Proposal would set default rules for legacy contracts whose LIBOR connection ends next year

Default rules for certain contracts that use a soon-to-be defunct interest rate reference rate would be provided under a proposal released Tuesday by the Federal Reserve.

The agency said its proposal on the London Interbank Offered Rate (LIBOR) – which now may only be used for legacy contracts, but will be discontinued for all after June 30, 2023 – implements the Adjustable Interest Rate (LIBOR) Act, which Congress enacted earlier this year.

That legislation is designed to minimize legal and operational risks and adverse economic impacts associated with the transition away from LIBOR. The legislation is also aimed at providing greater certainty to borrowers, lenders, bondholders, and consumers by protecting them from disruptions after LIBOR goes away completely in less than a year.

Comments on the proposal will be due 30 days after publication in the Federal Register.

“Consistent with the law, the proposal would replace references to LIBOR in certain contracts with the applicable Board-selected replacement rate after June 30, 2023,” the Fed said in a release. “The contracts include those governed by domestic law that do not mature before LIBOR ends and that lack adequate fallback provisions.”

The agency said its proposal identifies separate Fed-selected replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. The Fed said that as required by the law, each proposed replacement rate is based on the Secured Overnight Financing Rate (SOFR), a LIBOR alternative developed by the Federal Reserve and the Federal Reserve Bank of New York.

Federal Reserve Board invites comment on proposal that provides default rules for certain contracts that use the LIBOR reference rate, which will be discontinued next year