Testimony at a virtual hearing on Thursday, April 15, 2021, of the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the US House Committee on Financial Services reinforced regulatory support for federal legislation to facilitate the transition from LIBOR.
A replay of the full hearing is available here, the committee memorandum in support of the proposed legislation is here, and written testimony by representatives of five panel witnesses are here ( Federal Housing Finance Authority), here (Securities and Exchange Commission), here (US Department of the Treasury), here (US Federal Reserve Board (“FRB”)), and here (Office of the Comptroller of the Currency).
Significantly, the General Counsel of the FRB stated in his written testimony:
“The end of LIBOR may result in significant litigation. For example, if a legacy contract converts to a fixed rate when LIBOR ends, a party disadvantaged by that conversion might request that a court reform the contract by substituting an alternative floating rate for LIBOR. Parties also might request that a court reform or void a legacy contract that lacks any fallback language if the parties cannot agree bilaterally on a successor rate. Similarly, in instances where a legacy contract allows a person to select a replacement rate when LIBOR ends, a party disadvantaged by the replacement rate might argue that the manner in which another person—for example, a bond trustee—selected the replacement rate violates the implied covenant of good faith and fair dealing. Chair Powell and Vice Chair Quarles have publicly stated their support for federal legislation to mitigate risks related to legacy contracts. Federal legislation would establish a clear and uniform framework, on a nationwide basis, for replacing LIBOR in legacy contracts that do not provide for an appropriate fallback rate. Federal legislation should be targeted narrowly to address legacy contracts that have no fallback language, that have fallback language referring to LIBOR or to a poll of banks, or that convert to fixed-rate instruments. Federal legislation should not affect legacy contracts with fallbacks to another floating rate, nor should federal legislation dictate that market participants must use any particular benchmark rate in future contracts. Finally, to avoid conflict of laws problems, federal legislation should pre-empt any outstanding state legislation on legacy LIBOR contracts.”
While the text of the proposed legislation remains as a draft, this testimony is further evidence of the important regulatory support for federal legislation to facilitate the LIBOR transition for “tough legacy” contracts.