Federal Reserve Bank Publishes Final Rule on LIBOR Transition

The Federal Reserve Bank (FRB) recently published a final rule that establishes benchmark replacement rates for certain contracts that reference LIBOR and do not provide a clear replacement benchmark rate following the LIBOR replacement date (i.e., the first London banking day after June 30, 2023, (unless the FRB determines any LIBOR tenor will cease to be published or representative on a different date)).  This rule implements the LIBOR Act, which WBK previously wrote about here.  It takes effect on February 27, 2023.

Under the final rule, a “LIBOR contract” is defined as any obligation or asset that, by its terms, uses the overnight or one-, three-, six-, or twelve-month tenors of USD LIBOR as a benchmark.  Unless an exemption applies, the applicable FRB-selected benchmark replacement will apply to LIBOR contracts that: (i) contain no fallback provisions; (ii) contain fallback provisions that identify neither a specific benchmark replacement nor a determining person; or (iii) contain fallback provisions that identify a determining person but where that person has not selected a benchmark replacement within a certain time period.  The rule also identifies various benchmark replacement rates for specific transactions at specified times.  For example, as of one year after the LIBOR replacement date and thereafter, with respect to a consumer loan LIBOR contract, the benchmark replacement (i) for overnight LIBOR will be SOFR plus the tenor spread adjustment identified in the final rule; and (ii) for one-, three-, six-, or twelve-month LIBOR tenors will be the corresponding one-, three-, six-, or twelve-month CME Term SOFR plus the applicable tenor spread adjustment identified in the final rule.  For such consumer loans, the rates that Refinitiv Limited publishes or provides as “USD IBOR Cash Fallbacks” for “Consumer” products will be deemed to be equal to such rates.  

The final rule specifies that when LIBOR contracts transition to the benchmark replacement, no other contract provisions will be altered or impaired (except with respect to certain provisions identified in the final rule, such as conforming changes).  The final rule also restates the preemption provisions included in the LIBOR Act.