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US Securities and Exchange Commission

House Passes ‘Tough Legacy’ LIBOR Bill

A bill that seeks to head off an impending crisis related to some $16 trillion worth of so-called “tough legacy” contracts that can’t easily shift away from the London Interbank Offered Rate (LIBOR) cleared the House on December 8, 2021, by a wide margin.

H.R. 4616, the Adjustable Interest Rate (LIBOR) Act of 2021, is “the most important, genuinely boring bill that will come before this House this year,” Rep. Brad Sherman, a California Democrat and the bill’s sponsor, said during floor remarks prior to the 415-9 vote.

“Today, Mr. Speaker, we show that the House of Representatives can deal with a really big problem before it becomes a crisis, before almost anybody even knows that there’s a problem,” Sherman said. “We can deal with such a problem without drama, without deadlock, without partisanship. We can do it a year and a half before it all explodes, so as to give the Senate, the regulatory agencies, and the private sector the time that they need to do this job long before the impending uncertainty disrupts our economy.”

Sherman chairs the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

Congress, financial regulators, accounting standard-setters, banks, and others are bracing for the end of the benchmark rate, which is slated to be phased out completely by mid-2023 as a result of a rate-rigging scheme made public in 2012.

Sherman’s bill deals exclusively with tough legacy contracts – those that don’t have fallback language to an alternate reference rate and can’t be quickly amended – by allowing those contracts to shift to a Secured Overnight Financing Rate (SOFR)-based rate and shielding them from related litigation.

The measure, Sherman said, “will provide borrowers, investors and all those in the financial space certainty as to what happens when LIBOR is no longer published.” Every word of the bill has been carefully reviewed and cleared by the Federal Reserve Board, the Treasury Department, SEC, Office of the Comptroller of the Currency (OCC), Federal Housing Finance Agency (FHFA), and the Consumer Financial Protection Bureau (CFPB), Sherman said.

Nearly two-dozen Industry groups including the Securities Industry and Financial Markets Association (SIFMA), U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, and American Bankers Association, in a December 7 letter urged the passage of the Sherman bill, warning that “without federal legislation to address these contracts, investors, consumers, and issuers of securities may face years of uncertainty, litigation, and a change in value.”

“The legislation is narrowly crafted to allow parties to contracts that already have effective fallback provisions to opt-out of the legislation and to only apply to tough legacy contracts so that new or future business will not be affected,” the groups wrote. “In addition, the legislation offers uniform, equitable treatment for all U.S. contracts that fall under the federal legislation.”

The Federal Reserve, OCC, and other financial regulators on October 20 issued a joint statement pushing financial institutions to keep moving toward an orderly LIBOR transition, warning that “failure to adequately prepare for LIBOR’s discontinuance could undermine financial stability and institutions’ safety and soundness and create litigation, operational, and consumer protection risks.” Entering into new LIBOR contracts after the end of the year would create safety and soundness risks, they wrote.

Two senators – Jon Tester, a Montana Democrat, and Thom Tillis, a North Carolina Republican – are readying companion legislation to Sherman’s bill, Senate Banking Committee Chairman Sherrod Brown said during an early November banking panel hearing. (See Senate Readies Legislative Fix For Contracts in LIBOR Transition in the November 5, 2021, edition of ACA.)

 

This article originally appeared in the December 10, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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