While banks and regulators have been busying themselves with arrangements for many major markets and products -- and a newly passed law in New York state provides a further backstop for some agreements -- a vast swath of contracts is still potentially vulnerable. That’s where Congress comes in.
“Federal legislation would establish a clear and uniform framework, on a nationwide basis, for replacing Libor in legacy contracts that do not provide for an appropriate fallback rate,”
The phase-out of the widely used benchmark by mid-2023 has vast implications for financial markets, given that it is enshrined in contracts for everything from Wall Street derivatives to consumer credit cards. Both Federal Reserve Chairman
“What the markets need is a clear instruction manual,” the
The U.S. dollar Libor indexes were tied to about $223 trillion of contracts at the end of 2020, according to documents released ahead of the hearing. Those indexes were initially set to be phased out at the end of this year, but the
Yet that delay over the next two years won’t resolve the legal status for contracts that can’t easily be shifted to an alternative index and will still remain in force. While New York enacted a law that would allow such contracts to shift to new rates recommended by regulators, analysts said national legislation is still needed for products including credit cards, mortgages and small business loans covered by various state laws.
“New York legislation doesn’t provide a universal solution,” said John Libra, an attorney at securities litigation firm Korein Tillery. “There are still a large amount of deals outstanding that have different law provisions.”
The Treasury, meanwhile, says that federal legislation could ensure that it has sufficient authority to address the tax consequences of the Libor transition and also to amend a provision related to federal student loans, according to testimony from
Some in the financial industry are seeking relief from the Trust Indenture Act, a New Deal-era investor protection law. The statute requires unanimous consent for any changes, which could cover the interest rate on securities agreements.
“Potential safe harbor provisions will likely reduce the amount of litigation going forward,” Libra said. “It would give trustees and stakeholders comfort.”
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