ARRC proposes NY State legislation to ease LIBOR transition
admin | March 6, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The Alternative Reference Rates Committee (ARRC) has proposed legislation that could significantly smooth the transition to SOFR for legacy LIBOR-based contracts that are either silent regarding a discontinuation of LIBOR, or whose fallbacks prescribe an alternative method for calculating LIBOR. In particular it would nullify the fallback polling mechanism that is commonly found in many legacy securities contracts. The proposed legislation would not impact legacy contracts whose fallback provisions transition to a non-LIBOR replacement rate, such as prime. The legislation is also designed to provide a safe harbor from litigation for parties that adopt the recommended benchmark replacement. The vast majority of US dollar denominated financial securities are issued under NY law, so the legislation also intends to prevent contract disputes from burdening the state’s courts. The proposal is not unprecedented, as it is based in part on a 1998 statute enacted ahead of the discontinuation of several sovereign currencies that were being supplanted by the euro. The timing could be a confounding factor – the NY state legislature is only in session until early June in 2020, then again from January to June in 2021. It’s unclear whether that provides sufficient time for the legislation to be considered and voted on without causing significant market disruption. Some of the key components of the draft legislation are summarized in Exhibit 2. The ARRC proposal is here. Source: ARRC, APS
Exhibit 2: Key components of proposed statute
Source: ARRC, APS
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