The New York legislation addresses those contracts without effective fallbacks that are governed by New York state law.
On March 24, 2021, the New York Legislature passed Senate Bill 297B/Assembly Bill 164B, intended to reduce risks associated with the transition away from U.S. dollar (USD) LIBOR. The text of the legislation was initially presented by the ARRC last year. On April 6, 2021, New York Governor Andrew Cuomo signed the bill into law. The New York law has become the first legislative action relating to LIBOR transition and may serve as a model legislation for other states to follow.
While the UK Financial Conduct Authority, LIBOR’s regulator and administrator, confirmed that it would cease publication of representative USD LIBOR for the major USD LIBOR settings in mid-2023, which helps address a substantial portion of legacy contracts, there will be a significant number contracts that mature after mid-2023 and contracts that have no effective means to replace LIBOR upon its cessation. The New York legislation addresses those contracts without effective fallbacks that are governed by New York state law. It is expected to provide legal clarity for many New York financial products and agreements referencing USD LIBOR, reduce potential disputes surrounding the transition and lessen the burden on New York courts.
Key provisions of the legislation are summarized below. The legislation only refers to SOFR as the replacement benchmark. Although SOFR is the only rate currently recommended by the ARRC, other credit-sensitive rates such as AMERIBOR (provided by American Financial Exchange, LLC), BSBY (provided by the Bloomberg Short-Term Bank Yield Index), IHS Markit Credit Rate (provided by IHS Markit) and Bank Yield Index (provided by ICE Benchmark Administration) are also being considered but are not covered by the legislation.
- The legislation would require the use of the benchmark replacement recommended by the Federal Reserve, the New York Fed or the Alternative Reference Rates Committee where (i) the contract language uses LIBOR as a benchmark and contains no fallback provisions or is silent or (ii) the contract’s fallback provisions prescribe the use of LIBOR (including by way of a poll or survey of lending rates). Where the fallback provisions are discretionary, the legislation’s safe harbor (described below) is intended to encourage the selection of the recommended benchmark replacement. Notably, the legislation would not override existing contract language that specifies a non-LIBOR based rate as a fallback to LIBOR (e.g., the prime rate).
- The legislation prohibits parties from refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement.
- The legislation establishes that the recommended benchmark replacement shall constitute a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR.
- The legislation provides a safe harbor from litigation for the use of the recommended benchmark replacement, or the implementation of benchmark replacement conforming changes in the legislation. This allows parties 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. It also allows parties to mutually opt out of any mandatory application of the proposed legislation at any time.
The ARRC and the Federal Reserve Board have both endorsed the signing of this legislation.