S297B, signed into law by Gov. Andrew Cuomo on Tuesday, allows for any contract governed by the state of New York to replace LIBOR with a “recommended benchmark replacement.”
The law says the recommended benchmark replacement shall be based on the Secured Overnight Financing Rate (SOFR) and have been recommended by the Federal Reserve Board; the Federal Reserve Bank of New York; or the Alternative Reference Rates Committee (ARRC) for the applicable type of contract, security, or instrument.
The law also “establishes a safe harbor from liability for the selection and use of a recommended benchmark replacement and further provides that a party to a contract shall be prohibited from declaring a breach or refusing to perform as a result of another party’s selection or use of a recommended benchmark replacement,” according to a client alert from law firm Gibson Dunn.
The law does not mandate New York-governed contracts fall back to SOFR, but instead provides these provisions if both parties fail to agree on a LIBOR alternative.
Despite a recent announcement by the U.K. Financial Conduct Authority that it would stop publishing LIBOR on Dec. 31—a cessation known for years—the outstanding exposures to the rate in contracts has actually grown over the last four years to an estimated $223 trillion worldwide, according to a recent progress report from the ARRC.
The ARRC had previously praised the New York law, saying it would “minimize legal uncertainty and adverse economic impacts for legacy LIBOR contracts.” The legislation will provide legal clarity for these contracts, the committee said, and will lessen the burden on New York courts, “as legal uncertainty surrounding the transition likely would have prompted disputes.”
“Especially as we enter the home stretch for USD LIBOR, this legislation will address a key risk in the transition by providing a targeted solution for market participants who hold legacy contracts that have no effective fallbacks when LIBOR is discontinued,” said Tom Wipf, ARRC chairman and vice chairman of institutional securities at Morgan Stanley, in a statement.