UPDATED: Biden signs bill ‘closing the book’ on LIBOR as reference rate; ‘tough’ legacy contracts addressed

Legislation that would address “tough legacy” contracts under a now-defunct interest rate reference was approved by the Senate 68-31 March 10 and signed into law by President Joe Biden (D) Tuesday.

The legislation, part of a massive $1.5 trillion “omnibus” spending bill, had bipartisan support. It directs the Federal Reserve to determine replacement rates for legacy contracts using the reference rate, the London Interbank Overnight Rate (LIBOR), that lack fallback language. It also provides a safe harbor from litigation over a change in rates after the cessation of the rate.

The Senate bill was based on a House measure that passed that body in December. Under the provisions of the legislation, contracts would be automatically switched to a new benchmark rate. The Federal Reserve-developed Secured Overnight Financing Rate (SOFR) is emerging as the rate being settled upon by lenders and U.S. companies. (Agreements on rates for legacy contracts, such as those that that require holders to agree on a new reference rate, are reportedly difficult to reach.)

According the Alternative Rate Reference Committee (ARRC), the group set up by the Fed to address the cessation of LIBOR (and which also developed SOFR), the legislation provides “a targeted solution for financial contracts that mature after the cessation of LIBOR in mid-2023 and have no effective means to replace LIBOR upon its cessation.” The measure also provides a safe harbor to lenders if they choose SOFR in contracts where a party has the discretion to select a successor rate, ARRC said.

LIBOR essentially ended for new contracts at the end of 2021. Existing contracts depending on LIBOR must cease using the reference rate by June 30, 2023.

The legislation is aimed at closing the book on LIBOR as a reference rate, which had become unreliable over the past several years. SOFR, according to the Fed, is based on the cost of transactions in the market for overnight Treasury repurchase agreements.

The legislation is also intended to clarify what happens to the “legacy contracts” after June 2023.