On March 6, 2020, the Alternative Reference Rates Committee (ARRC) published its proposed model for New York State legislation to further clarify what will happen when LIBOR benchmark rates are no longer available. The ARRC was first convened by the US Federal Reserve Board and the Federal Reserve Bank of New York in 2014 to support market participants in the transition away from the use of USD-LIBOR as a benchmark rate.
Many derivatives and other financial contracts are governed by the laws of New York State. The ARRC intends its proposal for New York State legislation to provide legal certainty in situations where market participants are unable to or have failed to take action in response to the upcoming end of LIBOR. Critically, the proposed legislation is not meant to override the choices of market participants that have already taken steps to move away from LIBOR, whether through adherence to an ISDA Protocol or bilateral negotiation. Under the ARRC proposal, any contract, security, or instrument that uses LIBOR with no fallback to a substitute rate shall automatically be amended to refer to a new recommended benchmark replacement rate.
Moreover, under the proposal, the end of LIBOR shall not be an excuse to get out of any contract, security, or instrument. Full details of the ARRC proposal are available here.
Last week, the ARRC announced its recommendations for a spread adjustment methodology for cash products following its public consultation. The ARRC is recommending a spread adjustment methodology based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR. The five-year median spread adjustment methodology matches the methodology recommended by ISDA for derivatives and would make the ARRC’s recommended spread-adjusted version of SOFR comparable to USD LIBOR and consistent with ISDA’s fallbacks for derivatives markets. In Chatham’s response to the ARRC’s consultation, we stressed that alignment between derivatives and the loans they hedge is among the key criteria for determining appropriate fallbacks.