Adjustable Interest Rate (LIBOR) Act Update
Financial Institutions | Denver, CO
Financial Institutions | Kennett Square, PA
On Friday, December 16, the Federal Reserve Board adopted the final rule to implement the Adjustable Interest Rate (LIBOR) Act. The final rule identifies benchmark rates based on the Secured Overnight Financing Rate (SOFR) that will replace LIBOR in certain financial contracts after June 30, 2023.
The final rule is substantially similar to the proposal, but with clarifying changes made in response to public comments. Congress enacted the LIBOR Act in March to provide a nationwide solution for tough legacy contracts that did not have clear provisions for replacing LIBOR after June 30, 2023. The final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-, three-, six-, and twelve-month LIBOR in contracts subject to the Act. The contracts include U.S. contracts that do not mature before publication of LIBOR ends on June 30, 2023 and that lack adequate fallback provisions that would replace LIBOR with a practicable replacement benchmark rate. In response to public comments, the final rule restates safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected by the Fed. It also clarifies who would be considered a “determining person” able to choose to use the replacement benchmark rate selected by the Fed for use for certain LIBOR contracts.
On the issue of synthetic LIBOR, the Fed reiterated that nothing in the statute could impair the rights of LIBOR contracts that contain appropriate fallbacks, even if there is not a trigger based on non-representativeness. The one caveat is that if there is a Determining Person and such person doesn't select a benchmark prior to the earlier of June 30, 2023 or the contractual deadline for selecting a rate, it will default to the Fed-selected benchmark.
The selected benchmark rates are as follows:
- Derivatives: Fallback Rate (SOFR) which includes the applicable spread.
- Cash Products: Contracts that reference overnight LIBOR will go to daily SOFR and all others to CME Term SOFR plus spread adjustment. For one year following the LIBOR replacement date, the spread adjustment for consumer loans will be different from non-consumer cash products. Cash transactions involving entities regulated by the Federal Housing Finance Agency (other than FHLB advances) and Federal Family Education Loan Program ABS will go to 30-day Average SOFR.
- FHLB Advances: Fallback Rate (SOFR) which includes the applicable spread.
The spread adjustments outlined by the LIBOR Act are as follows:
Please contact us to discuss this or any other LIBOR discontinuation topic in more detail.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0319
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