Rule2023-00213
Regulations Implementing the Adjustable Interest Rate (LIBOR) Act
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 26, 2023
Effective
February 27, 2023
Issuing agencies
Federal Reserve System
Abstract
The Board is adopting a final rule (final rule) to implement the Adjustable Interest Rate (LIBOR) Act. The final rule establishes 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 final rule also provides additional definitions and clarifications consistent with the Adjustable Interest Rate (LIBOR) Act.
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 17 (Thursday, January 26, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 17 (Thursday, January 26, 2023)]
[Rules and Regulations]
[Pages 5204-5243]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00213]
[[Page 5203]]
Vol. 88
Thursday,
No. 17
January 26, 2023
Part III
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Part 253
Regulations Implementing the Adjustable Interest Rate (LIBOR) Act;
Final Rule
Federal Register / Vol. 88, No. 17 / Thursday, January 26, 2023 /
Rules and Regulations
[[Page 5204]]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 253
[Regulation ZZ; Docket No. R-1775]
RIN 7100-AG34
Regulations Implementing the Adjustable Interest Rate (LIBOR) Act
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board is adopting a final rule (final rule) to implement
the Adjustable Interest Rate (LIBOR) Act. The final rule establishes
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 final rule also provides additional definitions and
clarifications consistent with the Adjustable Interest Rate (LIBOR)
Act.
DATES: The final rule is effective February 27, 2023.
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, Senior 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.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5801(a)(1).
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
\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>.
---------------------------------------------------------------------------
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
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.
---------------------------------------------------------------------------
\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 Nov. 29, 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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
To allow most legacy USD LIBOR contracts governed by non-U.S. law
to mature without disruption, the FCA also announced that the panels
for the
[[Page 5205]]
remaining five tenors of USD LIBOR would continue through, but cease
after, June 30, 2023. The FCA has proposed to require IBA to continue
publishing one-, three-, or six-month USD LIBOR on a synthetic basis
until the end of September 2024 (synthetic LIBOR).\10\ As with
synthetic GBP or JPY LIBOR settings, the FCA has announced that
synthetic LIBOR settings are ``not representative of the markets that
the original LIBOR settings were intended to measure.'' \11\
---------------------------------------------------------------------------
\10\ See FCA, Further Consultation and Announcements on the
Wind-down of LIBOR (Nov. 23, 2022), <a href="https://www.fca.org.uk/news/news-stories/further-consultation-announcements-wind-down-libor">https://www.fca.org.uk/news/news-stories/further-consultation-announcements-wind-down-libor</a>
(discussing further consultation on synthetic LIBOR, <a href="https://www.fca.org.uk/publication/consultation/cp22-21.pdf">https://www.fca.org.uk/publication/consultation/cp22-21.pdf</a>).
\11\ See FCA, Consultation on `Synthetic' US Dollar LIBOR and
Feedback to CP22/11 ] 1.7 (Nov. 2022), <a href="https://www.fca.org.uk/publication/consultation/cp22-21.pdf">https://www.fca.org.uk/publication/consultation/cp22-21.pdf</a>; see also 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>.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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 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 Nov. 29, 2022).
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>.
---------------------------------------------------------------------------
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. 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 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.
---------------------------------------------------------------------------
\16\ See, e.g., N.Y. Gen. Oblig. Law art. 18-C; Ala. Code tit.
5, ch. 28; Fla. Stat. 687.15; Tenn. Code Ann. sec. 47-33-101 et
seq.; Ind. Code 28-10-2; Neb. Rev. Stat. 8-3101 et seq.
---------------------------------------------------------------------------
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 ``LIBOR Act'') as part of the Consolidated Appropriations Act,
2022.\17\ Among other things, the LIBOR Act lays out a set of default
rules that apply to tough legacy contracts subject to U.S. law.
---------------------------------------------------------------------------
\17\ Public Law 117-103, div. U, codified at 12 U.S.C. 5801 et
seq.
---------------------------------------------------------------------------
The LIBOR Act broadly distinguishes between three categories of
LIBOR contracts with different types of fallback provisions. For these
purposes, the LIBOR 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 final rule and the
remainder of the discussion will focus on these stated tenors of USD
LIBOR only. The LIBOR 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\
---------------------------------------------------------------------------
\18\ See 12 U.S.C. 5802(16) (definition of ``LIBOR contract''),
5802(15) (definition of ``LIBOR''). The LIBOR Act does not apply to
contracts that use the one-week or two-month tenors of USD LIBOR as
a benchmark. Id. The LIBOR 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. 12 U.S.C.
5802(1).
\19\ 12 U.S.C. 5802(11). The LIBOR 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. 12
U.S.C. 5802(3).
---------------------------------------------------------------------------
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 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) to conduct a poll, survey, or inquiries for quotes or
information concerning interbank lending or deposit rates.\20\ These
LIBOR
[[Page 5206]]
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\
---------------------------------------------------------------------------
\20\ See 12 U.S.C. 5803(b). The LIBOR Act defines ``benchmark
administrator'' to mean a person that publishes a benchmark for use
by third parties. 12 U.S.C. 5802(2).
\21\ 12 U.S.C. 5803(f)(2); see also 12 U.S.C. 5802(17)
(definition of ``LIBOR replacement date''). The Board has not
determined, and does not expect to determine, a LIBOR replacement
date earlier than the first London banking day after June 30, 2023.
---------------------------------------------------------------------------
The second category of LIBOR contracts encompasses (i) contracts
that contain no fallback provisions, as well as (ii) LIBOR contracts
with fallback provisions that do not identify a determining person (as
described below) and that only (A) identify a benchmark replacement
that is based in any way on USD LIBOR values (except to account for the
difference between LIBOR and the benchmark replacement) or (B) 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 LIBOR Act provides that the benchmark replacement on the
LIBOR replacement date will be the Board-selected benchmark replacement
identified by the Board, which must be based on SOFR and include the
tenor spread adjustments required under the LIBOR 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.
---------------------------------------------------------------------------
\22\ The LIBOR Act deems these types of fallback provisions to
be null and void by operation of law. 12 U.S.C. 5803(b). To the
extent a LIBOR contract contains fallback provisions that would be
applied ahead of another, separate benchmark replacement, then under
the LIBOR Act, these fallback provisions would be disregarded and
the separate benchmark replacement would apply.
\23\ 12 U.S.C. 5803(a)-(b); see also 12 U.S.C. 5802(6)
(definition of ``Board-selected benchmark replacement'').
---------------------------------------------------------------------------
For contracts that fall into this second category, the LIBOR Act
provides a series of statutory protections, 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\ These statutory provisions are described in
more detail below.
---------------------------------------------------------------------------
\24\ 12 U.S.C. 5804(a)-(b), (c)(1), (d).
---------------------------------------------------------------------------
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 LIBOR 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 LIBOR 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 LIBOR 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\
---------------------------------------------------------------------------
\25\ The LIBOR 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. 12 U.S.C.
5802(10).
\26\ 12 U.S.C. 5803(c)(3).
\27\ 12 U.S.C. 5803(c)(2).
---------------------------------------------------------------------------
Although the LIBOR Act does not require a determining person to
select the Board-selected benchmark replacement as the benchmark
replacement for a LIBOR contract, the statute provides a series of
statutory protections 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 liability for damages, arising out of the selection of the Board-
selected benchmark replacement as a benchmark replacement.\28\
---------------------------------------------------------------------------
\28\ 12 U.S.C. 5804(c)(1)-(2), 5804(a)-(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.
---------------------------------------------------------------------------
Where the Board-selected benchmark replacement becomes the
benchmark replacement for a LIBOR contract (either by operation of law
or through the selection of a determining person), the LIBOR 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 LIBOR 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 LIBOR 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\
---------------------------------------------------------------------------
\29\ 12 U.S.C. 5802(4)(A).
\30\ 12 U.S.C. 5802(4)(B). The LIBOR Act defines ``consumer
loan'' to mean a consumer credit transaction, which is defined by
cross-reference to the Truth in Lending Act. 12 U.S.C. 5802(9)
(definition of ``consumer loan); 5802(8) (definitions of
``consumer'' and ``credit'').
\31\ 12 U.S.C. 5802(7).
---------------------------------------------------------------------------
The LIBOR 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 certain statutory protections provided
by the LIBOR 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 LIBOR Act provides that
the calculating person shall not be subject to any claim
[[Page 5207]]
or cause of action in law or equity or request for equitable relief, or
have liability for damages.\34\
---------------------------------------------------------------------------
\32\ 12 U.S.C. 5803(d).
\33\ See 12 U.S.C. 5804(a)-(d).
\34\ 12 U.S.C. 5804(c).
---------------------------------------------------------------------------
The LIBOR Act includes various other provisions beyond the main
operative provisions and statutory protections described above. For
example, the LIBOR 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 LIBOR 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.\35\ Other provisions of the
LIBOR 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.\36\ Finally,
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.\37\
---------------------------------------------------------------------------
\35\ 12 U.S.C. 5805.
\36\ LIBOR Act sections 108-09, codified at 15 U.S.C. 77ppp(b)
and 20 U.S.C. 1087-1(b)(2)(I).
\37\ 12 U.S.C. 5806.
---------------------------------------------------------------------------
In July 2022, the Board invited public comment on a notice of
proposed rulemaking (proposed rule) to implement the LIBOR Act.\38\ The
comment period ended on August 29, 2022.
---------------------------------------------------------------------------
\38\ 87 FR 45268 (July 28, 2022).
---------------------------------------------------------------------------
II. Overview of the Final Rule
As required by the LIBOR Act, the Board's final rule identifies
SOFR-based Board-selected benchmark replacements for LIBOR contracts
that will not mature prior to the LIBOR replacement date and do not
contain clear and practicable benchmark replacements. The final rule
identifies different SOFR-based Board-selected benchmark replacements
for different categories of LIBOR contracts. In addition, the final
rule identifies certain benchmark replacement conforming changes
related to the implementation, administration, and calculation of the
Board-selected benchmark replacement. Consistent with the LIBOR Act,
the final rule also expressly indicates that a determining person may
select the Board-selected benchmark replacement for the relevant type
of LIBOR contract, with any applicable benchmark replacement conforming
changes. In addition, the final rule expressly provides that the LIBOR
Act's protections related to the selection or use of the Board-selected
benchmark replacement shall apply to any LIBOR contract for which the
Board-selected benchmark replacement becomes the benchmark replacement
(whether by operation of law or by the selection of a determining
person). Finally, the final rule indicates that, under the LIBOR Act,
the Board's final rule preempts any state or local law or standard
relating to the selection or use of a benchmark replacement or
conforming changes.
III. Summary of Public Comments
The Board received 29 comment letters in response to the proposed
rule.\39\ Commenters included eight banks and banking trade
associations; six other trade associations; four government-sponsored
enterprises; four consultants and researchers; three individuals; one
government agency; one consortium of consumer groups; and two anonymous
comments.
---------------------------------------------------------------------------
\39\ Two of these commenters submitted additional comment
letters that supplemented their original comment letters; these
supplemental comment letters have not been included in the count of
29 comment letters. In addition, the count of 29 comment letters
does not include two comment letters submitted to the Board that
addressed topics unrelated to the LIBOR Act.
---------------------------------------------------------------------------
Ten of these comment letters included an explicit statement of
support for the proposal. One commenter opposed the proposal based on
disagreement with the policy objectives of the LIBOR Act.\40\ The LIBOR
Act is federal law, and the Board is required to implement the LIBOR
Act consistent with the stated policy objectives of Congress. As
described below, the Board's discretion under the LIBOR Act is limited
to identifying SOFR-based Board selected benchmark replacements for
LIBOR contracts subject to the act, plus a few other narrow areas.
---------------------------------------------------------------------------
\40\ This commenter referenced the manipulation of LIBOR by
panel banks and indicated that the identification of Board-selected
benchmark replacements under the LIBOR Act and proposal would be
most likely to benefit banks rather than certain individuals who may
not be able directly to obtain LIBOR-based financing. The commenter
further criticized the proposal for failing to address various
social issues outside the scope of the LIBOR Act, including ethics
standards and climate change effects.
---------------------------------------------------------------------------
Most of the remaining commenters provided feedback on various
topics related to the proposal (including the proposed Board-selected
benchmark replacements for specific categories of contracts, synthetic
LIBOR, conforming changes, and certain protections expressly provided
by the LIBOR Act), but did not express support or opposition for the
overall proposal. Feedback from commenters related to particular
aspects of the proposal is discussed, as applicable, in section IV.
One commenter provided feedback on the Board's analysis of the
proposed rule under the Regulatory Flexibility Act. This comment is
discussed in more detail in section V.
Finally, a commenter requested that the prudential regulators
engage in specific efforts to educate banks, consumers, other issuers
of financial products, and impacted industry groups, potentially
through partnerships with industry groups and capital market
participants, on (i) the need to transition away from LIBOR to viable
alternative rates like SOFR, and (ii) the likely impact such transition
would have on financial instruments that currently reference LIBOR. As
previously discussed, U.S. financial regulators have encouraged banks
and market participants over the past several years to transition away
from USD LIBOR as a reference rate as soon as practicable, including
through issuance of an interagency statement.\41\ In addition, the ARRC
and third parties such as ISDA have engaged in significant efforts to
facilitate and to educate parties on the transition away from LIBOR as
LIBOR's cessation grows closer. Based on these and other industry
efforts, the Board believes that ample information is available
concerning the transition away from LIBOR.
---------------------------------------------------------------------------
\41\ See, e.g., 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>.
---------------------------------------------------------------------------
IV. Section-by-Section Analysis
A. Section 253.1--Authority, Purpose, and Scope
Section 253.1 of the final rule sets forth the authority for,
purpose of, and scope of the final rule. Significantly, and consistent
with the statute as described above, the final rule 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
fallback provisions 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 in Sec.
253.3(a)(1)(iii) and (c), which is discussed further
[[Page 5208]]
below.\42\ The proposed rule included a similar provision that received
a small number of comments.\43\ Section 253.1 also clarifies that any
determining person's selection of the applicable Board-selected
benchmark replacement is subject to Sec. Sec. 253.4 (identifying
Board-selected benchmark replacements for specific categories of LIBOR
contracts), 253.5 (concerning benchmark replacement conforming
changes), 253.6 (concerning preemption), and 253.7 (concerning
statutory protections for the selection or use of the Board-selected
benchmark replacement). The rule also applies only to existing
contracts governed by federal law or the law of any state. In addition,
consistent with the LIBOR Act, 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 rule.\44\
---------------------------------------------------------------------------
\42\ 12 U.S.C. 5803(f)(2)-(3). However, consistent with the
LIBOR Act, the final rule applies to LIBOR contracts that identify a
determining person if the determining person has not selected a
benchmark replacement by the earlier of (i) the LIBOR replacement
date and (ii) the latest date for selecting a benchmark replacement
according to the terms of the contract. See section
253.3(a)(1)(iii). In addition, the final rule mirrors provisions in
the LIBOR Act related to any selection by a determining person of
the Board-selected benchmark replacement. See section 253.3(c).
\43\ Some commenters indicated that the proposed rule did not
match the precise language of the LIBOR Act with respect to LIBOR
contracts subject to the statute. These comments are discussed in
more detail in section IV.C.
\44\ See 12 U.S.C. 5803(f)(1).
---------------------------------------------------------------------------
B. Section 253.2--Definitions
Section 253.2 provides definitions for many of the terms used in
the rule. As with the proposal, most of the defined terms in Sec.
253.2 are substantially the same as the defined terms in the LIBOR Act.
However, Sec. 253.2 includes additional definitions for the terms
``30-day Average SOFR,'' ``90-day Average SOFR,'' ``CME Term SOFR,''
``derivative transaction,'' ``derivative transaction fallback
observation day,'' ``Federal Housing Finance Agency (FHFA)-regulated
entity,'' ``Federal Family Education Loan Program (FFELP) Asset-Backed
Securitization (ABS),'' ``FHFA-regulated-entity contract,'' ``ISDA
protocol,'' and ``relevant benchmark administrator,'' each of which is
discussed below in connection with their use in Sec. 253.4 or Sec.
253.5, as applicable.\45\ For ease of reference, the ISDA protocol in
its entirety is republished in appendix A of the final rule.
---------------------------------------------------------------------------
\45\ One commenter indicated that some mortgage contracts may
include provisions referencing a LIBOR ``index'' which the commenter
believed should be interpreted to mean 12-month LIBOR based on
``common use of the term `index.' '' That commenter suggested
defining the term by regulation, since mortgage lenders otherwise
may seek to broaden that definition. The LIBOR Act applies on an
individual contract basis and looks to the particular provisions and
definitions of that contract to evaluate whether the LIBOR Act
applies. The final rule similarly applies to contracts on an
individual basis, following evaluation of that contract's
provisions. As a result, the Board does not believe it would be
reasonable to adopt one definition of ``index''. However, the Board
observes that the final rule, consistent with the LIBOR Act,
replaces the specific tenor of LIBOR referenced in the LIBOR
contract with a corresponding Board-selected benchmark replacement
that incorporates the applicable tenor spread adjustment specified
by the LIBOR Act.
---------------------------------------------------------------------------
Definition of ``determining person.'' Several commenters requested
that the term ``determining person'' be defined to include persons with
the right to select a replacement benchmark even if that right would
vest only in the future or is subject to some contingency. The
definition of ``determining person'' in section 103(10) of the LIBOR
Act does not specify whether a determining person must have a current
authority, right, or obligation to determine a benchmark replacement,
or whether a person with a contingent authority, right, or obligation
to determine a benchmark replacement also is a determining person.
The final rule clarifies this statutory ambiguity by defining the
term ``determining person'' to include 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, whether or not the
person's authority, right, or obligation is subject to any
contingencies specified in the LIBOR contract or by the governing law
of the LIBOR contract. The Board believes that this clarification is
consistent with Congressional intent and will promote a smooth
transition away from LIBOR for contracts that authorize a person to
select a benchmark replacement when LIBOR becomes unavailable or non-
representative. Under the final rule, such a person will qualify as a
determining person before LIBOR becomes unavailable or non-
representative, and therefore will have a statutory right under section
104(c)(1) and (c)(2) of the LIBOR Act to select the Board-selected
benchmark replacement by the earlier of (i) the LIBOR replacement date
and (ii) the latest date for selecting a benchmark replacement
according to the terms of the LIBOR contract.\46\
---------------------------------------------------------------------------
\46\ See 12 U.S.C. 5803(c)(1)-(2).
---------------------------------------------------------------------------
The Board notes that, if the term ``determining person'' were
interpreted to be limited only to persons with a current authority,
right, or obligation to select a benchmark replacement, then, under
certain LIBOR contracts, a person with a right to select a benchmark
replacement when LIBOR becomes unavailable or non-representative would
not become a determining person until the LIBOR replacement date--when
LIBOR will actually become unavailable or non-representative.
Accordingly, that person would need to wait until the LIBOR replacement
date to exercise the statutory right under section 104(c)(1) and (c)(2)
of the LIBOR Act to select the Board-selected benchmark replacement.
The Board believes that this outcome--and the market disruption that
would likely result from determining persons not selecting a benchmark
replacement until the LIBOR replacement date--would be inconsistent
with the Congressional intent to facilitate a smooth transition away
from LIBOR and avoid disruptive litigation.
A commenter also requested that the final rule clarify that a
``determining person'' must have sole authority to decide a benchmark
replacement and would not include a person who is required under the
LIBOR contract to collaborate with other persons. The final rule
clarifies that the term ``determining person'' refers to a person with
sole authority, right, or obligation, including on a temporary basis,
to determine a benchmark replacement. Particularly when considered in
the context of the various protections provided by the LIBOR Act with
respect to a determining person's selection of the Board-selected
benchmark replacement, the most sensible interpretation is that such a
selection would be made by only one person, rather than some group.\47\
---------------------------------------------------------------------------
\47\ See, e.g., 12 U.S.C. 5803(c), 5804(c).
---------------------------------------------------------------------------
Finally, as requested by a commenter, the Board hereby clarifies
that a determining person selecting a Board-selected benchmark
replacement pursuant to the authority and statutory protections of the
LIBOR Act must choose the Board-selected benchmark replacement
identified in Sec. 253.4 for that contract type.
C. Section 253.3--Applicability
Section 253.3 addresses the applicability of the regulation to
LIBOR contracts. Specifically, for the following LIBOR contracts, the
applicable Board-selected benchmark replacement indicated in Sec.
253.4 of the final rule shall be the benchmark replacement for the
contract on and after the LIBOR replacement date unless an express
exception applies: (i) LIBOR contracts that contain no fallback
provisions; (ii) LIBOR contracts that contain fallback
[[Page 5209]]
provisions that identify neither a specific benchmark replacement nor a
determining person; and (iii) LIBOR contracts that contain fallback
provisions that identify a determining person, but where the
determining person has not selected 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,
for any reason.\48\
---------------------------------------------------------------------------
\48\ Section 253.3(a) of the final rule.
---------------------------------------------------------------------------
In evaluating whether a LIBOR contract has any of these
characteristics on the LIBOR replacement date, the final rule mirrors
the statute and disregards any reference in any fallback provisions of
a 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 (collectively, ``LIBOR-
or poll-based fallback provisions'').\49\ For example, if a LIBOR
contract specifies the last published LIBOR value will be used if LIBOR
is not published, but contains no other fallback provisions, then,
pursuant to Sec. 253.3(a)(2), this language would be disregarded as of
the LIBOR replacement date. As a result, on the LIBOR replacement date,
the LIBOR contract would be treated as having no fallback provisions
and would transition to the Board-selected benchmark replacement under
the final rule.
---------------------------------------------------------------------------
\49\ Section 253.3(a)(2) of the final 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. 12 U.S.C. 5803(b).
---------------------------------------------------------------------------
Consistent with the LIBOR Act, Sec. 253.3(b) lists three types of
contracts that generally would not be subject to the act: (i) any LIBOR
contract that the parties have agreed in writing shall not be subject
to the act; (ii) any LIBOR contract that contains fallback provisions
that identify a benchmark replacement that is not based in any way on
any LIBOR value (including the prime rate or the effective Federal
Funds rate), after disregarding any LIBOR- or poll-based fallback
provisions; and (iii) any LIBOR contract as to which a determining
person does not elect to use the Board-selected benchmark replacement,
again after disregarding any LIBOR- or poll-based fallback
provisions.\50\ Importantly, however, even if a determining person does
not elect to use the Board-selected benchmark replacement, the LIBOR
contract will transition to the Board-selected benchmark replacement by
operation of law if the determining person does not select any
benchmark replacement by the earlier of (i) the LIBOR replacement date
and (ii) the latest date for selecting a benchmark replacement
according to the terms of the LIBOR contract.\51\
---------------------------------------------------------------------------
\50\ Section 253.3(b) of the final rule. As discussed further in
section IV.G, nothing in the final rule is intended to alter or
modify the availability or effect of the provisions of section
105(e) of the LIBOR Act, and those provisions may apply to these
LIBOR contracts. See 12 U.S.C. 5804(e).
\51\ Section 253.3(a)(1)(iii) of the final rule.
---------------------------------------------------------------------------
The proposed rule would have defined the term ``covered contract''
to mean those contracts that would be subject to the proposed rule and
would transition to the applicable Board-selected benchmark replacement
on and after the LIBOR replacement date. Similarly, the proposed rule
would have defined the term ``non-covered contract'' to mean those
contracts that generally would not be subject to the proposed rule.
However, the proposed rule would have clarified 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, consistent with the LIBOR Act.\52\ Several commenters
indicated that the proposed rule's definitions of ``covered contract''
and ``non-covered contract'' did not fully align with the provisions of
the LIBOR Act and were confusing. Therefore, these commenters
recommended eliminating these terms. To avoid confusion, the final rule
does not employ those terms and instead hews closely to the text of the
LIBOR Act.
---------------------------------------------------------------------------
\52\ Section 253.3(b)(2) of the proposed rule.
---------------------------------------------------------------------------
A commenter requested that the Board clarify that a determining
person may ``transition'' to the Board-selected benchmark replacement
by the LIBOR replacement date or the first reset date following that
date, which the commenter argued was the same as a practical matter.
The LIBOR Act authorizes a determining person to select the Board-
selected benchmark replacement, but requires the determining person to
make such selection by the earlier of (i) the LIBOR replacement date
and (ii) the latest date for selecting a benchmark replacement
according to the terms of the contract.\53\ As a result, a determining
person may not select the Board-selected benchmark replacement on any
date after the LIBOR replacement date, including the first reset date
following the LIBOR replacement date, and rely on the LIBOR Act's
protections for such a selection. The final rule mirrors the statute by
authorizing a determining person to select the Board-selected benchmark
replacement by the earlier of (i) the LIBOR replacement date and (ii)
the latest date for selecting a benchmark replacement according to the
terms of the contract.\54\ The Board notes that, under the LIBOR Act
and the final rule, a determining person's inaction with respect to
selecting a benchmark replacement by the LIBOR replacement date will,
in the absence of another fallback provision in the LIBOR contract
identifying a clear and practicable benchmark replacement, cause the
LIBOR contract to transition to the Board-selected benchmark
replacement rate by operation of law.\55\
---------------------------------------------------------------------------
\53\ 12 U.S.C. 5803(c)(2)(B).
\54\ Section 253.3(c) of the final rule. Although selection of
the benchmark replacement must occur by this date, since the LIBOR
Act does not affect or alter the payment or reset dates under the
LIBOR contract, the actual replacement of LIBOR for payment purposes
may not occur until the first reset date after the LIBOR replacement
date.
\55\ 12 U.S.C. 5803(c)(3); see also Sec. 253.3(a)(1)(iii) of
the final rule.
---------------------------------------------------------------------------
In its proposal, the Board invited public comment as to whether the
final rule should require a determining person to provide notice to one
or more parties concerning the determining person's selection. Multiple
commenters recommended that the final rule not impose any notice
requirements on determining persons. No commenter expressed support for
the imposition of notice requirements on determining persons. As a
result, the final rule does not include impose any notice requirements.
Eurodollar deposit and lending rates. Some commenters requested
clarification that a fallback provision that requires an inquiry for
Eurodollar deposit or lending rates would be considered a LIBOR- or
poll-based fallback provision that should be disregarded under the
LIBOR Act and the final rule.\56\ Eurodollars are
[[Page 5210]]
unsecured U.S. dollar deposits held at banks or bank branches outside
of the United States, and many institutional parties, including foreign
central banks, are active lenders in the Eurodollar market.\57\ U.S.
depository institutions and U.S. branches of foreign banks indirectly
borrow in Eurodollars by accepting Eurodollar deposits through offshore
branches and then transferring the funds onshore.\58\ The Board has
therefore clarified that Eurodollar deposit and lending rates are
``interbank lending or deposit rates'' for purposes of the LIBOR rule.
Accordingly, any requirement to conduct an inquiry concerning
Eurodollar deposit and lending rates in fallback provisions of LIBOR
contracts should be disregarded as if not included in those fallback
provisions and deemed null and void and without any force or effect for
purposes of the final rule. Should the LIBOR contract not identify
either (i) a determining person or (ii) another clear and practicable
benchmark replacement recognized under the LIBOR Act, the LIBOR
contract will transition to the applicable Board-selected benchmark
replacement under the final rule.
---------------------------------------------------------------------------
\56\ Section 253.3(a)(2) of the final rule; 12 U.S.C. 5803(b).
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. 12 U.S.C. 5803(b).
Another commenter argued that fallback provisions referencing
any third-party funding rate or certificate of deposit rate also
should be disregarded, regardless of the method by which such rates
would be obtained. Such treatment, however, would be inconsistent
with the text of the LIBOR Act, which considers the methodology by
which interbank lending or deposit rate information would be
obtained. See id. It also would conflict with other provisions of
the LIBOR Act, such as section 104(f)(2), which expressly indicates
that the act does not alter or impair fallback provisions that
identify a benchmark replacement that is not based in any way on any
LIBOR value, including the prime rate or the effective Federal funds
rate. 12 U.S.C. 5803(f)(2).
\57\ Marco Cipriani and Julia Gouny, The Eurodollar Market in
the United States, Liberty Street Economics (May 27, 2015), <a href="https://libertystreeteconomics.newyorkfed.org/2015/05/the-eurodollar-market-in-the-united-states">https://libertystreeteconomics.newyorkfed.org/2015/05/the-eurodollar-market-in-the-united-states</a>.
\58\ Id.
---------------------------------------------------------------------------
Relatedly, one commenter requested that the Board clarify how the
rule applies to LIBOR contracts that give a determining person the
right, authority, or obligation to select an ``alternative index'' or
``alternative comparable index'' that is ``used for determining
Eurodollar lending rates'' (``Eurodollar DP contracts''). Section
104(c) of the LIBOR Act generally creates a statutory right for a
determining person to select the Board-selected benchmark replacement;
however, under section 104(f)(2) of the LIBOR Act, a determining person
cannot exercise this right if the LIBOR contract identifies a benchmark
replacement that is not based on any LIBOR value, such as the prime
rate or the effective Federal funds rate. The commenter requested
confirmation that references in Eurodollar DP contracts to an
alternative index ``used for determining Eurodollar lending rates'' do
not ``identify a benchmark replacement'' for purposes of section
104(f)(2), and thus that a determining person for a Eurodollar DP
contract may select the Board-selected benchmark replacement pursuant
to section 104(c) of the LIBOR Act.
Section 104(f)(2) of the LIBOR Act is intended to exclude from the
act's scope only those contracts that identify a specific benchmark
replacement such as the prime rate. Eurodollar DP contracts provide
certain guidelines for determining persons to follow in selecting a
benchmark replacement, but they do not identify a specific benchmark
replacement. Accordingly, the Board confirms that a determining person
for a Eurodollar DP contract may exercise the statutory right to select
the Board-selected benchmark replacement under section 104(c) of the
LIBOR Act and Sec. 253.3(c) of the final rule.\59\
---------------------------------------------------------------------------
\59\ The Board notes, however, that this statutory right would
not be available to the determining person if the LIBOR contract
does identify a specific benchmark replacement such as the prime
rate.
---------------------------------------------------------------------------
Other provisions of LIBOR contracts. The final rule includes a new
paragraph stating that LIBOR contracts that transition to the Board-
selected benchmark replacement generally will not have their other
provisions altered or impaired by the final rule.\60\ For example, the
final rule states that provisions specifying the date for determining a
benchmark (except in the case of derivative transactions and Federal
Home Loan Bank advances, as discussed in more detail in section IV.D)
would not be affected. This example is similar to a provision in the
proposed rule that indicated that selection and use of the Board-
selected benchmark replacement would not affect the dates on which the
contractual rates are determined.\61\
---------------------------------------------------------------------------
\60\ Section 253.3(d) of the final rule.
\61\ Section 253.4(d) of the proposed rule. The proposed rule
generally would have replaced references to ``LIBOR'' in LIBOR
contracts with the proposed Board-selected benchmark replacement,
without any modification of other contractual provisions. 87 FR
45268, 45276 (July 28, 2022).
---------------------------------------------------------------------------
Other contractual provisions that the final rule expressly does not
affect include, but are not limited to, (i) provisions specifying
rounding conventions for a benchmark; (ii) provisions referencing LIBOR
or any LIBOR value prior to the LIBOR replacement date (including any
provision requiring a person to look back to a LIBOR value as of a date
preceding the LIBOR replacement date); (iii) provisions applying any
cap, floor, modifier, or spread adjustment to which LIBOR had been
subject pursuant to the terms of a LIBOR contract; (iv) certain
provisions of Federal consumer financial law; and (v) except as
provided in 12 U.S.C. 5804(c), the rights or obligations of any person,
or the authorities of any agency, under Federal consumer financial law,
as defined in 12 U.S.C. 5481.\62\
---------------------------------------------------------------------------
\62\ Section 253.3(d) of the final rule.
---------------------------------------------------------------------------
Some commenters had requested that the final rule expressly state
its impact on these types of provisions, particularly provisions
specifying rounding conventions or lookback periods that straddle the
LIBOR replacement date, perhaps as benchmark replacement conforming
changes. The Board believes it is most sensible to address provisions
such as those listed above by clarifying that they would not be
affected by the final rule.\63\
---------------------------------------------------------------------------
\63\ As described further in section IV.E., the final rule does
include certain benchmark replacement conforming changes.
---------------------------------------------------------------------------
Synthetic LIBOR. When issuing the proposal, the Board sought
feedback on whether the final rule should clarify how the LIBOR Act
would apply if the FCA requires IBA (or any successor administrator) to
publish synthetic LIBOR on and after the LIBOR replacement date. The
Board specifically requested comment on how synthetic LIBOR might
affect LIBOR contracts that contain fallback provisions that either
identify a clear and practicable benchmark replacement or authorize a
person to select a benchmark replacement, but where these fallback
provisions are triggered only where LIBOR is unavailable (and are not
expressly triggered where a benchmark called ``LIBOR'' is available but
is not representative of the market that LIBOR is intended to measure).
For example, the Board requested comment on whether the final rule
should provide that a LIBOR contract containing fallback provisions
that identify a clear and practicable benchmark replacement (e.g., the
prime rate) but lack an express non-representativeness trigger would
transition to the benchmark replacement specified in the LIBOR contract
(i.e., the prime rate) on the earlier of (i) the date specified
pursuant to the LIBOR contract or (ii) the LIBOR replacement date.
Several commenters supported the clarification outlined in the
proposal. In general, these commenters argued that such clarification
would (i) be consistent with the intent of the statute, (ii) promote an
orderly transition away from LIBOR, (iii) reduce disruptive litigation,
and (iv) be reasonable.
However, some commenters argued that the Board lacks the legal
authority to adopt the clarification outlined in the proposal. In
particular, these commenters noted that LIBOR contracts containing
fallback provisions that
[[Page 5211]]
identify a specific benchmark replacement (e.g., the prime rate) are
outside the scope of the LIBOR Act, even if they lack an express non-
representativeness trigger. Accordingly, these commenters recommended
that the Board clarify only the ambiguity described in the proposal
with respect to LIBOR contracts that authorize a determining person to
select a benchmark replacement when LIBOR is unavailable.
Other commenters gave other suggestions for addressing synthetic
LIBOR. For example, one commenter asked the Board to work with the FCA
to avoid the publication of synthetic LIBOR altogether. Other
commenters suggested that the Board should deem LIBOR to be unavailable
for all LIBOR contracts within the scope of the LIBOR Act even if
synthetic LIBOR would be published, unless a determining person
affirmatively selects synthetic LIBOR as a benchmark replacement; these
commenters argued that construing synthetic LIBOR's publication as
continued availability of LIBOR would be inconsistent with the purposes
of the LIBOR Act.
The Board has considered this issue in light of the comments
received. The Board believes that LIBOR contracts containing fallback
provisions that identify a specific benchmark replacement are outside
the scope of the LIBOR Act, even if these fallback provisions lack an
express non-representativeness trigger. In particular, section
102(b)(3) of the LIBOR Act states that one purpose of the statute is to
allow existing contracts that reference LIBOR but provide for the use
of a clearly defined and practicable replacement to operate according
to their terms.\64\ Further, section 104(f)(2) of the LIBOR Act
expressly provides that nothing in the statute may be construed to
alter or impair any LIBOR contract that contains fallback provisions
that identify a benchmark replacement and are not LIBOR- or poll-based
fallback provisions.\65\ The Board believes these provisions of the
statute unambiguously remove LIBOR contracts that identify a specific
benchmark replacement (e.g., the prime rate) from the scope of the
LIBOR Act, even if these fallback provisions lack an express non-
representativeness trigger.
---------------------------------------------------------------------------
\64\ 12 U.S.C. 5801(b)(3).
\65\ 12 U.S.C. 5803(f)(2).
---------------------------------------------------------------------------
However, consistent with the suggestion of some commenters, the
Board is clarifying in the final rule how synthetic LIBOR would affect
a LIBOR contract that includes fallback provisions authorizing a person
to select a benchmark replacement only when LIBOR is unavailable. As
noted in section IV.B, the final rule defines a determining person to
include a person with a contingent authority, right, or obligation to
determine a benchmark replacement. Under the final rule, a person who
has the authority, right, or obligation to select a benchmark
replacement when LIBOR is unavailable is a ``determining person;''
accordingly, such person has a statutory right under section 104(c)(1)
and (c)(2) of the LIBOR Act to select the Board-selected benchmark
replacement by the earlier of (i) the LIBOR replacement date and (ii)
the latest date for selecting a benchmark replacement according to the
terms of the LIBOR contract.\66\ If the determining person does not
select a benchmark replacement by the LIBOR replacement date, the
applicable Board-selected benchmark replacement will be the benchmark
replacement for the LIBOR contract under section 104(c)(3) of the LIBOR
Act.\67\
---------------------------------------------------------------------------
\66\ See 12 U.S.C. 5803(c)(1)-(2); section 253.3(c) of the final
rule.
\67\ See 12 U.S.C. 5803(c)(3); Sec. 253.3(a)(1)(iii) of the
final rule. The Board notes that the statute does not accelerate a
determining person's contingent right under a LIBOR contract to
select a benchmark replacement other than the Board-selected
benchmark replacement. See 12 U.S.C. 5803(c)(2).
---------------------------------------------------------------------------
D. Section 253.4--Board-Selected Benchmark Replacements
Section 253.4 identifies the Board-selected benchmark replacements
for various types of contracts subject to the LIBOR Act. As indicated
in the proposal, the Board agrees with the ARRC's observation that
different benchmark replacements may be appropriate for derivative
transactions and other transactions (hereafter, ``cash
transactions'').\68\ Therefore, the final rule identifies different
benchmark replacements for derivative transactions and for different
types of cash transactions, as under the proposal. Consistent with the
LIBOR Act, all of the Board-selected benchmark replacements (i) are
based upon SOFR and (ii) incorporate spread adjustments for each
specified tenor of LIBOR.\69\
---------------------------------------------------------------------------
\68\ 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>.
\69\ See Sec. 253.4 of the final rule. See also 12 U.S.C. 5802-
03.
---------------------------------------------------------------------------
The spread adjustments specified in the LIBOR 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.\70\ 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.\71\ The LIBOR Act prescribes static spread
adjustments based on the tenor of LIBOR referenced in the contract
(tenor spread adjustments)--specifically, 0.644 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.\72\ For clarity, the final rule,
like the proposed rule, reiterates these tenor spread adjustments in
paragraph (c) of Sec. 253.4.\73\
---------------------------------------------------------------------------
\70\ 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>.
\71\ Id.
\72\ See 12 U.S.C. 5802(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>.
\73\ Section 253.4(c) of the final rule.
---------------------------------------------------------------------------
Two commenters requested that the final rule use different tenor
spread adjustments than those specified in the LIBOR Act. As discussed,
the LIBOR Act specifies tenor spread adjustments that shall be
incorporated into the Board-selected benchmark replacements and does
not authorize the Board to alter or modify those tenor spread
adjustments. As a result, the final rule identifies Board-selected
benchmark replacements that incorporate the tenor spread adjustments
specified by the LIBOR Act, without modification.
Another commenter requested that the Board avoid selecting
benchmark replacements that are overly complex to calculate or that
have the potential to conflict with other Board-selected replacements
and result in ambiguous or confusing scenarios. That commenter noted
that the Board's selection of different benchmark replacements
depending on contract type could create potential for hedging mismatch
issues and urged the Board to consider issuing a broad range of
alternative rates to allow individual firms flexibility to exercise
their judgment in guarding against asset-liability mismatch issues
while allowing them to rely on the LIBOR Act's protections for use of
the Board-selected benchmark replacement.
[[Page 5212]]
As discussed in further detail below, and consistent with the
ARRC's recommendations, the Board continues to believe that different
contract types warrant different benchmark replacements. However, since
a key purpose of the LIBOR Act and final rule is to replace LIBOR with
the applicable Board-selected benchmark replacement by operation of
law, the final rule aims to create a simple, clear, and manageable
taxonomy with as few categories as possible. In addition, the Board
believes this purpose of the final rule--to replace LIBOR automatically
with a Board-selected benchmark replacement--can function only if there
is a single Board-selected benchmark replacement applicable to any
particular LIBOR contract. Therefore, the final rule does not identify
a broad range of alternative rates as ``Board-selected benchmark
replacements'' from which a firm could choose and avail itself of the
LIBOR Act's protections for use of the Board-selected benchmark
replacement.
1. Derivative Transactions
With respect to derivative transactions, the Board observed in the
proposal 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.\74\ 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,\75\
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.\76\ As of November 29, 2022, over 15,400 entities
have adhered to the ISDA protocol to amend their derivative
transactions.\77\
---------------------------------------------------------------------------
\74\ 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>.
\75\ 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).
\76\ 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>.
\77\ 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 Nov. 29, 2022).
---------------------------------------------------------------------------
The Board proposed to select the Fallback Rate (SOFR) as the Board-
selected benchmark replacement for derivative transactions. The Board
noted that because derivatives markets already appear to reference SOFR
compounded in arrears and there has been significant adherence to the
ISDA protocol, it would be sensible to avoid disruption to these
markets' efforts to transition away from referencing LIBOR.\78\ The
Board also observed that promoting use of a consistent approach to
replace LIBOR references in derivative transactions should enhance
financial stability and that the proposed approach was consistent with
the recommendations of the ARRC.\79\ The proposed rule defined a
``derivative transaction'' 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.'' \80\
---------------------------------------------------------------------------
\78\ 87 FR 45268, 45274 (July 28, 2022).
\79\ Id. See also 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).
\80\ 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>.
---------------------------------------------------------------------------
As noted in the proposal, ISDA has selected Bloomberg Index
Services Limited (Bloomberg) to calculate and publish the Fallback Rate
(SOFR) referenced in its ISDA protocol.\81\ Similar to how IBA requires
a license for certain uses of LIBOR,\82\ the use of the Fallback Rate
(SOFR) is subject to certain licensing or other usage terms imposed by
Bloomberg.\83\ 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.\84\
---------------------------------------------------------------------------
\81\ 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>.
\82\ IBA, About, <a href="https://www.theice.com/iba/about#licensing">https://www.theice.com/iba/about#licensing</a>
(last visited Nov. 29, 2022).
\83\ 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>.
\84\ 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.
---------------------------------------------------------------------------
The Board did not receive comments regarding the proposed
definition of ``derivative transaction.'' Most commenters supported use
of the Fallback Rate (SOFR) in the ISDA protocol as the Board-selected
benchmark replacement for derivative transactions, but some suggested
that the Board incorporate certain technical amendments in the final
rule to match precisely the calculation of the Fallback Rate (SOFR)
under the ISDA protocol. In particular, these commenters requested that
the Board clarify that the Fallback Rate (SOFR) should be determined on
the ``derivative transaction fallback observation day,'' which
essentially is defined in the ISDA Protocol as the day two payment
business days prior to the payment date for the relevant calculation
period.
One commenter stated that it would have preferred that the Board
propose to select a rate equal to CME Term SOFR (discussed in detail in
section IV.D.2) as its benchmark replacement for derivative
transactions pursuant to the LIBOR Act. The commenter argued that CME
Term SOFR would be the ``most economically equivalent and simplest''
replacement for LIBOR for end-users. However, that commenter
acknowledged that such an approach would differ from the ARRC's
recommendation and ultimately indicated that the Board should not make
any changes from the ISDA
[[Page 5213]]
protocol's rate given the timing of the rule.
Some commenters suggested that the Board identify separate
benchmark replacements for certain categories of derivative contracts.
One commenter requested that the final rule transition derivative
transactions linked to certain securitizations to the same benchmark
replacement as those of securities related to that securitization
rather than the Fallback (SOFR) rate in order to avoid basis risk,
potential ratings downgrades and defaults due to unplanned mismatches
in cash flows, and potential disruptions arising from disputes over how
excess cashflows and shortfalls should be treated. Another commenter
requested that, where a derivative transaction is executed in
connection with a cash asset-backed security and the cash security's
terms are structured to reflect payments under the related derivative
transaction, the final rule should transition the derivative
transaction to a benchmark replacement equal to a term SOFR rate so as
to avoid circumventing the expectations of the parties and causing
unexpected payment mismatches between the security and the derivative
transaction. Similarly, another commenter recommended that the final
rule allow a derivative transaction that specifically refers to the
definition of LIBOR in an asset-backed security in order to hedge
cashflows in the related securitization transaction to transition to
the same benchmark replacement as the associated asset-backed security.
This commenter acknowledged that it would not be practical or even
advisable that every derivative transaction related to every cash
security be transitioned in this way and that it is not operationally
feasible for the parties to identify all such derivative transactions.
As a result, the commenter suggested that the final rule acknowledge
that, regardless of the original intent of the parties, there will be
misalignments between many cash products and their related hedges
because the Board-selected benchmark replacements for these products
differ.
As noted, because a key purpose of the LIBOR Act and final rule is
to replace LIBOR with the applicable Board-selected benchmark
replacement by operation of law, the Board believes it is important for
the final rule to create as simple, clear, and manageable a taxonomy as
possible. This should allow parties to determine quickly and easily the
Board-selected benchmark replacement to which a particular LIBOR
contract will transition in the absence of fallback provisions
identifying either (i) a clear and practicable benchmark replacement or
(ii) a determining person. The addition of new sub-categories of
derivatives transactions would increase greatly the complexity of the
rule and increase burden associated with determining the applicable
Board-selected benchmark replacement for a given LIBOR contract.
The Board acknowledges that basis risk may arise to the extent that
derivative transactions and related cash transactions transition to
different Board-selected benchmark replacements; however, the parties
typically involved in these types of derivative transactions frequently
manage basis risk and other hedging-related risk in the ordinary course
of business. In addition, nothing in the LIBOR Act or final rule
prevents parties to LIBOR contracts from agreeing to transition a
particular LIBOR contract to a benchmark replacement that is more
suitable to that contract than the Board-selected benchmark
replacement.\85\
---------------------------------------------------------------------------
\85\ See, e.g., Sec. 253.3(b)(1) of the final rule (providing
that the rule does not apply to ``[a]ny LIBOR contract that the
parties have agreed in writing shall not be subject to the
Adjustable Interest Rate (LIBOR) Act'').
---------------------------------------------------------------------------
For all the foregoing reasons, the final rule selects the Fallback
Rate (SOFR) in the ISDA protocol as the Board-selected benchmark
replacement for derivative transactions. In response to comments, the
final rule includes certain technical amendments to ensure that the
calculation of the Fallback Rate (SOFR) under the final rule matches
precisely the manner in which that rate is calculated in the ISDA
protocol. In particular, the final rule defines ``derivative
transaction fallback observation day'' in the same way the term is
defined in the ISDA protocol and incorporates additional technical
related to the calculation of the Fallback Rate (SOFR). Incorporation
of this term, together with the provision in Sec. 253.3(d)(3)
indicating that contractual provisions referencing LIBOR or any LIBOR
value prior to the LIBOR replacement date (including any provision
requiring a person to look back to a LIBOR value as of a date preceding
the LIBOR replacement date) remain unaffected, aligns the Board-
selected benchmark replacement in the final rule with the calculation
of the Fallback Rate (SOFR) in the ISDA protocol.
2. Cash Transactions
Under the proposed rule, references to overnight LIBOR in cash
transactions would be replaced with SOFR plus a spread adjustment
specified in the LIBOR Act,\86\ consistent with the ARRC's
recommendations.\87\ Similarly, consistent with the ARRC's
recommendations,\88\ references to one-, three-, six-, or 12-month
LIBOR in cash transactions generally would have been replaced with the
comparable tenor CME Term SOFR rate plus the spread adjustment
specified LIBOR Act.\89\ As described further below, however, the Board
proposed different Board-selected benchmark replacements for certain
cash transactions involving entities regulated by the Federal Housing
Finance Agency (FHFA).\90\
---------------------------------------------------------------------------
\86\ Section 253.4(b)(1)(i), (b)(2)(i)(A), (b)(2)(ii)(A),
(b)(3)(i) of the proposed rule. As described further below, for one
year following the LIBOR replacement date, the spread adjustment
specified for cash transactions that are consumer loans will differ
from the spread adjustment for LIBOR contracts that are not consumer
loans.
\87\ 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>.
\88\ 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>. 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. Id. 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 generally would
be an appropriate basis for a benchmark replacement for one-, three-
, six-, and 12-month LIBOR, respectively.
\89\ Section 253.4(b)(1)(ii), (b)(2)(i)(B), and (b)(2)(ii)(B) of
the proposed rule. CME Term SOFR is a forward-looking term rate
based on SOFR administered by CME Group Benchmark Administration,
Ltd. (CME Group). 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. 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>.
\90\ Section 253.4(b)(3)(ii) of the proposed rule.
---------------------------------------------------------------------------
CME Group calculates and publishes CME Term SOFR in one-, three-,
six-, and 12-month tenors.\91\ Similar to how IBA requires a license
for certain uses of LIBOR,\92\ the use of CME Term SOFR is subject to
certain licensing or other
[[Page 5214]]
usage terms imposed by CME Group.\93\ One commenter, whose letter
appeared to focus on cash transactions, requested that the Board make
every effort to ensure that Board-selected benchmark replacements be
made available at low or no cost to credit unions and other not-for-
profit institutions. As noted by the commenter, under its present usage
terms, an end user seeking only to enter into a transaction does not
need a license from CME Group.\94\ In addition, CME Group has waived
fees for users of CME Term SOFR for cash transactions through 2026.\95\
Based on these facts, the Board believes that Board-selected benchmark
replacements that are based on CME Term SOFR would be made available to
market participants and end users at low to no cost.
---------------------------------------------------------------------------
\91\ 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 Nov. 29, 2022).
\92\ IBA, About, <a href="https://www.theice.com/iba/about#licensing">https://www.theice.com/iba/about#licensing</a>
(last visited Nov. 29, 2022).
\93\ 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 Nov. 29, 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>.
\94\ 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>.
\95\ 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>.
---------------------------------------------------------------------------
Similar to the proposal, the final rule generally replaces
references to overnight LIBOR in cash transactions with SOFR plus a
spread adjustment specified in the LIBOR Act.\96\ With respect to
references to one-, three-, six-, or 12-month LIBOR in cash
transactions other than those in the specific categories listed below,
the final rule generally identifies as the Board-selected benchmark
replacement the corresponding tenor of CME Term SOFR plus a spread
adjustment specified in the LIBOR Act.\97\ As discussed further below,
for one year following the LIBOR replacement date, the spread
adjustment for cash transactions that are consumer loans will differ
from the spread adjustment for LIBOR contracts that are not consumer
loans.
---------------------------------------------------------------------------
\96\ Section 253.4(b)(1)(i), (b)(2)(i)(A), (b)(2)(ii)(A), and
(b)(3)(i)(A) of the final rule.
\97\ Section 253.4(b)(1)(ii), (b)(2)(i)(B), and (b)(2)(ii)(B) of
the final rule.
---------------------------------------------------------------------------
The final rule identifies separate Board-selected benchmark
replacements for two categories of cash transactions: (i) similar to
the proposal, certain cash transactions involving entities regulated by
FHFA; and (ii) Federal Family Education Loan Program (FFELP) asset-
backed securitizations (ABS). These categories of cash transactions are
discussed in more detail below.
a. 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 LIBOR
Act.\98\ Specifically, 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).\99\ 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.
---------------------------------------------------------------------------
\98\ 12 U.S.C. 5803(e)(2). See Sec. 253.2 of the final rule for
the definition of ``consumer loan.''
\99\ 12 U.S.C. 5803(e)(2).
---------------------------------------------------------------------------
The proposed rule generally identified the same Board-selected
benchmark replacements for consumer loans as for other cash
transactions (i.e. SOFR for overnight LIBOR and CME Term SOFR for one-,
three-, six-, and 12-month LIBOR).\100\ Consistent with the LIBOR Act,
however, the proposed rule provided that, for the one-year period
beginning on the LIBOR replacement date, the Board-selected benchmark
replacements for consumer loans would incorporate the applicable
transition tenor spread adjustment.\101\
---------------------------------------------------------------------------
\100\ Section 253.4(b)(2) of the proposed rule.
\101\ Section 253.2(b)(2)(i) of the proposed rule.
---------------------------------------------------------------------------
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.\102\ 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 date may be complex, the proposed
rule indicated that these rates from Refinitiv would be deemed equal to
the Board-selected benchmark replacement in the proposed rule.\103\ Use
of these ``USD IBOR Cash Fallbacks'' for ``Consumer'' products may be
subject to certain licensing or other usage terms imposed by Refinitiv
Limited.
---------------------------------------------------------------------------
\102\ 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 LIBOR Act.
\103\ 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 and, if
needed, verify that any vendor's reported rate (including that of
Refinitiv) is consistent with that proposed replacement such that no
provision similar to Sec. 253.4(b)(2)(iii) is needed for these
transactions.
---------------------------------------------------------------------------
The Board did not receive comments concerning the proposed Board-
selected benchmark replacement for cash transactions that are consumer
loans. As a result, the final rule generally retains these provisions
as proposed, including a provision deeming the ``USD IBOR Cash
Fallbacks'' for ``Consumer'' products published by Refinitiv equal to
the Board-selected benchmark replacement for these transactions.\104\
---------------------------------------------------------------------------
\104\ See Sec. 253.4(b)(2) of the final rule.
---------------------------------------------------------------------------
b. Cash Transactions Involving Certain Entities Regulated by FHFA
Since 2020, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation--government-sponsored
enterprises (GSEs) that are regulated by FHFA--have transitioned to
using the 30-calendar-day compounded average of SOFR (30-day Average
SOFR), as
[[Page 5215]]
published by the FRBNY,\105\ in their newly issued multifamily loans
and other structured products. Consistent with those GSEs' current
practices, the proposed rule would have selected as the benchmark
replacement for LIBOR contracts involving those entities (i) in place
of overnight LIBOR, SOFR, or in place of one-, three-, six, or 12-month
tenors of LIBOR, 30-day Average SOFR; plus (ii) the applicable tenor
spread adjustment specified in the LIBOR Act.\106\ Selection of this
proposed benchmark replacement was expected to enhance liquidity for
both newly issued and legacy LIBOR-based products issued by those
GSEs.\107\
---------------------------------------------------------------------------
\105\ 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
Nov. 29, 2022) (detailing the calculation methodology for the SOFR
averages and index).
\106\ See Sec. 253.4(b)(3) of the proposed rule.
\107\ 87 FR 45268, 45276 (July 28, 2022).
---------------------------------------------------------------------------
The proposed rule would have defined a ``government-sponsored
enterprise (GSE),'' consistent with its definition under the Board's
capital rule, 12 CFR 217.2, 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.'' \108\ The proposal
would have defined the LIBOR contracts involving the GSEs that would
use this benchmark replacement--termed a ``covered GSE contract''--as
``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.''
\109\
---------------------------------------------------------------------------
\108\ Section 253.2 of the proposed rule.
\109\ Id.
---------------------------------------------------------------------------
Multiple commenters opposed the proposed rule's definitions of
``GSE'' and ``covered GSE contract'' as overly broad in light of the
Board's stated intent to capture contracts involving entities regulated
by FHFA.\110\ One commenter suggested that residential mortgage pass-
through certificates issued by the Federal Home Loan Mortgage
Corporation should not be considered a ``covered GSE contract'' and
should instead be considered a cash transaction that would transition
to CME Term SOFR. Other commenters suggested that the Board-selected
benchmark replacement for covered GSE contracts be a term SOFR rate
rather than 30-day Average SOFR for several reasons: (i) that the ARRC
did not recommend 30-day Average SOFR for contracts involving GSEs,
(ii) that use of 30-day Average SOFR in advance could create volatility
in earnings during periods of monetary policy activity; and (iii) that
use of a term SOFR rate would avoid bifurcating the market and would be
consistent with public statements made by the GSEs, including GSEs not
regulated by FHFA. Another commenter--FHFA--generally supported the
Board's proposal but suggested certain technical amendments to the
definition of ``GSE-covered contract.''
---------------------------------------------------------------------------
\110\ One of these commenters would prefer that LIBOR contracts
involving the Federal Agricultural Mortgage Corporation (Farmer Mac)
that reference one-, three-, six-, or 12-month LIBOR transition to
the corresponding tenor of CME Term SOFR plus the applicable tenor
spread adjustment specified in the LIBOR Act. This commenter noted
that Farmer Mac does not use 30-day Average SOFR as a benchmark for
its loan products or securities.
---------------------------------------------------------------------------
The Board continues to believe that, with the exception of Federal
Home Loan Bank advances, which are discussed further below, it is
appropriate to replace references to one-, three-, six, or 12-month
LIBOR in contracts involving entities regulated by FHFA with 30-day
Average SOFR plus the applicable tenor spread adjustment specified in
the LIBOR Act. In response to comments suggesting that the ``GSE''
definition was too broad and would cover entities that are not
regulated by FHFA, the final rule replaces the terms ``GSE'' and
``covered GSE contract'' with ``FHFA-regulated entity'' and ``FHFA-
regulated-entity contract''. ``FHFA-regulated entity'' is defined as
having the same meaning as ``regulated entity'' in 12 U.S.C.
4502(20).\111\ ``FHFA-regulated-entity contract'' is defined to mean
``a LIBOR contract that is a commercial or multifamily mortgage loan
that has been purchased or guaranteed, in whole or in part, by an FHFA-
regulated-entity, or for which an FHFA-regulated entity is identified
as a party in the transaction documents, and that is (i) a commercial
or multifamily mortgage-backed security (other than a security backed
by consumer loans), (ii) a collateralized mortgage obligation, (iii) a
credit risk transfer transaction, or (iv) a Federal Home Loan Bank
advance.'' These narrower definitions more closely track SOFR contracts
executed by FHFA-regulated entities without impacting LIBOR contracts
of other GSEs.
---------------------------------------------------------------------------
\111\ Section 253.2 of the final rule. Under 12 U.S.C. 4502(20),
the term ``regulated entity'' means ``(A) the Federal National
Mortgage Association and any affiliate thereof; (B) the Federal Home
Loan Mortgage Corporation and any affiliate thereof; and (C) any
Federal Home Loan Bank.''
---------------------------------------------------------------------------
Similar to the proposal, the final rule identifies as the Board-
selected benchmark replacement for FHFA-regulated-entity contracts
other than Federal Home Loan Bank advances (i) in place of overnight
LIBOR, SOFR, or in place of one-, three-, six-, or 12-month tenors of
LIBOR, 30-day Average SOFR; plus (ii) the applicable tenor spread
adjustment specified in the LIBOR Act.\112\ Having consulted with FHFA,
the Board believes that the final rule's Board-selected benchmark
replacement rate should enhance liquidity for both newly issued and
legacy LIBOR-based products issued by FHFA-regulated entities. In
addition, concerning a commenter's request that any Board-selected
benchmark replacement for a cash transaction be made available at low
or no cost to credit unions and other not-for-profit institutions, the
Board notes that 30-day Average SOFR is published by the Federal
Reserve Bank of New York and available for free.
---------------------------------------------------------------------------
\112\ See Sec. 253.4(b)(3) of the final rule; see also section
253.2 of the final rule (defining ``30-day Average SOFR'').
---------------------------------------------------------------------------
Federal Home Loan Bank advances. As noted, the proposed rule would
have included Federal Home Loan Bank advances as ``covered GSE
contracts'' for which references to one-, three-, six-, or 12-month
tenors of LIBOR would be replaced with 30-day Average SOFR plus the
applicable tenor spread adjustment specified in the LIBOR Act. One
commenter recommended that references to one-, three-, six-, or 12-
month tenors of LIBOR in Federal Home Loan Bank advances be replaced
with a rate based on daily average SOFR in arrears matching the
Fallback Rate (SOFR) in the ISDA protocol, and not with a rate based on
30-day Average SOFR. This commenter noted that, because the Federal
Home Loan Banks utilize SOFR in-arrears indices for their established
advance products, selection of the Fallback Rate (SOFR) in the ISDA
protocol would align with the current practices of the Federal Home
Loan Banks with respect to their advances.\113\ FHFA, the supervisor of
the Federal Home Loan Banks, supported selection of the Fallback Rate
(SOFR) in the ISDA protocol for an FHFA-regulated-entity contract that
is a Federal Home Loan Bank advance.
---------------------------------------------------------------------------
\113\ This commenter noted also that, since the Federal Home
Loan Banks use the same rate for their funding and hedging programs,
selection of the Fallback Rate (SOFR) in the ISDA protocol would
have the added benefit of aligning its funding costs where such
funding has been created using derivative transactions with its
lending rate for advances.
---------------------------------------------------------------------------
[[Page 5216]]
Having consulted with FHFA, the Board believes it would be
appropriate to identify a separate benchmark replacement for FHFA-
regulated-entity contracts that are Federal Home Loan Bank advances so
as to align the benchmark used in legacy contracts that are Federal
Home Loan Bank advances with the current practices of the Federal Home
Loan Banks. Therefore, the final rule identifies the Board-selected
benchmark replacement for an FHFA-regulated-entity contract that is a
Federal Home Loan Bank advance as the ``Fallback Rate (SOFR)'' in the
ISDA protocol, as calculated under the ISDA protocol.\114\
---------------------------------------------------------------------------
\114\ Section 253.4(b)(3) of the final rule. Concerning a
commenter's request that any Board-selected benchmark replacement
for a cash transaction be made available at low or no cost to credit
unions and other not-for-profit institutions, the Board notes that,
although use of the Fallback Rate (SOFR) is subject to certain
licensing or other usage terms imposed by Bloomberg, Bloomberg
presently 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. 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>. 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.
---------------------------------------------------------------------------
FFELP ABS. One group of commenters recommended that the Board
identify a separate benchmark replacement for asset-backed securities
that are predominantly secured by loans made under the FFELP that
aligns with the LIBOR Act's amendments to FFELP special allowance
payments related to those loans. Specifically, section 109 of the LIBOR
Act amended the Higher Education Act of 1965 to indicate that, among
other things, in instances where one-month LIBOR ceases or is non-
representative, special allowance payments shall be calculated using
30-day Average SOFR rates.\115\ The Board did not receive any comments
recommending against identification of a separate benchmark replacement
for these contracts.
---------------------------------------------------------------------------
\115\ 20 U.S.C. 1087-1(b)(2)(I)(viii).
---------------------------------------------------------------------------
The Board believes it would be appropriate to identify a separate
benchmark replacement for any asset-backed security for which more than
50 percent of the collateral pool consists of FFELP loans, as reported
in the most recent servicer report available on the LIBOR replacement
date (defined in the final rule as ``Federal Family Education Loan
Program (FFELP) asset-backed securitizations (ABS)'').\116\ The Board
understands that outstanding FFELP ABS do not reference overnight
LIBOR; therefore, the final rule identifies benchmark replacements for
one-, three-, six-, and 12-month LIBOR only.\117\ Consistent with the
comment received, the final rule identifies the benchmark replacement
for a FFELP ABS as follows: (i) one-month LIBOR will be replaced with
30-day Average SOFR plus the tenor spread adjustment specified in the
LIBOR Act; (ii) three-month LIBOR will be replaced with 90-day Average
SOFR plus the tenor spread adjustment specified in the LIBOR Act; and
(iii) six- or 12-month LIBOR will be replaced with 30-day Average SOFR
plus the applicable tenor spread adjustment specified in the LIBOR
Act.\118\
---------------------------------------------------------------------------
\116\ See Sec. 253.2 of the final rule.
\117\ See Sec. 253.4(b)(4) of the final rule.
\118\ Id. Concerning a commenter's request that any Board-
selected benchmark replacement for a cash transaction be made
available at low or no cost to credit unions and other not-for-
profit institutions, the Board notes that 30-day Average SOFR and
90-day Average SOFR are published by the Federal Reserve Bank of New
York and available for free.
---------------------------------------------------------------------------
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 that 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).\119\ The Board's proposed rule did not require any conforming
changes, since it did not appear any additional conforming changes
would be needed for successful implementation of the Board-selected
benchmark replacements identified in the proposed rule. However, under
the proposed rule, the Board reserved the authority, in its discretion,
to require any additional conforming changes, by regulation or
order.\120\
---------------------------------------------------------------------------
\119\ 12 U.S.C. 5803(e).
\120\ Section 253.5(a)(1) of the proposed rule.
---------------------------------------------------------------------------
For clarity, the proposed rule also indicated 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.\121\ This
language in the proposed rule mirrored sections 103(4)(B) and 104(d) of
the LIBOR Act.\122\
---------------------------------------------------------------------------
\121\ Section 253.5(a)(2) of the proposed rule.
\122\ See 12 U.S.C. 5802(4)(B), 5803(d).
---------------------------------------------------------------------------
The Board did not receive any comments concerning the proposed
rule's provisions mirroring sections 103(4)(B) and 104(d) of the LIBOR
Act. Some commenters agreed with the Board that no additional
conforming changes were necessary. One commenter urged the Board to
consider whether some conforming changes may be appropriate for complex
consumer loans, since the LIBOR Act does not provide for a calculating
person to make additional conforming changes for such loans. Another
commenter recommended the Board include as a conforming change a
provision that, should the Board-selected benchmark replacement not be
published on a given day, then the prior day's publication of the
Board-selected benchmark replacement should be used. Several commenters
requested conforming changes addressing provisions in LIBOR contracts
that (i) specify a particular source where a LIBOR rate may be obtained
(e.g., ``LIBOR as published in The Wall Street Journal''), (ii) specify
a LIBOR rate in effect as of a particular time of day, (iii) require
averaging of LIBOR over a period of time that spans the LIBOR
replacement date, and (iv) define ``business day'' in a manner
differently from the proposed rule.\123\
---------------------------------------------------------------------------
\123\ As discussed in section IV.C, some commenters also
requested conforming changes addressing provisions in LIBOR
contracts that (i) specify rounding conventions, to the extent a
particular source for the Board-selected benchmark replacement
provides a different number of decimal places; and (ii) specify a
lookback period that straddles the LIBOR replacement date. In the
Board's view, it is clearer and more reasonable to indicate that
these contractual provisions are unaffected by the final rule,
rather than to include these as conforming changes.
---------------------------------------------------------------------------
The final rule, like the proposed rule, includes provisions
mirroring the language in sections 103(4) and 104(d) of the LIBOR Act,
including the Board's ability to, in its discretion, publish additional
benchmark replacement conforming changes, by regulation or order, and a
calculating person's ability to make certain conforming changes with
respect to a LIBOR contract that is not a consumer loan, consistent
with the LIBOR Act.\124\ In response to comments, the final rule also
specifies certain conforming changes and, consistent with the LIBOR
Act, indicates that these conforming changes shall become an integral
part of any LIBOR contract for
[[Page 5217]]
which the Board-selected benchmark replacement replaces the contract's
references to LIBOR.\125\
---------------------------------------------------------------------------
\124\ Section 253.5(a) of the final rule.
\125\ Section 253.5(a) and (b) of the final rule.
---------------------------------------------------------------------------
First, the final rule replaces references in a LIBOR contract to a
specified source for LIBOR (such as a particular newspaper, website, or
screen) with the publication of the applicable Board-selected benchmark
replacement by either the relevant benchmark administrator for the
applicable Board-selected benchmark replacement or any third party
authorized by the relevant benchmark administrator to publish the
applicable Board-selected benchmark replacement.\126\ Second, the final
rule replaces references in a LIBOR contract to a particular time of
day for determining LIBOR (such as 11:00 a.m. London time) with the
standard publication time for the applicable Board-selected benchmark,
as established by the relevant benchmark administrator.\127\ Third, the
final rule modifies any provision of a LIBOR contract requiring use of
a combination (such as an average) of LIBOR values over a period of
time that spans the LIBOR replacement to provide that the combination
shall be calculated consistent with that contractual provision using
(i) the applicable LIBOR for any date prior to the LIBOR replacement
date and (ii) the applicable Board-selected benchmark replacement for
any date on or following the LIBOR replacement date, respectively.\128\
These conforming changes provide clarifications expressly requested by
commenters.
---------------------------------------------------------------------------
\126\ Section 253.5(b)(1) of the final rule.
\127\ Section 253.5(b)(2) of the final rule.
\128\ Section 253.5(b)(3) of the final rule.
---------------------------------------------------------------------------
The final rule also provides, subject to Sec. 253.4(a) and
(b)(3)(ii) of the final rule, that to the extent a Board-selected
benchmark replacement is not available or published on a particular day
indicated in the LIBOR contract as the determination date, the most
recently available publication of the Board-selected benchmark
replacement will apply.\129\ The Board believes this provision,
together with Sec. 253.4(a) and (b)(3)(ii) of the final rule,
addresses more directly an issue raised by a commenter concerning a
provision of a LIBOR contract that defines ``business day'' differently
from the final rule. A different definition of ``business day'' in the
LIBOR contract could result in unavailability of the Board-selected
benchmark replacement on the contractual determination date. This
conforming change in the final rule would address that issue by
directing parties to use the most recently available publication of the
Board-selected benchmark replacement in the event the Board-selected
benchmark replacement is not available or published on a particular day
indicated in the LIBOR contract as the determination date, without
affecting other provisions in the LIBOR contract that may refer to
``business day'' for a different purpose.\130\
---------------------------------------------------------------------------
\129\ Section 253.5(b)(4) of the final rule.
\130\ Another commenter initially requested that the Board
permit the Federal Home Loan Banks to identify conforming changes
for Federal Home Loan Bank advances related to terms such as
determination dates, reset dates, payment dates, calculation
periods, and adjustment spreads to better reflect the economics of
replacing LIBOR with its preferred benchmark replacement for Federal
Home Loan Bank advances. The Board notes that, for LIBOR contracts
other than consumer loans, the LIBOR Act and the final rule
expressly authorize a calculating person to identify benchmark
replacement conforming changes. Additionally, consistent with a
subsequent suggestion from the same commenter, the final rule
identifies the Fallback Rate (SOFR) as the Board-selected benchmark
replacement for Federal Home Loan Bank advances.
---------------------------------------------------------------------------
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.\131\ For clarity, Sec. 253.6 of the proposed rule
referenced and repeated 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.
---------------------------------------------------------------------------
\131\ 12 U.S.C. 5806.
---------------------------------------------------------------------------
The Board did not receive any comments on this section of the
proposed rule. Therefore, the final rule retains this section as
proposed.\132\
---------------------------------------------------------------------------
\132\ Section 253.6 of the final rule.
---------------------------------------------------------------------------
G. Section 253.7--Continuity of Contract and Safe Harbor
In its proposal, the Board noted that the LIBOR Act provides, among
other things, certain statutory protections enumerated in section 105
related to the selection and use of the Board-selected benchmark
replacement.\133\ The Board viewed these provisions as self-executing
and, therefore, did not believe it was necessary to include any
provisions in the proposed rule reiterating these sections of the LIBOR
Act. However, the Board invited comment on whether the Board should
incorporate into the regulation the statutory protections in section
105 of the LIBOR Act.
---------------------------------------------------------------------------
\133\ 87 FR 45268, 45271 (July 28, 2022).
---------------------------------------------------------------------------
Some commenters recommended that the final rule incorporate the
statutory protections of section 105 of the LIBOR Act. Another
commenter suggested that the Board expressly acknowledge in the final
rule that section 105 of the LIBOR Act is self-executing and that
nothing in the rule is intended to alter or modify the scope of those
protections.
Some commenters requested that the final rule expressly state,
consistent with section 104(f)(6) of the LIBOR Act, that nothing in the
final rule would alter or impair the rights or obligations of any
person, or the authorities of any agency, under Federal consumer
financial law, as defined in 12 U.S.C. 5481. One commenter suggested in
the alternative that section 104(f)(6) of the LIBOR Act be expressly
incorporated into the final rule. Consistent with the LIBOR Act, the
Board affirms that the final rule does not affect any requirements
imposed by any provision of Federal consumer financial law, as defined
in 12 U.S.C. 5481.
Having considered all of these comments, the Board's final rule
includes a new section expressly stating that the provisions of section
105(a)-(d) of the LIBOR Act shall apply to any LIBOR contract for which
the Board-selected benchmark replacement becomes the benchmark
replacement pursuant to Sec. 253.3(a) or (c) of the final rule.\134\
The section separately states that nothing in the final rule is
intended to alter or modify the availability or effect of the
provisions of section 105(e) of the LIBOR Act.\135\
---------------------------------------------------------------------------
\134\ Section 253.7(a) of the final rule.
\135\ Section 253.7(b) of the final rule.
---------------------------------------------------------------------------
V. Regulatory Analyses
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
requires an agency to consider whether its rules will have a
significant economic impact on a substantial number of small entities.
Under the RFA, in connection with a final rule, an agency is generally
required to publish a final regulatory flexibility analysis (FRFA),
unless the head of the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
and the agency publishes the factual basis supporting such
certification. For the reasons described below, the Board certifies
that the final rule will not have a significant economic impact on a
substantial number of small entities.
LIBOR is used in contracts subject to the LIBOR Act across all
industries, and
[[Page 5218]]
the Board does not believe that it is feasible to provide an estimate
of the number of small entities to which the final rule will
apply.\136\ Given the broad coverage of the LIBOR Act, the Board
expects that the number of small entities to which the final rule will
apply could be significant for one or more classes of small
entities.\137\ However, for the reasons described below, the Board does
not believe that the rule will have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------
\136\ The Board generally uses the industry-specific size
standards adopted by the Small Business Administration for purposes
of estimating the number of small entities to which a proposed rule
would apply. See 13 CFR 121.201. As the Board stated in the initial
regulatory flexibility analysis (IRFA) that was published with the
proposed rule, parties to contacts subject to the LIBOR Act may
include firms of any size and in any industry, and the Board does
not believe that it has sufficient data to provide a reasonable
estimate of the number of small entities to which the final rule
would apply.
\137\ The Board received one comment letter in response to the
IRFA that asked the Board to consider conducting a survey of a
representative sample of small businesses to determine whether and
how the rule will affect them. The Board has considered this
commenter's request, but in light of (i) the practical challenges
associated with assembling a representative sample of small
businesses across all sectors of the U.S. economy, (ii) the
statutory deadline within which the Board must promulgate
implementing regulations, and (iii) the Board's conclusion that the
final rule will not have a significant economic impact on a
substantial number of small entities, the Board has declined to
follow this commenter's suggestion. The same commenter additionally
recommend that the Board conduct a policy analysis illustrating the
effect of the rule on small businesses, including an analysis of
alternatives, and stated that the Board should grant an exemption
from the rule for small businesses if the Board cannot determine how
the rule will affect them. The LIBOR Act does not authorize the
Board to grant exemptions from the LIBOR Act or the final rule.
Elsewhere in this preamble, the Board has discussed the effect of
the final rule on parties to LIBOR contracts and explained its
reasoning in respect of the limited areas where the Board has
discretion to adopt alternatives.
---------------------------------------------------------------------------
As the Board stated in the IRFA that was published with the
proposal, although section 110 of the LIBOR Act directs the Board to
promulgate regulations to carry out the LIBOR Act, the Board's
discretion under the LIBOR Act is limited to a small number of areas:
(i) selecting SOFR-based benchmark replacements, (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).
With respect to Board-selected benchmark replacements, the final
rule establishes Board-selected benchmark replacements for six
categories of LIBOR contracts.\138\ As required by the LIBOR Act, all
of these Board-selected benchmark replacements are based on SOFR.
Although the Board recognizes that there are some differences between
the different versions of SOFR that the Board could have selected as a
benchmark replacement for LIBOR, the Board believes that there is a
basic economic equivalence between all SOFR-based benchmark
replacements. This basic economic equivalence is reflected in the LIBOR
Act itself, which requires the Board to adjust any Board-selected
benchmark replacement to include the same statutorily prescribed tenor
spread adjustments (except for the transition tenor spread adjustment
for consumer loans). In addition, the Board was guided by voluntary
market practices in selecting the Board-selected benchmark replacement
for each category of LIBOR contracts. For example, the Board selected
CME Term SOFR as the Board-selected benchmark replacement for most cash
transactions in large part because the loan market has already
transitioned from LIBOR to Term SOFR on a voluntary basis. Thus, the
Board has exercised its discretion to select SOFR-based benchmark
replacements in a way that will minimize market disruption.
Accordingly, the Board does not believe that the Board's selection of a
particular Board-selected benchmark replacement over an alternative
SOFR-based rate for a particular category of LIBOR contracts is
economically material.
---------------------------------------------------------------------------
\138\ Specifically, as provided in Sec. 253.4 of the final
rule, the Board has selected different benchmark replacements for
(i) derivatives transactions (``Fallback Rate (SOFR)'' in the ISDA
protocol), (ii) FHFA-regulated-entity contracts other than Federal
Home Loan Bank advances (30-day Average SOFR), (iii) FHFA-regulated-
entity contracts that are Federal Home Loan Bank advances
(``Fallback Rate (SOFR)'' in the ISDA protocol), (iv) FFELP ABS (30-
day Average SOFR and 90-day Average SOFR, as applicable), (v)
consumer loans (CME Term SOFR), and (vi) all other transactions
(i.e., cash transactions) (CME Term SOFR).
---------------------------------------------------------------------------
With respect to benchmark replacement conforming changes, the final
rule identifies a small number of benchmark replacement conforming
changes based on feedback from commenters. Specifically, as provided in
Sec. 253.5(b) of the final rule, the Board established benchmark
replacement conforming changes related to (i) any reference to a
specified source for LIBOR (such as a particular newspaper, website, or
screen), (ii) any reference to a particular time of day for determining
LIBOR, (iii) any provision of a LIBOR contract requiring the use of a
combination of LIBOR values over a period of time that spans the LIBOR
replacement date, and (iv) any provision of LIBOR contract specifying
use of the most recently available publication of LIBOR for any day
where LIBOR is not available or published. Because these benchmark
replacement conforming changes are limited to technical, administrative
changes to LIBOR contracts that facilitate the transition from LIBOR to
the applicable Board-selected benchmark replacement, the Board does not
believe that any of the benchmark replacement conforming changes will
represent a material change to any LIBOR contract. To the contrary, the
Board believes that these benchmark replacement conforming changes will
provide clarity and reduce the possibility of disputes over the meaning
of a LIBOR contract for which a Board-selected benchmark replacement
becomes the benchmark replacement. Therefore, the Board believes that
economic impact of these benchmark replacement conforming changes will
be de minimis.
With respect to determining the LIBOR replacement date, the Board
did not propose, and the final rule does not include, a determination
that any LIBOR tenor will cease or become nonrepresentative prior to
the first London banking day after June 30, 2023.
Beyond these three areas where the LIBOR Act expressly vests the
Board with discretion, there is one additional aspect of the final rule
in respect of which the Board has exercised discretion. Specifically,
the Board in the final rule has interpreted the ambiguous statutory
term ``determining person'' to include any person with sole 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, whether or not the
person's authority, right or obligation is subject to any contingencies
specified in the LIBOR contract or by the governing law of the LIBOR
contract. The Board's interpretation of ``determining person'' in the
final rule does have implications for LIBOR contracts under the terms
of which the determining person's authority would be triggered on or
after the LIBOR replacement date (i.e., LIBOR contracts where a
determining person's contractual authority arises when LIBOR becomes
unavailable or non-representative).
As discussed elsewhere in this preamble, section 104(c)(2) of the
LIBOR Act creates a statutory right for a determining person to select
the Board-selected benchmark replacement by the earlier of the LIBOR
replacement date and the latest date for selecting a benchmark
replacement according to
[[Page 5219]]
the terms of the LIBOR contract, and the Board's interpretation of
``determining person'' clarifies that this statutory right is available
to a determining person even if the determining person's contractual
right to select a benchmark replacement is subject to any contingencies
that have not yet occurred. If the determining person does not avail
itself of this statutory right, then the LIBOR contract would be
regarded on the LIBOR replacement date as a LIBOR contract for which
the determining person has not selected a benchmark replacement, and
thus, the applicable Board-selected benchmark replacement shall be the
benchmark replacement for the LIBOR contract on and after the LIBOR
replacement date under section 104(c)(3) of the LIBOR Act.\139\
---------------------------------------------------------------------------
\139\ Alternatively, depending on the particular language of the
LIBOR contract, the determining person may take the position that
its authority to select a benchmark replacement under the terms of
the LIBOR contract is triggered on the LIBOR replacement date, and
select an alternative replacement benchmark on that date only. The
LIBOR Act and the final rule generally do not apply to a LIBOR
contract for which a determining person selects an alternative
benchmark replacement.
---------------------------------------------------------------------------
Alternatively, the Board could have construed ``determining
person'' to include only persons whose right to select a benchmark
replacement has already been triggered.\140\ Under this alternative
interpretation, where a LIBOR contract authorizes a person to select a
benchmark replacement subject to any contingencies that do not occur
before the LIBOR replacement date, such person would be unable to use
the statutory right to select the Board-selected benchmark replacement
rate in advance. On the LIBOR replacement date, such contract would be
regarded, as applicable, as a LIBOR contract that contains no fallback
provisions (or contains fallback provisions that identify neither a
specific benchmark replacement nor a determining person), or a LIBOR
contract for which a determining person does not select a benchmark
replacement, and thus, the applicable Board-selected benchmark
replacement shall be the benchmark replacement for the LIBOR contract
on and after the LIBOR replacement date under section 104(a) or section
104(c)(3) of the LIBOR Act, respectively.\141\
---------------------------------------------------------------------------
\140\ As explained elsewhere in the preamble, the alternative
interpretation of ``determining person'' is not preferable because,
under that interpretation, a person who has a right to select a
benchmark replacement when LIBOR becomes unavailable or non-
representative would not become a determining person until the LIBOR
replacement date--when LIBOR will actually become unavailable or
non-representative. Accordingly, that person would need to wait
until the LIBOR replacement date to exercise the statutory right
under section 104(c)(1) and (c)(2) of the LIBOR Act to select the
Board-selected benchmark replacement. The Board believes that this
outcome--and the market disruption that would likely result from
determining persons not selecting a benchmark replacement until the
LIBOR replacement date--would be inconsistent with the Congressional
intent to facilitate a smooth transition away from LIBOR and avoid
disruptive litigation.
\141\ Alternatively, depending on the particular language of the
LIBOR contract, the determining person may take the position that
its authority to select a benchmark replacement under the terms of
the LIBOR contract is triggered on the LIBOR replacement date, and
select a replacement benchmark on that date only. The LIBOR Act and
the final rule generally do not apply to a LIBOR contract for which
a determining person selects an alternative benchmark replacement.
---------------------------------------------------------------------------
As demonstrated above, the Board's interpretation of ``determining
person'' in the final rule may impact the timing of a determining
person's selection but does not affect the ultimate benchmark
replacement for contracts under the terms of which the determining
person's authority is not triggered until on or after the LIBOR
replacement date: Under either possible interpretation, the LIBOR
contract would transition to the Board-selected benchmark replacement
on and after the LIBOR replacement date.\142\ Accordingly, the Board
does not believe its interpretation of ``determining person'' will have
a material economic impact on any party to an affected LIBOR contract.
---------------------------------------------------------------------------
\142\ But see supra notes 139 and 141.
---------------------------------------------------------------------------
For the reasons discussed above, the Board believes that the
economic impact of the final rule on small entities, including any
particular class, will not be significant. Therefore, the Board is
certifying that the final rule will not have a significant economic
impact on a substantial number of small entities.
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 both the proposed
rule and the final rule under the authority delegated to the Board by
the OMB and determined that it contains no collections of information
under the PRA.\143\ Accordingly, there is no paperwork burden
associated with the final rule. The Board received no comments
concerning paperwork burden associated with the proposed rule.
---------------------------------------------------------------------------
\143\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------
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 received no comments on these matters and
believes that the final rule is written plainly and clearly.
D. Riegle Community Development and Regulatory Improvement Act of 1994
Section 302(a) of the Riegle Community Development and Regulatory
Improvement Act (the ``Riegle Act''), Public Law 103-325, generally
requires that, in determining the effective date and administrative
compliance requirements for new regulations that impose additional
reporting, disclosure, or other requirements on insured depository
institutions, a Federal banking agency must consider, consistent with
the principle of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such
regulations.\144\ In addition, section 302(b) of the Riegle Act
requires new regulations and amendments to existing regulations that
impose additional reporting, disclosures, or other new requirements on
insured depository institutions generally shall take effect on the
first day of a calendar quarter that begins on or after the date of
publication in the Federal Register.\145\ This requirement concerning
the effective date does not apply in certain limited cases, including
(i) if the agency determines, for good cause published with the
regulation, that the regulation should become effective before such
time, and (ii) if the regulation is required to take effect on a
different date pursuant to an act of Congress.\146\
---------------------------------------------------------------------------
\144\ 12 U.S.C. 4802(a).
\145\ 12 U.S.C. 4802(b).
\146\ Id.
---------------------------------------------------------------------------
The Board believes that, in this case, there is good cause for an
earlier effective date. In particular, an earlier effective date gives
determining persons, including any determining person that is an
insured depository institution, additional time to use the statutory
right to select the Board-selected benchmark replacement, rather than
requiring the determining person to wait until at least April 1, 2023,
to make such selection. For this reason, the Board believes that an
earlier effective
[[Page 5220]]
date will increase certainty for parties to LIBOR contracts involving
determining persons and will facilitate a smooth transition away from
LIBOR after the LIBOR replacement date.
In addition, prompt effectiveness of the rule is consistent with
congressional intent.\147\
---------------------------------------------------------------------------
\147\ 12 U.S.C. 4802(b)(1)(C); see also 12 U.S.C. 5807.
---------------------------------------------------------------------------
List of Subjects in 12 CFR Part 253
Banks and banking, Interest rates.
Authority and Issuance
0
For the reasons stated in the preamble, the Board of Governors of the
Federal Reserve System adds part 253 to 12 CFR chapter II 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.
253.7 Continuity of contract and safe harbor.
Appendix A to Part 253--ISDA Protocol
Authority: 12 U.S.C. 5801 et seq.
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''), codified at 12 U.S.C. 5801 et seq.
(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.\148\ This part implements the statute by defining terms used in
the statute and identifying Board-selected benchmark replacements for
LIBOR contracts.
---------------------------------------------------------------------------
\148\ 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, the Adjustable Interest
Rate (LIBOR) Act and this part 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 fallback provisions providing 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. This part 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, and except as provided in Sec. 253.3(a)(1)(iii) and (c),
generally does not apply to or affect LIBOR contracts that have
fallback provisions 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. Any
determining person's selection of the applicable Board-selected
benchmark replacement pursuant to Sec. 253.3(c) is subject to
Sec. Sec. 253.4, 253.5 (including any benchmark replacement conforming
changes made by a calculating person), 253.6, and 253.7.
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.
90-day Average SOFR means the 90-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:
(1) 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
(2) 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
paragraph (1) of this definition.
Board-selected benchmark replacement means the benchmark
replacements identified in Sec. 253.4.
Business day means any day except for:
(1) A Saturday;
(2) A Sunday;
(3) 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
(4) 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.
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''
[[Page 5221]]
under the International Swaps and Derivatives Association (ISDA)
protocol (see appendix A to this part) 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 LIBOR
contract.
Derivative transaction fallback observation day means the day that
is two payment business days prior to the payment date for the relevant
calculation period.
Determining person means, with respect to any LIBOR contract, any
person with the sole 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, whether or not the person's authority, right, or
obligation is subject to any contingencies specified in the LIBOR
contract or by the governing law of the LIBOR contract.
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.
Federal Housing Finance Agency (FHFA)-regulated entity has the same
meaning as ``regulated entity'' in 12 U.S.C. 4502(20).
Federal Family Education Loan Program (FFELP) asset-backed
securitization (ABS) means an asset-backed security for which more than
50 percent of the collateral pool consists of FFELP loans, as reported
in the most recent servicer report available on the LIBOR replacement
date.
FHFA-regulated-entity contract means a LIBOR contract that is a
commercial or multifamily mortgage loan that has been purchased or
guaranteed, in whole or in part, by an FHFA-regulated entity, or for
which an FHFA-regulated entity is identified as a party in the
transaction documents, and that is:
(1) A commercial or multifamily mortgage-backed security (other
than a security backed by consumer loans);
(2) A collateralized mortgage obligation;
(3) A credit risk transfer transaction; or
(4) A Federal Home Loan Bank advance.
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 (see
appendix A to this part).
LIBOR, as used in this part:
(1) 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
(2) 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.
Relevant benchmark administrator means:
(1) Bloomberg Index Services Limited with respect to Fallback Rate
(SOFR);
(2) CME Group Benchmark Administration, Ltd. with respect to CME
Term SOFR;
(3) Refinitiv Limited with respect to the Board-selected benchmark
replacement for a LIBOR contract that is a consumer loan; and
(4) The Federal Reserve Bank of New York with respect to 30-day
Average SOFR and 90-day Average SOFR.
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) General requirement. On and after the LIBOR replacement date,
the applicable Board-selected benchmark replacement shall be the
benchmark replacement for the following LIBOR contracts, except to the
extent that an exception in paragraph (b) of this section applies:
(1) A LIBOR contract with one of the following characteristics as
of the LIBOR replacement date, after giving effect to paragraph (a)(2)
of this section:
(i) The LIBOR contract contains no fallback provisions;
(ii) The LIBOR contract contains fallback provisions that identify
neither--
(A) A specific benchmark replacement; nor
(B) A determining person; or
(iii) The LIBOR contract contains fallback provisions that identify
a determining person, but the determining person has not selected 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, for any reason.
(2) 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:
(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 (including,
but not limited to, Eurodollar deposit or lending rates).
(b) Exceptions. Notwithstanding paragraph (a) of this section, this
part shall not apply to--
(1) Any LIBOR contract that the parties have agreed in writing
shall not be subject to the Adjustable Interest Rate (LIBOR) Act;
(2) Any LIBOR contract that contains fallback provisions that
identify a benchmark replacement that is not based in any way on any
LIBOR value (including the prime rate or the effective Federal Funds
rate) after application of paragraph (a)(2) of this section; or
(3) Except as provided in paragraph (a)(2) or (a)(1)(iii) of this
section, any LIBOR contract subject to paragraph (c) of this section as
to which a determining person does not elect to use a Board-selected
benchmark replacement pursuant to paragraph (c).
(c) Selection of Board-selected benchmark replacement by
determining person. Except for any LIBOR contract described in
paragraph (b)(2) of this section, a determining person may select the
Board-selected benchmark replacement specified in Sec. 253.4 as the
benchmark replacement for a LIBOR contract. Any such selection shall
be--
[[Page 5222]]
(1) Irrevocable;
(2) 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
(3) Used in any determinations of the benchmark under or with
respect to the LIBOR contract occurring on and after the LIBOR
replacement date.
(d) Other provisions of LIBOR contracts unchanged. Except as
provided in paragraph (a)(2) of this section and in Sec. 253.5, where
the applicable Board-selected benchmark replacement becomes the
benchmark replacement for a LIBOR contract on and after the LIBOR
replacement date pursuant to paragraph (a) or (c) of this section, all
other provisions of such contract shall not be altered or impaired and
shall apply to such contract using the Board-selected benchmark
replacement, including but not limited to:
(1) Any provision specifying the date for determining a benchmark,
except in the case of derivative transactions, which are subject to
Sec. 253.4(a)(2), and Federal Home Loan Bank advances, which are
subject to Sec. 253.4(b)(3)(ii)(B);
(2) Any provision specifying rounding conventions for a benchmark;
(3) Any provision referencing LIBOR or any LIBOR value prior to the
LIBOR replacement date (including any provision requiring a person to
look back to a LIBOR value as of a date preceding the LIBOR replacement
date);
(4) Any provision applying any cap, floor, modifier, or spread
adjustment to which LIBOR had been subject pursuant to the terms of a
LIBOR contract;
(5) Any provision of Federal consumer financial law that--
(i) Requires creditors to notify borrowers regarding a change-in-
terms; or
(ii) Governs the reevaluation of rate increases on credit card
accounts under open-ended (not home-secured) consumer credit plans; or
(6) Except as provided in 12 U.S.C. 5804(c), the rights or
obligations of any person, or the authorities of any agency, under
Federal consumer financial law, as defined in 12 U.S.C. 5481.
Sec. 253.4 Board-selected benchmark replacements.
(a) Derivative transactions. (1) A LIBOR contract subject to the
requirements of this part that is a derivative transaction shall use
the benchmark replacement identified as the ``Fallback Rate (SOFR)'' in
the ISDA protocol (see appendix A to this part) for each day on which
LIBOR would ordinarily be observed occurring on or after the LIBOR
replacement date. 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.
(2) The benchmark replacement used to calculate the payment due for
the relevant calculation period shall be determined on the derivative
transaction fallback observation day in respect of the day that, under
the LIBOR contract, would have been used to determine the LIBOR-based
rate that is being replaced or, if the Board-selected benchmark
replacement in respect of that day is not available on the derivative
transaction fallback observation day, the most recently available
publication on the derivative transaction fallback observation day
shall be used.
(b) All other transactions. On the LIBOR replacement date, a LIBOR
contract subject to the requirements of this part that is not a
derivative transaction shall use the following benchmark replacements:
(1) For a LIBOR contract that is not a consumer loan, an FHFA-
regulated-entity contract, or a FFELP ABS--
(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 LIBOR 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 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 LIBOR contract that is an FHFA-regulated-entity
contract--
(i) For an FHFA-regulated-entity contract that is not a Federal
Home Loan Bank advance--
(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 30-day Average SOFR plus the
applicable tenor spread adjustment identified in paragraph (c) of this
section.
(ii) For an FHFA-regulated-entity contract that is a Federal Home
Loan Bank advance--
(A) The benchmark replacement shall be the ``Fallback Rate (SOFR)''
in the ISDA protocol (see appendix A to this part) for each day on
which LIBOR would ordinarily be observed occurring on or after the
LIBOR replacement date. 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) The benchmark replacement used to calculate the payment due for
the relevant calculation period shall be determined on the derivative
transaction fallback observation day in respect of the day that, under
the LIBOR contract, would have been used to determine the LIBOR-based
rate that is being replaced or, if the Board-selected
[[Page 5223]]
benchmark replacement in respect of that day is not available on the
derivative transaction fallback observation day, the most recently
available publication on the derivative transaction fallback
observation day shall be used.
(4) For a LIBOR contract that is a FFELP ABS--
(i) In place of one-month LIBOR, the benchmark replacement shall be
30-day Average SOFR plus the tenor spread adjustment identified in
paragraph (c)(2) of this section;
(ii) In place of three-month LIBOR, the benchmark shall be 90-day
Average SOFR plus the tenor spread adjustment identified in paragraph
(c)(3) of this section; and
(iii) In place of six- or 12-month tenors of LIBOR, the benchmark
replacement shall be 30-day Average SOFR plus the tenor spread
adjustment identified in paragraph (c)(4) or (5) of this section, as
applicable.
(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.
Sec. 253.5 Benchmark replacement conforming changes.
(a) Benchmark replacement conforming changes generally. (1) If the
Board-selected benchmark replacement becomes the benchmark replacement
for a LIBOR contract pursuant to Sec. 253.3(a) or (c), all applicable
benchmark replacement conforming changes shall become an integral part
of the LIBOR contract.
(2) Paragraph (b) of this section establishes specific benchmark
replacement conforming changes. The Board may, in its discretion,
publish additional benchmark replacement conforming changes by
regulation or order.
(3) Solely with respect to any 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,
without any requirement to obtain consent from any other person prior
to the adoption of such benchmark replacement conforming changes.
(b) Specified benchmark replacement conforming changes. (1) Any
reference to a specified source for LIBOR (such as a particular
newspaper, website, or screen) shall be replaced with the publication
of the applicable Board-selected benchmark replacement (inclusive or
exclusive of the relevant tenor spread adjustment identified in Sec.
253.4(c)) by either the relevant benchmark administrator for the
applicable Board-selected benchmark replacement or any third party
authorized by the relevant benchmark administrator to publish the
applicable Board-selected benchmark replacement.
(2) Any reference to a particular time of day for determining LIBOR
(such as 11:00 a.m. London time) shall be replaced with the standard
publication time for the applicable Board-selected benchmark
replacement (inclusive or exclusive of the relevant tenor spread
adjustment identified in Sec. 253.4(c)), as established by the
relevant benchmark administrator.
(3) Any provision of a LIBOR contract requiring use of a
combination (such as an average) of LIBOR values over a period of time
that spans the LIBOR replacement date shall be modified to provide that
the combination shall be calculated consistent with that contractual
provision using:
(i) The applicable LIBOR for any date prior to the LIBOR
replacement date; and
(ii) The applicable Board-selected benchmark replacement rate for
any date on or following the LIBOR replacement date, respectively.
(4) Subject to Sec. 253.4(a) and (b)(3)(ii), to the extent a
Board-selected benchmark replacement is not available or published on a
particular day indicated in the LIBOR contract as the determination
date, the most recently available publication of the Board-selected
benchmark replacement will apply.
Sec. 253.6 Preemption.
Pursuant to section 107 of the Adjustable Interest Rate (LIBOR)
Act, 12 U.S.C. 5806, this part supersedes any provision of any state or
local law, statute, rule, regulation, or standard--
(a) Relating to the selection or use of a benchmark replacement or
related conforming changes; or
(b) 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.
Sec. 253.7 Continuity of contract and safe harbor.
(a) The provisions of section 105(a)-(d) of the Adjustable Interest
Rate (LIBOR) Act, 12 U.S.C. 5804(a)-(d), shall apply to any LIBOR
contract for which the Board-selected benchmark replacement becomes the
benchmark replacement pursuant to Sec. 253.3(a) or (c).
(b) Nothing in this part is intended to alter or modify the
availability or effect of the provisions of section 105(e) of the
Adjustable Interest Rate (LIBOR) Act, 12 U.S.C. 5804(e).
Appendix A to Part 253--ISDA Protocol
For ease of reference, the Board is republishing, with
permission, the full text of the ISDA 2020 IBOR Fallbacks Protocol
(ISDA protocol), published on October 23, 2020, by the International
Swaps and Derivatives Association, Inc. The full text of the ISDA
protocol follows:
ISDA 2020 IBOR Fallbacks Protocol
Published on October 23, 2020
By the International Swaps and Derivatives Association, Inc.
The International Swaps and Derivatives Association, Inc. (ISDA)
has published this ISDA 2020 IBOR Fallbacks Protocol (this Protocol)
to enable parties to Protocol Covered Documents to amend the terms
of each such Protocol Covered Document to (i) in respect of a
Protocol Covered Document which incorporates, or references a rate
as defined in, a Covered ISDA Definitions Booklet, include in the
terms of such Protocol Covered Document either the terms of, or a
particular defined term included in, the Supplement to the 2006 ISDA
Definitions, finalized on October 23, 2020 and to be published by
ISDA and effective on January 25, 2021 (the IBOR Fallbacks
Supplement) and (ii) in respect of a Protocol Covered Document which
otherwise references a Relevant IBOR, include in the terms of such
Protocol Covered Document new fallbacks for that Relevant IBOR.
Accordingly, a party may adhere to this Protocol and be bound by
its terms by completing and delivering a letter substantially in the
form of Exhibit 1 to this Protocol (an Adherence Letter) to ISDA, as
agent, as described below (each such party, an Adhering Party).
1. Adherence to and Effectiveness of the Protocol
(a) By adhering to this Protocol in the manner set forth in this
paragraph 1, each
[[Page 5224]]
Adhering Party agrees, in consideration of the mutual promises and
covenants contained herein, that the terms of each Protocol Covered
Document between such Adhering Party and any other Adhering Party
will be amended in accordance with the terms and subject to the
conditions set forth in the Attachment hereto.
(b) Adherence to this Protocol will be evidenced by the
execution and online delivery, in accordance with this paragraph, to
ISDA, as agent, of an Adherence Letter (in accordance with
subparagraphs 1(b)(i) to 1(b)(iii) below). ISDA shall have the
right, in its sole and absolute discretion, upon at least thirty
calendar days' notice on the ``ISDA 2020 IBOR Fallbacks Protocol''
section of its website at <a href="http://www.isda.org">www.isda.org</a> (or by other suitable means),
to designate a closing date of this Protocol (such closing date, the
Cut-off Date). After the Cut-off Date, ISDA will not accept any
further Adherence Letters to this Protocol.
(i) Each Adhering Party will access the ``Protocols'' section of
the ISDA website at <a href="http://www.isda.org">www.isda.org</a> to enter information online that is
required to generate its form of Adherence Letter and will submit
payment of any applicable fee. Either by directly downloading the
populated Adherence Letter from the Protocol system or upon receipt
via email of the populated Adherence Letter, each Adhering Party
will sign and upload the signed Adherence Letter as a PDF (portable
document format) attachment into the Protocol system. Once the
signed Adherence Letter has been approved and accepted by ISDA, such
Adhering Party will receive an email confirmation of the Adhering
Party's adherence to this Protocol.
(ii) A conformed copy of each Adherence Letter containing, in
place of each signature, the printed or typewritten name of each
signatory will be published by ISDA so that it may be viewed by all
Adhering Parties. Each Adhering Party agrees that, for evidentiary
purposes, a conformed copy of an Adherence Letter certified by the
General Counsel (or other appropriate officer) of ISDA will be
deemed to be an original.
(iii) Each Adhering Party agrees that the determination of the
date and time of acceptance of any Adherence Letter will be
determined by ISDA in its absolute discretion. Any Adherence Letter
which is dated and delivered to ISDA before the date on which this
Protocol is published will be deemed to have been delivered on the
date on which this Protocol is published.
(c) As between two Adhering Parties, the agreement to make the
amendments contemplated by this Protocol, on the terms and
conditions set forth in this Protocol, will be effective on the
Implementation Date and that agreement will form part of each
Protocol Covered Document from the later of the Implementation Date
and the related Protocol Covered Document Date. The amendments
contemplated by this Protocol shall be made on the later of (i) the
Implementation Date and (ii) the Protocol Effective Date.
(A) The Protocol Effective Date with respect to a Protocol
Covered Document shall be January 25, 2021.
(B) The Implementation Date with respect to any two Adhering
Parties shall be the date of acceptance by ISDA, as agent, of an
Adherence Letter (in accordance with paragraph 1(b) above) from the
later of such two Adhering Parties to adhere except that:
(I) In respect of any Protocol Covered Document into which an
Agent has entered on behalf of a Client, subject to paragraph 3(m)
below, the Implementation Date shall be the date specified in
subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B), subparagraph
3(g)(i)(C), paragraph 3(h), paragraph 3(i) or paragraph 3(j) below,
as applicable; and
(II) In respect of any Non-Agent Executed Protocol Covered
Document, subject to paragraph 3(m) below, the Implementation Date
shall be the day specified in paragraph 3(l) below.
Acceptance by ISDA of a subsequent or revised Adherence Letter
from either such Adhering Party will not have the effect of changing
such Implementation Date.
(d) This Protocol is intended for use without negotiation, but
without prejudice to any amendment, modification or waiver in
respect of a Protocol Covered Document that the parties may
otherwise effect in accordance with the terms of that Protocol
Covered Document.
(i) In adhering to this Protocol, an Adhering Party may not
specify additional provisions, conditions or limitations in its
Adherence Letter.
(ii) Any purported adherence that ISDA, as agent, determines in
good faith is not in compliance with this Protocol will be void and
ISDA will inform the relevant party of such fact as soon as
reasonably possible after making such determination.
(e) Each Adhering Party acknowledges and agrees that adherence
to this Protocol is irrevocable, except that an Adhering Party may,
after the Protocol Effective Date, deliver to ISDA, as agent, a
notice substantially in the form of Exhibit 2 to this Protocol that
is effective (determined pursuant to paragraph 3(f) below) on any
Protocol Business Day (a Revocation Notice) to designate the next
Revocation Date as the last date on which an Implementation Date can
occur in respect of any Protocol Covered Document between the
counterparty and such Adhering Party. Following the effective
delivery of a Revocation Notice by an Adhering Party, this Protocol
will not amend any Protocol Covered Document between that Adhering
Party and another Adhering Party for which the Implementation Date
would occur after the related Revocation Date.
(i) If an Agent adheres to this Protocol on behalf of a Client,
then, if the Client effectively delivers a Revocation Notice in
accordance with this paragraph 1(e), this Protocol will not amend
any Protocol Covered Document between another Adhering Party and
that Client entered into by that Client itself or by the Agent on
behalf of that Client or any Non-Agent Executed Protocol Covered
Document (if applicable), in each case, for which the Implementation
Date would occur after the Revocation Date designated as the last
date on which an Implementation Date can occur in the Client's
Revocation Notice.
(ii) If an Agent delivers a Revocation Notice in accordance with
this paragraph 1(e) on behalf of a Client and the Client separately
adheres to this Protocol directly rather than through the agency of
an Agent, then the Revocation Notice delivered by the Agent will not
prevent an Implementation Date from occurring after the Revocation
Date in respect of any Protocol Covered Document into which the
Client has entered with another Adhering Party (including through
the Agent).
(iii) Subparagraph 1(e)(i), subparagraph 1(e)(ii) and
subparagraph 1(e)(iii) are without prejudice to any amendment
effected pursuant to this Protocol to any Protocol Covered Document
between two Adhering Parties for which the Implementation Date
occurred on or before the day on which that Revocation Date occurs
or is deemed to occur, regardless of the date on which such Protocol
Covered Document is entered into, and any such amendment shall be
effective notwithstanding the occurrence or deemed occurrence of
such Revocation Date.
(iv) Each Revocation Notice must be delivered by the means
specified in paragraph 3(f) below.
(v) Each Adhering Party agrees that, for evidentiary purposes, a
conformed copy of a Revocation Notice certified by the General
Counsel or an appropriate officer of ISDA will be deemed to be an
original.
(vi) Any purported revocation that ISDA, as agent, determines in
good faith is not in compliance with this paragraph 1(e) will be
void and ISDA will inform the relevant party of such fact as soon as
reasonably possible after making such determination.
2. Representations and Undertakings
(a) As of the later of (i) the date on which an Adhering Party
adheres to this Protocol in accordance with paragraph 1 above (which
will be the date of acceptance by ISDA of an Adherence Letter from
that Adhering Party (in accordance with paragraph 1(b) above)) and
(ii) the Protocol Covered Document Date, such Adhering Party
represents to each other Adhering Party with which it has entered
into a Protocol Covered Document (which representations will be
deemed to be repeated on the Protocol Effective Date and the
Implementation Date if one or both such dates are later than the
date on which such Adhering Party adheres to this Protocol) each of
the following matters:
(A) Status. It is, if relevant, duly organized and validly
existing under the laws of the jurisdiction of its organization or
incorporation and, if relevant under such laws, in good standing or,
if it otherwise represents its status in or pursuant to the Protocol
Covered Document, has such status.
(B) Powers. It has the power to execute and deliver the
Adherence Letter and to perform its obligations under the Adherence
Letter and the Protocol Covered Document as amended by the Adherence
Letter and this Protocol (including the Attachment hereto), and has
taken all necessary action to authorize such execution, delivery and
performance.
(C) No Violation or Conflict. Such execution, delivery and
performance do not violate or conflict with any law applicable to
it, any provision of its constitutional documents, any order or
judgment of any court or other agency of government
[[Page 5225]]
applicable to it or any of its assets or any contractual restriction
binding on or affecting it or any of its assets.
(D) Consents. All governmental and other consents that are
required to have been obtained by it with respect to the Adherence
Letter and the Protocol Covered Document, as amended by the
Adherence Letter and this Protocol (including the Attachment
hereto), have been obtained and are in full force and effect and all
conditions of any such consents have been complied with.
(E) Obligations Binding. Its obligations under the Adherence
Letter and the Protocol Covered Document, as amended by the
Adherence Letter and this Protocol (including the Attachment
hereto), constitute its legal, valid and binding obligations,
enforceable in accordance with their respective terms (subject to
applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws affecting creditors' rights generally and subject, as
to enforceability, to equitable principles of general application
(regardless of whether enforcement is sought in a proceeding in
equity or at law)).
(F) Credit Support. Its adherence to this Protocol and any
amendment contemplated by this Protocol (including the Attachment
hereto) will not, in and of itself, adversely affect the
enforceability, effectiveness or validity of any obligations owed,
whether by it or by any third party, under any Credit Support
Document or Third Party Credit Support Document in respect of its
obligations relating to any Protocol Covered Document as amended by
the Adherence Letter and this Protocol (including the Attachment
hereto).
(b) Each Adhering Party agrees with each other Adhering Party
with which it has entered into a Protocol Covered Document that each
of the foregoing representations will be deemed, in the case of a
Protocol Covered Document that is an ISDA Master Agreement, to be a
representation for purposes of Section 5(a)(iv) and in the case of
any other Protocol Covered Document, to be a representation for
purposes of any analogous provisions of each such Protocol Covered
Document, that is made by each Adhering Party as of the later of (i)
the date on which such Adhering Party adheres to this Protocol in
accordance with paragraph 1 above and (ii) the Protocol Covered
Document Date and which is deemed repeated on the Protocol Effective
Date and the Implementation Date if one or both such dates are later
than the date on which such Adhering Party adheres to this Protocol.
(c) Undertakings in respect of Protocol Covered Documents with
Third Party Credit Support Documents. With respect to Protocol
Covered Documents with Third Party Credit Support Documents that
expressly require the consent, approval, agreement, authorization or
other action of a Third Party to be obtained, each Adhering Party
whose obligations under such arrangements are secured, guaranteed or
otherwise supported by such Third Party undertakes to each other
Adhering Party with which it has entered into such arrangements that
it has obtained the consent (including by way of paragraph 2(d)
below), approval, agreement, authorization or other action of such
Third Party and that it will, upon demand, deliver evidence of such
consent, approval, agreement, authorization or other action to such
other Adhering Party.
(d) Deemed Third Party Consent. Each Adhering Party which is
also a Third Party in relation to a Third Party Credit Support
Document is hereby deemed to have consented to the amendments
imposed by this Protocol on the Protocol Covered Document supported
by such Third Party Credit Support Document.
3. Miscellaneous
(a) Entire Agreement; Restatement; Survival.
(i) This Protocol constitutes the entire agreement and
understanding of the Adhering Parties with respect to its subject
matter and supersedes all oral communication and prior writings
(except as otherwise provided herein) with respect thereto. Each
Adhering Party acknowledges that in adhering to this Protocol it has
not relied on any oral or written representation, warranty or other
assurance (except as provided for or referred to elsewhere in this
Protocol or in the Attachment) and waives all rights and remedies
which might otherwise be available to it in respect thereof, except
that nothing in this Protocol will limit or exclude any liability of
an Adhering Party for fraud.
(ii) Except for any amendment deemed to be made pursuant to this
Protocol in respect of any Protocol Covered Document, all terms and
conditions of each Protocol Covered Document will continue in full
force and effect in accordance with its provisions as in effect
immediately prior to the date on which it first becomes subject to
this Protocol. Except as explicitly stated in this Protocol, nothing
herein shall constitute a waiver or release of any rights of any
Adhering Party under any Protocol Covered Document to which such
Adhering Party is a party or a provider or recipient of credit
support. This Protocol will, with respect to its subject matter,
survive, and any amendments made or deemed to be made pursuant to
this Protocol will form a part of each Protocol Covered Document
between the Adhering Parties, notwithstanding any statements in a
Protocol Covered Document to the effect that such Protocol Covered
Document constitutes the entire agreement and understanding between
the parties to such Protocol Covered Document with respect to the
subject of such Protocol Covered Document.
(b) Exclusion of Agreements. Notwithstanding anything in
paragraph 1(a) above, with respect to any agreement between Adhering
Parties, if the parties to such agreement have expressly stated in
such agreement or otherwise agreed in writing that this Protocol
shall not apply, then such agreement shall not be a Protocol Covered
Document.
(c) Amendments. An amendment, modification or waiver in respect
of the matters contemplated by this Protocol (including, for the
avoidance of doubt, any amendment, modification or waiver relating
to the alignment of a Protocol Covered Document with an instrument
for which such Protocol Covered Document is intended to serve as a
hedge (or vice versa)) will only be effective in respect of a
Protocol Covered Document if made in accordance with the terms of
the Protocol Covered Document and then only with effect between the
parties to that Protocol Covered Document.
(d) Headings. The headings used in this Protocol and any
Adherence Letter are for convenience of reference only and are not
to affect the construction of or to be taken into consideration in
interpreting this Protocol or any Adherence Letter.
(e) Governing Law. This Protocol and each Adherence Letter will,
as between two Adhering Parties and in respect of each Protocol
Covered Document between them, be governed by and construed in
accordance with the laws of England and Wales, without reference to
choice of law doctrine, provided that the amendments to each
Protocol Covered Document shall be governed by and construed in
accordance with the law specified to govern that Protocol Covered
Document and otherwise in accordance with the applicable choice of
law doctrine.
(f) Notices. Any Revocation Notice must be in writing and
delivered as a locked PDF (portable document format) attachment to
an email to ISDA at <a href="/cdn-cgi/l/email-protection#563f253237163f25323778392431"><span class="__cf_email__" data-cfemail="1e776d7a7f5e776d7a7f30716c79">[email protected]</span></a> and will be deemed effectively
delivered on the date it is delivered unless, on the date of that
delivery, ISDA's London office is closed or that communication is
delivered after 5:00 p.m., London time, in which case that
communication will be deemed effectively delivered on the next day
ISDA's London office is open.
(g) Ability of an Agent to Adhere to the Protocol on Behalf of a
Client.
(i) An Agent may adhere to this Protocol:
(A) On behalf of all Clients represented by such Agent (in which
case, such Agent need not identify each Client through an online
platform available generally to the industry, including, for
example, the ISDA Amend platform provided by IHS Markit (a Platform)
and, in respect of any Protocol Covered Document into which the
Agent has entered on behalf of those Clients, the Implementation
Date shall be the date of acceptance by ISDA of an Adherence Letter
(in accordance with paragraph 1(b) above) from the later of the two
Adhering Parties to adhere);
(B) On behalf of only those Clients represented by such Agent
that such Agent specifically names or identifies through a Platform
and, in respect of any Protocol Covered Document into which the
Agent has entered on behalf of any such Client, the Implementation
Date shall be the date shown on the Platform as the date on which
the Agent communicates the name or identity of that Client to the
other Adhering Party (or, if later, the date of acceptance by ISDA,
as agent, of an Adherence Letter from the other Adhering Party); or
(C) On behalf of all Clients represented by such Agent,
excluding any Clients whose name or identity the Agent communicates
to the other Adhering Party through a Platform as a Client excluded
from adherence, subject to subparagraph 3(h)(i) below, on or before
the date of acceptance by ISDA of an Adherence Letter (in accordance
with
[[Page 5226]]
paragraph 1(b) above) from the later of the two Adhering Parties to
adhere (in which case, such Agent need not identify each Client on
whose behalf it adheres through a Platform). In respect of any
Protocol Covered Document into which the Agent has entered on behalf
of any Client whose name or identity has not been communicated to
the other Adhering Party through a Platform as a Client excluded
from adherence, the Implementation Date shall (subject to
subparagraph 3(h)(i) below) be the date of acceptance by ISDA of an
Adherence Letter (in accordance with paragraph 1(b) above) from the
later of the two Adhering Parties to adhere. If the Agent has not
communicated the name or identity of any Clients excluded from
adherence to the other Adhering Party through a Platform on or
before the date of acceptance by ISDA of an Adherence Letter (in
accordance with paragraph 1(b) above) from the later of the two
Adhering Parties to adhere, then (subject to subparagraph 3(h)(i)
below) in respect of any Protocol Covered Document into which the
Agent has entered on behalf of any Client, the Implementation Date
shall be the date of acceptance by ISDA of an Adherence Letter (in
accordance with paragraph 1(b) above) from the later of the two
Adhering Parties to adhere, and, in each case, if the Agent elects
for Option 2 in its Adherence Letter, on behalf of those Clients
whose name or identity the Agent communicates to the other Adhering
Party through a Platform as being a Client in respect of which
subparagraph 3(g)(ii)(B)(II) below applies (in which case, the
Implementation Date in respect of any Non-Agent Executed Protocol
Covered Document shall be as specified in subparagraph 3(l) below).
(ii) In each case, the Agent can elect to apply the amendments
in this Protocol to either:
(A) In respect of all those Clients on whose behalf the Agent
adheres pursuant to subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B)
or subparagraph 3(g)(i)(C) above, each Protocol Covered Document
into which the Agent has entered on behalf of those Clients (Option
1); or
(B) In respect of all those Clients on whose behalf the Agent
adheres pursuant to subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B)
or subparagraph 3(g)(i)(C) above, each Protocol Covered Document
into which the Agent has entered on behalf of those Clients and (II)
in respect of those Clients on whose behalf the Agent adheres whose
name or identity the Agent communicates to the other Adhering Party
through a Platform as being a Client in respect of which this
subparagraph 3(g)(ii)(B)(II) applies, each Protocol Covered Document
into which the Agent did not enter on behalf of those Clients but
which the Agent has the authority from the relevant Client to amend
(for the purpose of this Protocol, documents described in this
subparagraph 3(g)(ii)(B)(II) being Non-Agent Executed Protocol
Covered Documents and the date shown on the Platform as the date on
which the Agent communicates the name or identity of the Client to
the other Adhering Party for
[…truncated; see source link]Indexed from Federal Register on January 26, 2023.
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.