The Alternative Reference Rates Committee (ARRC) today released a proposal for New York State legislation, which is intended to minimize legal uncertainty and adverse economic impacts associated with LIBOR transition. The ARRC is publishing this proposed legislation to promote broader engagement.
Many financial contracts referencing LIBOR do not envision a permanent or indefinite cessation of LIBOR. Therefore, existing contracts either do not have fallback language that adequately addresses a permanent LIBOR cessation or have language that could dramatically alter the economics of contract terms if LIBOR is discontinued. Although existing contracts may be amended, such an amendment process might be challenging, if not impossible, for certain products. The ARRC proposes New York State legislation to address this issue because a substantial number of financial contracts that reference U.S. dollar LIBOR are governed by New York law.
The proposed legislation would:
- prohibit a party from refusing to perform its contractual obligations or declaring a breach of contract as a result of LIBOR discontinuance or the use of the legislation’s recommended benchmark replacement;
- establish that the recommended benchmark replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR; and
- provide a safe harbor from litigation for the use of the recommended benchmark replacement.
Specifically, the proposed legislation, on a mandatory basis, would:
- override existing fallback language that references a LIBOR-based rate and instead require the use of the legislation’s recommended benchmark replacement;
- nullify existing fallback language that requires polling for LIBOR or other interbank funding rates; and
- insert the recommended benchmark replacement as the LIBOR fallback in contracts that do not have any existing fallback language.
The proposed legislation would also, on a permissive basis, allow:
- parties with the right to exercise discretion or judgment regarding the fallback rate to avail themselves of the litigation safe harbor if they select the recommended benchmark replacement as the fallback rate; and
- parties to mutually opt-out of any mandatory application of the proposed legislation, at any time.
Importantly, however, the proposed legislation would not override existing contract language that specifies a non-LIBOR based rate as a fallback to LIBOR (e.g., the Prime rate).