmark replacement's
value as of the specified prior date. To the extent that the specified
prior date precedes the LIBOR replacement date, the benchmark
originally specified in the contract--here, 12-month LIBOR--would be
used, consistent with the covered contract's terms. However, once the
parties would look to a benchmark value as of a date on or after the
LIBOR replacement date under the covered contract's terms, the
corresponding Board-selected benchmark replacement--here, 12-month CME
Term SOFR--would be used.
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\89\ For example, if a LIBOR contract indicated that interest
due on borrowings for periods between published LIBOR tenors should
be calculated by interpolation, the proposed rule would not affect
the parties' ability to use interpolation except that the
corresponding Board-selected benchmark replacement values should be
used in place of the LIBOR values for the interpolation. Similarly,
if the LIBOR contract provided that interest should be on a fixed
rate for some specified period and on a floating interest rate based
on LIBOR only after that specified period for the remaining maturity
of the loan, then the proposed rule only would replace the LIBOR
reference with the relevant Board-selected benchmark replacement and
would not affect the fixed-rate period or other terms of the
contract.
\90\ Section 253.4(d) of the proposed rule.
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E. Section 253.5 Benchmark Replacement Conforming Changes
The LIBOR Act authorizes the Board to require any additional
technical, administrative, or operational changes, alterations, or
modifications to LIBOR contracts based on a determination such changes,
alterations, or modifications would address one or more issues
affecting the implementation, administration, and calculation of the
Board-selected benchmark replacement in LIBOR contracts (conforming
changes).\91\ At this time, the Board does not believe any additional
conforming changes would be needed for successful implementation of the
Board-selected benchmark replacements indicated in Sec. 253.4 of the
proposed rule. However, the Board reserves the authority, in its
discretion, to require any additional conforming changes, by regulation
or order.\92\
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\91\ Act section 104(e).
\92\ Id.
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For clarity, the proposed rule also indicates that, with respect to
a LIBOR contract that is not a consumer loan, a calculating person may
make any additional technical, administrative, or operational changes,
alterations or modifications that, in that person's reasonable
judgment, would be necessary or appropriate to permit the
implementation, administration, and calculation of the Board-selected
benchmark replacement under or with respect to a LIBOR contract after
giving due consideration to any changes, alterations, or modifications
otherwise required by the Board under the proposed rule.\93\ This
proposed language mirrors sections 103(4)(B) and 104(d) of the LIBOR
Act.
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\93\ Section 253.5(a)(2) of the proposed rule.
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F. Section 253.6 Preemption
As noted, section 107 of the LIBOR Act expressly preempts any
provision of state or local law relating to the selection or use of a
benchmark replacement or related conforming changes, or expressly
limiting the manner of calculating interest (including the compounding
of interest) as that provision applies to the selection or use of a
Board-selected benchmark replacement or benchmark replacement
conforming changes.\94\ For clarity, Sec. 253.6 of the proposed rule
references and repeats the statutory language concerning preemption of
such state or local law, statute, rule, regulation, or standard by a
final rule issued by the Board pursuant to the LIBOR Act.
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\94\ Act section 107.
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G. Effective Date
The Board proposes that the proposed rule, if finalized, will
become effective on the first day of the next calendar quarter that
begins 30 days after publication of the final rule in the Federal
Register. The Board notes that the LIBOR Act directs the Board to
promulgate regulations not later than
[[Page 45277]]
180 days after the date of enactment.\95\ As a result, the effective
date of the final rule would be well in advance of the LIBOR
replacement date.
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\95\ One hundred eighty days after the date of enactment, March
15, 2022, is September 11, 2022.
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III. Request for Comment
The Board invites comment on all aspects of the proposed rule. In
addition, the Board invites comment on the following specific questions
related to the proposed rule:
<bullet> What, if any, alternative SOFR-based benchmark
replacements should the Board consider for derivative transactions
instead of Fallback Rate (SOFR) as defined in the ISDA protocol (e.g.,
a type of SOFR average)? What, if any, alternative SOFR-based benchmark
replacements should the Board consider for covered GSE contracts
instead of 30-day Average SOFR, such as SOFR term rates? What, if any,
alternative SOFR-based benchmark replacements should the Board consider
for other cash transactions instead of CME Term SOFR, such as a type of
SOFR average or SOFR term rates that may be offered by a provider other
than CME? Why would those alternatives be better choices than those
indicated in the proposed rule? Should the Board identify a single
Board-selected benchmark replacement for all covered contracts?
<bullet> Are there any categories of covered contracts for which
the Board should consider an alternative SOFR-based Board-selected
benchmark replacement? What aspects of the nature, circumstances, or
characteristics (e.g., issuer type, lender type, borrower type,
structure, use) of those contracts warrant consideration of a different
SOFR-based benchmark replacement?
<bullet> What, if any, additional clarifications should the Board
consider regarding the Board-selected benchmark replacements? Why would
those clarifications be helpful?
<bullet> What, if any, additional clarifications should the Board
consider regarding the definition of ``covered contract''? For example,
should the Board clarify that Sec. 253.3(a)(2)(ii)(B) of the proposed
regulation--which generally nullifies any references in the fallback
provisions of a LIBOR contract to a requirement that a person (other
than a benchmark administrator) conduct a poll, survey, or inquiries
for quotes or information concerning interbank lending or deposit
rates--applies to a contract that requires a person to poll for
``Eurodollar'' deposit rates? What, if any, additional clarifications
should the Board consider regarding other defined terms in the proposed
rule?
<bullet> Is the proposed provision concerning the application of
the proposed rule to non-covered contracts sufficiently clear? What, if
any, additional clarifications should the Board consider with respect
to non-covered contracts? For example, should the final rule address
the ambiguity discussed above regarding LIBOR contracts with fallback
provisions that lack an express nonrepresentativeness trigger, perhaps
by indicating that those contracts' fallback provisions would be
triggered on the LIBOR replacement date? \96\
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\96\ See discussion concerning non-covered contracts in section
II.C.
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<bullet> What, if any, additional clarifications, should the Board
consider regarding selections of benchmark replacements by determining
persons, including their ability to select a replacement on or before
the LIBOR replacement date? For example, should the Board consider
requiring a determining person to provide notice to one or more parties
concerning the selection and, if so, what specific notification
requirements would be appropriate and why? What, if any, potential
litigation or other risks could result from such a notification
requirement, and how might the Board address those risks?
<bullet> What, if any, benchmark replacement conforming changes
should the Board consider (e.g., clarification regarding calculation of
any contractual rate cap or floor in light of the Act's specified tenor
adjustments, application of any contractual lookback period or other
term related to determination of the precise applicable benchmark
replacement rate)? Should those conforming changes apply to all covered
contracts or just one or more categories of covered contracts?
<bullet> Should the Board incorporate into the regulation the
statutory protections in section 105 of the Act? If so, should the
Board make any clarifications related to these statutory protections?
IV. Regulatory Analyses
A. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency to consider the impact of its proposed rules on
small entities. In connection with a proposed rule, the RFA generally
requires an agency to prepare an Initial Regulatory Flexibility
Analysis (IRFA) describing the impact of the rule on small entities,
unless the head of the agency certifies that the proposed rule will not
have a significant economic impact on a substantial number of small
entities and publishes such certification along with a statement
providing the factual basis for such certification in the Federal
Register. An IRFA must contain (i) a description of the reasons why
action by the agency is being considered; (ii) a succinct statement of
the objectives of, and legal basis for, the proposed rule; (iii) a
description of, and, where feasible, an estimate of the number of small
entities to which the proposed rule will apply; (iv) a description of
the projected reporting, recordkeeping, and other compliance
requirements of the proposed rule, including an estimate of the classes
of small entities that will be subject to the requirement and the type
of professional skills necessary for preparation of the report or
record; (v) an identification, to the extent practicable, of all
relevant Federal rules that may duplicate, overlap with, or conflict
with the proposed rule; and (vi) a description of any significant
alternatives to the proposed rule that accomplish its stated
objectives.
The Board is providing an IRFA with respect to the proposed rule.
The Board invites comment on all aspects of this IRFA.
a. Reasons Action Is Being Considered
The Board is issuing the proposed rule to implement its statutory
mandate in the LIBOR Act. Specifically, section 110 of the Act directs
the Board to promulgate regulations to carry out the Act not later than
180 days after enactment. In general, the proposed rule would codify
into regulation the rules that are laid out in the Act; under the Act,
as described below, the Board's discretion is limited to a few key
areas, such as the selection of Board-selected benchmark replacements
based on SOFR.
b. Objectives of the Proposed Rule
Congress enacted the LIBOR Act to provide a uniform, nationwide
solution for replacing references to LIBOR in tough legacy contracts--
contracts governed by U.S. law that reference USD LIBOR and that will
not mature until after USD LIBOR ceases or becomes nonrepresentative,
but have no effective means to replace LIBOR after it ceases or becomes
nonrepresentative. The statute directs the Board to select one or more
benchmark replacements based on SOFR that will replace LIBOR by
operation of law following the LIBOR replacement date. In this way, the
Act and the Board's implementing regulation should preclude disruptive
litigation related to tough legacy contracts.
[[Page 45278]]
c. Description and Estimate of the Number of Small Entities
The proposed rule would primarily apply to the parties to covered
contracts, as defined in Sec. 253.3(a)(2) of the proposal.\97\ Parties
to covered contracts may include firms of any size and in any industry
and are not limited to Board-regulated institutions or even firms
engaged in financial activities. In general, covered contracts would
include (i) LIBOR contracts that contain no fallback provisions, (ii)
LIBOR contracts that contain inadequate fallback provisions (defined as
LIBOR contracts with fallback provisions that identify neither a
specific benchmark replacement nor a determining person), or (iii)
LIBOR contracts for which a determining person has failed to select a
benchmark replacement by the earlier of the LIBOR replacement date or
the latest date for selecting a benchmark replacement according to the
terms of the LIBOR contract. Covered contracts would not include any
LIBOR contract that the parties have agreed in writing shall not be
subject to the LIBOR Act. Covered contracts also would not include
LIBOR contracts where a determining person selects the Board-selected
benchmark replacement by the earlier of the LIBOR replacement date and
the latest date for selecting a benchmark replacement according to the
terms of the LIBOR contract. The proposed definition of ``covered
contract'' is derived from and designed to match the scope of contracts
designated in section 104(a)-(c) of the Act.
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\97\ The proposed rule also would apply to determining persons
and calculating persons in respect of covered contracts, who may not
themselves be parties to the covered contract. In addition, Sec.
253.3(b)(2) of the proposed rule would apply to non-covered
contracts.
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The Board does not believe that it is feasible to provide an
estimate of the number of small entities to which the proposed rule
will apply.\98\ Although estimates exist of the total outstanding
exposure to USD LIBOR across all firms and transactions,\99\ the Board
is not aware of any method of determining what share of this
outstanding exposure is attributable to covered contracts, or of
determining the identity, industry, or size of the parties to those
covered contracts, and the Board is not aware of any other data sources
sufficient to provide an estimate of the number of smaller firms to
which the proposed rule would apply.
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\98\ The Board generally uses the industry-specific size
standards adopted by the Small Business Administration (SBA) for
purposes of estimating the number of small entities to which a
proposed rule would apply. See 13 CFR 121.210. Consistent with the
SBA's General Principles of Affiliation, the Board would include the
assets of all domestic and foreign affiliates toward the applicable
size threshold when determining whether to classify a particular
entity as a small entity. See 13 CFR 121.103. The Board has
considered the SBA standards and expects that a potentially
substantial number of small entities, across many industries, likely
would be affected by the proposed rule. However, for the reasons
discussed above, the Board does not believe it has sufficient data
to provide a reasonable estimate of the precise number of small
entities to which the proposed rule would apply.
\99\ As of the end of 2020, for example, the outstanding gross
notional value of all financial products referencing U.S. dollar
(USD) LIBOR was estimated to be $223 trillion. See ARRC, Progress
Report: The Transition for U.S. Dollar LIBOR (Mar. 2021) at 3,
<a href="https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf">https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/USD-LIBOR-transition-progress-report-mar-21.pdf</a>.
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d. Estimating Compliance Requirements
The proposed rule would not impose any reporting or recordkeeping
requirements on the parties to covered or non-covered contracts. With
respect to broader compliance requirements, the proposed rule would not
require the parties to covered contracts to take any affirmative steps
(such as amending their contracts).\100\ Rather, the proposed rule
would codify requirements under section 104 of the Act that modify the
terms of covered contracts by operation of law by replacing references
to LIBOR with the applicable Board-selected benchmark replacement
(i.e., Fallback Rate (SOFR) as defined in the ISDA protocol, 30-day
Average SOFR, or CME Term SOFR), as defined in Sec. 253.2 and Sec.
253.4 of the proposal. As a result of this modification, parties to
covered contracts may need to alter how they perform their contractual
obligations. For example, in the case of a bilateral loan agreement
that is a covered contract, the proposal would, as required by the Act,
replace references to LIBOR with the applicable Board-selected
benchmark replacement on and after the LIBOR replacement date. As a
result, after that date, amounts due under such loan agreement would
need to be determined by reference to the Board-selected benchmark
replacement, rather than LIBOR, and those amounts due likely would not
be identical. For this reason, the Board expects that the proposal
could have a potentially significant economic impact on parties to
covered contracts. However, the Act requires the Board to identify one
or more Board-selected benchmark replacements based on SOFR, and the
Board has proposed benchmark replacements that were recommended by the
ARRC and ISDA after wide consultation and that are consistent with
market practices. The Board does not believe that selecting alternative
SOFR-based benchmark replacements (other than those proposed in Sec.
253.4 of the proposal) would materially reduce the potential economic
impact of the proposal.
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\100\ Similarly, the proposed rule would not require a
determining person in respect of a covered contract to select a
particular benchmark replacement (or select any benchmark
replacement at all) and would not require a calculating person in
respect of a covered contract to make any or a particular benchmark
replacement conforming change.
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e. Duplicative, Overlapping, and Conflicting Rules
The Board is not aware of any federal rules that may duplicate,
overlap with, or conflict with the proposed rule.
f. Significant Alternatives Considered
Although section 110 of the LIBOR Act directs the Board to
promulgate regulations to carry out the Act, the Board's discretion
under the Act is limited to (i) selecting SOFR-based benchmark
replacements and adjusting them to include the statutorily prescribed
tenor spread adjustment (and, if applicable, transition tenor spread
adjustment), (ii) determining any benchmark replacement conforming
changes, and (iii) determining the LIBOR replacement date (in the event
that any LIBOR tenor ceases or becomes nonrepresentative prior to the
planned LIBOR cessation date).\101\ Given its limited discretion, the
Board was unable to consider alternatives to the proposed rule that
would be significantly different from the statutory scheme of the LIBOR
Act.
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\101\ At this time, the Board does not propose to determine any
benchmark replacement conforming changes and does not propose to
determine that any LIBOR tenor will cease or become
nonrepresentative prior to the first London banking day after June
30, 2023.
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As discussed, the Board has considered and invites comment on
possible alternative SOFR-based benchmark replacements. The Board also
invites comment on whether it should consider any benchmark replacement
conforming changes.
B. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number. The Board reviewed the proposed rule
under the authority delegated to the Board by the OMB and determined
that it contains no collections of information under the
[[Page 45279]]
PRA.\102\ Accordingly, there is no paperwork burden associated with the
rule.
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\102\ See 44 U.S.C. 3502(3).
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C. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposed rule in a
simple and straightforward manner and invites comment on the use of
plain language and whether any part of the proposed rule could be more
clearly stated.
List of Subjects in 12 CFR Part 253
Banks and banking, Interest rates
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System proposes to add new part 253 to 12 CFR
chapter II, as follows:
PART 253--REGULATIONS IMPLEMENTING THE ADJUSTABLE INTEREST RATE
(LIBOR) ACT (REGULATION ZZ)
0
1. Add part 253 to read as follows:
PART 253--REGULATIONS IMPLEMENTING THE ADJUSTABLE INTEREST RATE
(LIBOR) ACT (REGULATION ZZ)
Sec.
253.1 Authority, Purpose, and Scope.
253.2 Definitions.
253.3 Applicability.
253.4 Board-selected Benchmark Replacements.
253.5 Benchmark Replacement Conforming Changes.
253.6 Preemption.
Authority: Pub. L. 117-103, div. U.
Sec. 253.1 Authority, Purpose, and Scope.
(a) Authority. The Board of Governors of the Federal Reserve System
(Board) has issued this part (Regulation ZZ) under the authority of
Public Law 117-103, division U (the ``Adjustable Interest Rate (LIBOR)
Act'').
(b) Purpose. The purposes of the Adjustable Interest Rate (LIBOR)
Act are to establish a clear and uniform process, on a nationwide
basis, for replacing the overnight and one-, three-, six-, and 12-month
tenors of U.S. dollar LIBOR in existing contracts that do not provide
for the use of a clearly defined or practicable replacement benchmark
rate; to preclude litigation related to such existing contracts; to
allow existing contracts that reference LIBOR but provide for the use
of a clearly defined and practicable replacement rate to operate
according to their terms; and to address LIBOR references in Federal
law.\1\ This regulation implements the statute by defining terms used
in the statute and establishing Board-selected benchmark replacements
for LIBOR contracts.
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\1\ The Act does not affect the ability of parties to use any
appropriate benchmark rate in new contracts.
---------------------------------------------------------------------------
(c) Scope. As described in Sec. 253.3(a), the Adjustable Interest
Rate (LIBOR) Act and this regulation apply by their terms to existing
contracts governed by federal law or the law of any state that
reference the overnight and one-, three-, six-, and 12-month tenors of
U.S. dollar LIBOR and do not have terms that provide for the use of a
clearly defined and practicable replacement benchmark rate following
the LIBOR replacement date, unless the parties to that contract agree
in writing that the contract is not subject to the Adjustable Interest
Rate (LIBOR) Act. Except as provided in Sec. 253.3(b)(2), this
regulation does not apply to or affect existing or prospective
contracts that do not reference the overnight or one-, three-, six-, or
12-month tenors of U.S. dollar LIBOR or have terms providing for the
use of a clearly defined and practicable replacement benchmark for
LIBOR (either directly or through selection by a determining person),
even if that rate differs from the otherwise applicable Board-selected
benchmark replacement.
Sec. 253.2 Definitions.
30-day Average SOFR means the 30-calendar-day compounded average of
SOFR, as published by the Federal Reserve Bank of New York or any
successor administrator.
Benchmark means an index of interest rates or dividend rates that
is used, in whole or in part, as the basis of or as a reference for
calculating or determining any valuation, payment, or other
measurement.
Benchmark administrator means a person that publishes a benchmark
for use by third parties.
Benchmark replacement means a benchmark, or an interest rate or
dividend rate (which may or may not be based in whole or in part on a
prior setting of LIBOR) to replace LIBOR or any interest rate or
dividend rate based on LIBOR, whether on a temporary, permanent, or
indefinite basis, under or with respect to a LIBOR contract.
Benchmark replacement conforming change means any technical,
administrative, or operational change, alteration, or modification that
(i) the Board determines, in its discretion, would address one or more
issues affecting the implementation, administration, and calculation of
the Board-selected benchmark replacement in LIBOR contracts; or (ii)
solely with respect to a LIBOR contract that is not a consumer loan, in
the reasonable judgment of a calculating person, are otherwise
necessary or appropriate to permit the implementation, administration,
and calculation of the Board-selected benchmark replacement under or
with respect to a LIBOR contract after giving due consideration to any
benchmark replacement conforming changes determined by the Board under
item (i) of this definition.
Board-selected benchmark replacement means the benchmark
replacements identified in Sec. 253.4 of this part.
Business day means any day except for (i) a Saturday, (ii) a
Sunday, (iii) a day on which the Securities Industry and Financial
Markets Association recommends that the fixed income departments of its
members be closed for the entire day for purposes of trading in United
States government securities, or (iv) a day on which the Federal
Reserve Bank of New York, with advance notice, chooses not to publish
its Treasury repurchase agreement reference rates if participants in
the Treasury repurchase agreement market broadly expect to treat that
day as a holiday.
Calculating person means, with respect to any LIBOR contract, any
person, including the determining person, responsible for calculating
or determining any valuation, payment, or other measurement based on a
benchmark.
CME Term SOFR means the CME Term SOFR Reference Rates published for
one-, three-, six-, and 12-month tenors as administered by CME Group
Benchmark Administration, Ltd. (or any successor administrator
thereof).
Consumer has the same meaning as in section 103 of the Truth in
Lending Act (15 U.S.C. 1602).
Consumer loan means a consumer credit transaction.
Covered contract is defined in Sec. 253.3(a) of this part.
Covered GSE contract means a covered contract for which a GSE is
identified as a party in the transaction documents and that is (i) a
commercial or multifamily mortgage loan, (ii) a commercial or
multifamily mortgage-backed security, (iii) a collateralized mortgage
obligation, (iv) a credit risk
[[Page 45280]]
transfer transaction, or (v) a Federal Home Loan Bank advance.
Credit has the same meaning as in section 103 of the Truth in
Lending Act (15 U.S.C. 1602).
Derivative transaction means a contract that would satisfy the
criteria to be a ``Protocol Covered Document'' under the ISDA protocol
but for the fact that one or more parties to such contract is not an
``Adhering Party'' as such term is used in the ISDA protocol, provided
that, for purposes of this definition, ``Protocol Effective Date'' as
such term is used in the ISDA protocol means the LIBOR replacement date
for the relevant covered contract.
Determining person means, with respect to any LIBOR contract, any
person with the authority, right, or obligation, including on a
temporary basis (as identified by the LIBOR contract or by the
governing law of the LIBOR contract, as appropriate) to determine a
benchmark replacement.
Fallback provisions means terms in a LIBOR contract for determining
a benchmark replacement, including any terms relating to the date on
which the benchmark replacement becomes effective.
Government-sponsored enterprise (GSE) means an entity established
or chartered by the U.S. government to serve public purposes specified
by the U.S. Congress but whose debt obligations are not explicitly
guaranteed by the full faith and credit of the U.S. government.
ISDA protocol means the ISDA 2020 IBOR Fallbacks Protocol published
by the International Swaps and Derivatives Association, Inc., on
October 23, 2020, and minor or technical amendments thereto.
LIBOR (i) means the overnight and one-, three-, six-, and 12-month
tenors of U.S. dollar LIBOR (formerly known as the London interbank
offered rate) as administered by ICE Benchmark Administration Limited
(or any predecessor or successor administrator thereof) and (ii) does
not include the one-week or two-month tenors of U.S. dollar LIBOR.
LIBOR contract means any contract, agreement, indenture,
organizational document, guarantee, mortgage, deed of trust, lease,
security (whether representing debt or equity, including any interest
in a corporation, a partnership, or a limited liability company),
instrument, or other obligation or asset that, by its terms, uses LIBOR
as a benchmark.
LIBOR replacement date means the first London banking day after
June 30, 2023, unless the Board determines that any LIBOR tenor will
cease to be published or cease to be representative on a different
date.
Non-covered contract is a LIBOR contract that is not a covered
contract.
Security has the same meaning as in section 2(a) of the Securities
Act of 1933 (15 U.S.C. 77b(a)).
SOFR means the Secured Overnight Financing Rate published by the
Federal Reserve Bank of New York or any successor administrator.
State means any state, commonwealth, territory, or possession of
the United States, the District of Columbia, the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa,
Guam, or the United States Virgin Islands.
Sec. 253.3 Applicability.
(a) Covered contracts.
(1) General requirement. On and after the LIBOR replacement date,
the applicable Board-selected benchmark replacement shall be the
benchmark replacement for a covered contract.
(2) Definition. (i) For purposes of this part, a covered contract
means a LIBOR contract with one of the following characteristics as of
the LIBOR replacement date, after giving effect to paragraph (a)(2)(ii)
of this section:
(A) The LIBOR contract contains no fallback provisions;
(B) The LIBOR contract contains fallback provisions that identify
neither--
(1) A specific benchmark replacement; nor
(2) A determining person; or
(C) The LIBOR contract contains fallback provisions that identify a
determining person, but the determining person has failed to select a
benchmark replacement by the earlier of the LIBOR replacement date and
the latest date for selecting a benchmark replacement according to the
terms of the LIBOR contract.
(ii) For purposes of this part, on the LIBOR replacement date, any
reference in any fallback provisions of a LIBOR contract to the
following shall be disregarded as if not included in the fallback
provisions of such LIBOR contract and shall be deemed null and void and
without any force or effect:
(A) A benchmark replacement that is based in any way on any LIBOR
value, except to account for the difference between LIBOR and the
benchmark replacement; or
(B) A requirement that a person (other than a benchmark
administrator) conduct a poll, survey, or inquiries for quotes or
information concerning interbank lending or deposit rates.
(iii) Notwithstanding paragraphs (a)(2)(i) through (ii) of this
section, the term ``covered contract'' does not include any LIBOR
contract that the parties have agreed in writing shall not be subject
to the Adjustable Interest Rate (LIBOR) Act.
(b) Non-covered contracts.
(1) In general. This regulation does not affect LIBOR contracts
that are not covered contracts.
(2) Selection of Board-selected benchmark replacement by
determining person. Notwithstanding paragraph (b)(1) of this section, a
determining person may select the Board-selected benchmark replacement
specified in Sec. 253.4 of this rule as the benchmark replacement for
a LIBOR contract. Any such selection shall be--
(i) Irrevocable;
(ii) Made by the earlier of the LIBOR replacement date and the
latest date for selecting a benchmark replacement according to the
terms of the LIBOR contract; and
(iii) Used in any determinations of the benchmark under or with
respect to the LIBOR contract occurring on and after the LIBOR
replacement date.
Sec. 253.4 Board-selected Benchmark Replacements.
(a) Derivative transactions. On the LIBOR replacement date, a
covered contract that is a derivative transaction shall use the
benchmark replacement identified as the ``Fallback Rate (SOFR)'' in the
ISDA protocol. For clarity, the reference to ``spread relating to U.S.
dollar LIBOR'' in the definition of ``Fallback Rate (SOFR)'' in the
ISDA protocol is equal to the applicable tenor spread adjustment
identified in paragraph (c) of this section.
(b) All other transactions. On the LIBOR replacement date, a
covered contract that is not a derivative transaction shall use the
following benchmark replacements:
(1) For a covered contract that is not a consumer loan or a covered
GSE contract--
(i) In place of overnight LIBOR, the benchmark replacement shall be
SOFR plus the tenor spread adjustment identified in paragraph (c)(1) of
this section; and
(ii) In place of one-, three-, six-, or 12-month tenors of LIBOR,
the benchmark replacement shall be the corresponding one-, three-, six-
, or 12-month CME Term SOFR plus the applicable tenor spread adjustment
identified in paragraph (c) of this section.
(2) For a covered contract that is a consumer loan--
(i) During the one-year period beginning on the LIBOR replacement
date:
(A) In place of overnight LIBOR, the benchmark replacement shall be
SOFR
[[Page 45281]]
plus an amount that transitions linearly for each business day during
that period from:
(1) The difference between SOFR and overnight LIBOR determined as
of the day immediately before the LIBOR replacement date; to
(2) The tenor spread adjustment identified in paragraph (c)(1) of
this section; or
(B) In place of the one-, three-, six-, or 12-month tenors of
LIBOR, the benchmark replacement shall be the corresponding one-,
three-, six-, or 12-month CME Term SOFR plus an amount that transitions
linearly for each business day during that period from:
(1) The difference between the relevant CME Term SOFR and the
relevant LIBOR tenor determined as of the day immediately before the
LIBOR replacement date; to
(2) The applicable tenor spread adjustment identified in paragraph
(c) of this section.
(ii) On the date one year after the LIBOR replacement date and
thereafter:
(A) In place of overnight LIBOR, the benchmark replacement shall be
SOFR plus the tenor spread adjustment identified in paragraph (c)(1) of
this section; and
(B) In place of one-, three-, six-, or 12-month tenors of LIBOR,
the benchmark replacement shall be the corresponding one-, three-, six-
, or 12-month CME Term SOFR plus the applicable tenor spread adjustment
identified in paragraph (c) of this section.
(iii) The rates published or provided by Refinitiv Limited as ``USD
IBOR Cash Fallbacks'' for ``Consumer'' products shall be deemed equal
to the rates identified in paragraphs (b)(2)(i) and (ii) of this
section.
(3) For a covered contract that is a covered GSE contract--
(i) In place of overnight LIBOR, the benchmark replacement shall be
SOFR plus the tenor spread adjustment identified in paragraph (c)(1) of
this section; and
(ii) In place of one-, three-, six-, or 12-month tenors of LIBOR,
the benchmark replacement shall be the 30-day Average SOFR plus the
applicable tenor spread adjustment identified in paragraph (c) of this
section.
(c) Tenor spread adjustments. The following tenor spread
adjustments shall be included as part of the Board-selected benchmark
replacements as indicated in paragraphs (a) and (b) of this section:
(1) 0.00644 percent for overnight LIBOR;
(2) 0.11448 percent for one-month LIBOR;
(3) 0.26161 percent for three-month LIBOR;
(4) 0.42826 percent for six-month LIBOR; and
(5) 0.71513 percent for 12-month LIBOR.
(d) Date for determining Board-selected benchmark replacement. For
purposes of this part, any Board-selected benchmark replacement shall
be determined as of the day that, under the covered contract, would
have been used to determine the LIBOR-based rate that is being replaced
or, if the Board-selected benchmark replacement is not published on the
day indicated in the covered contract, the most recently available
publication should be used.
Sec. 253.5 Benchmark Replacement Conforming Changes.
(a) Benchmark replacement conforming changes.
(1) The Board may, in its discretion, by regulation or order,
require any additional technical, administrative, or operational
changes, alterations, or modifications in LIBOR contracts based on a
determination that such changes, alterations, or modifications would
address one or more issues affecting the implementation,
administration, and calculation of a Board-selected benchmark
replacement in LIBOR contracts.
(2) Solely with respect to a LIBOR contract that is not a consumer
loan, a calculating person may make any additional technical,
administrative, or operational changes, alterations or modifications
that, in that person's reasonable judgment, would be necessary or
appropriate to permit the implementation, administration, and
calculation of the Board-selected benchmark replacement under or with
respect to a LIBOR contract after giving due consideration to any
changes, alterations, or modifications otherwise required by the Board
in this part or pursuant to paragraph (a)(1) of this section.
Sec. 253.6 Preemption.
(a) Pursuant to section 107 of the Adjustable Interest Rate (LIBOR)
Act, this part supersedes any provision of any state or local law,
statute, rule, regulation, or standard--
(1) Relating to the selection or use of a benchmark replacement or
related conforming changes; or
(2) Expressly limiting the manner of calculating interest,
including the compounding of interest, as that provision applies to the
selection or use of a Board-selected benchmark replacement or benchmark
replacement conforming changes.
By order of the Board of Governors of the Federal Reserve
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2022-15658 Filed 7-27-22; 8:45 am]
BILLING CODE 6210-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.