Fed Clears Hurdle for Up to $16 Trillion in Legacy Libor Deals

The Federal Reserve has identified benchmark rates in a long-awaited move aimed at preventing chaos in the transition away from the London interbank offered rate.

The central bank said Friday it finalized a rule that identifies rates based on the Secured Overnight Financing Rate, or SOFR, to replace Libor in contracts that don’t have a clear alternative once the dollar-denominated benchmark sunsets on June 30, 2023.

The decision fulfills guidelines set out in congressional legislation enacted in March to address the so-called tough legacy contracts and required the Fed to determine the replacement rates, as well as clarify who could be eligible to choose to use the fallback benchmark.

The latest Fed steps were a key linchpin in the legislation that will protect some $16 trillion of deals outside New York that may survive beyond June 2023 and which could pose a threat to financial stability. These products are especially challenging because many were drawn up before anyone knew Libor would end and lenders must secure consent from borrowers for the switch, which can be difficult to obtain.

“Now that the final rule has been released, we have the details that are needed under the statute,” said Lary Stromfeld, a partner at Cadwalader, Wickersham & Taft LLP. “The rule is setting out what particular version of SOFR will apply to various asset classes.”

Market participants have been waiting for the Fed’s ruling as the legislation stipulated the central bank put a final rule into effect 180 days after the date of its enactment, which should have been around mid-September. The Board of Governors first sought comment on the final rule on July 19.

Read: House Passes Libor Measure to Prevent Legal Chaos From Phaseout

Most indexes for the London interbank offered rate were retired at the end of December 2021, but various tenors of the dollar-denominated benchmark were extended until mid-2023, in part to allow older contracts that lack a clear replacement rate to expire naturally.

While that would help reduce the threat to financial stability, the most challenging floating-rate debt and securitizations — as well as Libor-based mortgages and student loans — will still be in place after the benchmark is no longer used, making legislation to bridge the gap critical.

To contact the reporters on this story:
Alexandra Harris in New York at aharris48@bloomberg.net;
Ben Bain in Washington at bbain2@bloomberg.net

To contact the editors responsible for this story:
Ben Bain at bbain2@bloomberg.net

Stephanie Stoughton, Stephen Kirkland

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