The New York State Legislature passed a statutory solution to reduce the risks associated with the transition away from USD LIBOR. New York Senate Bill 297B/Assembly Bill 164B (the “NY Bill”), proposed by the Alternative Reference Rates Committee (“ARRC”) and sponsored by New York Senator Kevin Thomas, was designed to solve transition issues for legacy LIBOR contracts that have insufficient fallback language.
The NY Bill permits indices recommended by the ARRC to be “appropriate replacements” for LIBOR in financial contracts that otherwise would be negatively affected by the transition from LIBOR (i.e., existing contracts that incorporate ambiguous fallback language or do not address the end of LIBOR in 2021). Because many of the financial products and contracts referencing LIBOR are under New York’s jurisdiction, the legislation is expected to diminish the burden on New York’s courts resulting from legal uncertainty associated with the transition from LIBOR.
Any financial products and contracts the NY Bill’s scope will be transitioned automatically by operation of law from the relevant USD LIBOR rate to the “recommended benchmark replacement” rate. This is defined in the legislation as the appropriate adjusted SOFR plus a spread adjustment to be selected by the US regulators.
The trigger for transition has already been activated by the Financial Conduct Authority (FCA) announcement that all USD LIBOR settings will cease to be provided by any administrator or will no longer be representative immediately after (i) the end of the year (December 31, 2021), in the case of one-week and two-month USD settings, and (ii) June 30, 2023, in the case of the remaining USD settings. However, the parties to the financial products and contracts can opt out of the operation of the statute to instead switch to a reference rate of their own choice at any time if mutually agreed upon.
The NY legislation states that neither the discontinuation of USD LIBOR nor the selection/use of the “recommended benchmark replacement” (or related conforming changes) will affect the continuity of any contracts referencing LIBOR. This usefully means that the effect of the NY legislation cannot be relied upon as impacting contractual rights, to discharge or excuse performance, to terminate/suspend performance, to constitute a breach, or to void/nullify the contract in question.
The NY Bill includes a broad form of safe harbor from other claims for those whose contracts are switched to the “recommended benchmark replacement” (whether as a result of the mandatory or discretionary provisions of the legislation), which is intended to provide comfort to market participants in adopting that benchmark proactively and reduce the risk of speculative litigation following the transition event. The wording of the safe harbor from claims is broad and includes the following: “…no person shall have any liability for damage to any person or be subject to any claim or request for equitable relief arising out of or related to the selection or use of [the recommended benchmark replacement]…and such selection or use of [the recommended benchmark replacement] shall not give rise to any claim or cause of action by any person in law or in equity.”
The NY Bill also states that its provision should not be interpreted as creating any negative inference or negative presumption regarding the validity or enforceability of: (a) replacements for USD LIBOR that are not the “recommended benchmark replacement”; (b) other ways of calculating the spread adjustment; or (c) “any changes, alterations or modifications to or in respect of a contract, security or instrument that are not benchmark replacement confirming changes”.
The NY Bill is not strictly confined to NY (or even US) law contracts. The only express relevant limitation on its scope is that it will apply only to contracts referencing USD LIBOR rates.
The ARRC has noted that there may still be a significant portion of contracts that will mature after the respective Dec. 31, 2021 and June 30, 2023 cessation dates which have no other effective means to replace LIBOR upon its cessation, and that the Bill would address such contracts written under New York law, which governs many of the financial products and agreements referencing LIBOR. For further information on the upcoming cessation dates for all LIBOR settings announced by LIBOR’s administrator and regulator.
The NY Bill can be found at: https://www.nysenate.gov/legislation/bills/2021/s297/amendment/b.