By Mark S. Nelson, J.D.
A bipartisan quartet of Senators, including the leadership of the Senate Banking, Housing, and Urban Affairs Committee, recently introduced the Economic Continuity and Stability Act with the goal of easing the transition to a new reference rate standard, especially for legacy contracts that may lack provisions allowing for the use of a new reference rate. The bill has substantial bipartisan backing but it also joins related legislation that passed the House but has not been taken up by the Senate.
The backers of the Economic Continuity and Stability Act, Sens. Jon Tester (D-Mont), Thom Tillis (R-NC), Sherrod Brown (D-Ohio)—Chair of the Senate Banking Committee—and Ranking Member Patrick Toomey (R-Pa), said in a press release that the bill comes with a sense of urgency as the 2023 end-date for LIBOR fast approaches and uncertainties remain about the potential for litigation over some legacy contracts.
The bill’s sponsors cited in their press release a letter from 23 banking and securities industry participants in support of the Senate legislation. According to the industry letter: “The Economic Continuity and Stability Act provides a solution for these ‘tough legacy’ contracts that have insufficient fallback language and cannot otherwise be easily amended among the parties. The legislation is narrowly crafted to allow parties to contracts that already have effective fallback provisions to opt-out of the legislation, and to only apply to tough legacy contracts so that new or future business will not be affected, while clarifying regulatory standards for the use of alternative reference rates going forward.”
Almost a year ago, the Chamber of Commerce commented on earlier LIBOR bill proposals seeking clarity for U.S. markets that must use reference rates. The Chamber of Commerce also signed on to the latest industry effort in support of the Senate bill.
In December 2021, the House passed the Adjustable Interest Rate (LIBOR) Act (H.R. 4616), sponsored by Rep. Brad Sherman (D-Calif), by a vote of 415-9. The bill defines key terms and provides for safe harbor regarding legal liability for debt instruments that have or will need to specify a benchmark replacement, such as the Secured Overnight Financing Rate (SOFR). One of the bill’s main goals is to avoid a flood of litigation over legacy debt instruments once the LIBOR changeover occurs.
The February 16, 2022, meeting notes of the Alternative Reference Rates Committee reiterate the organization’s support for federal and state legislation to ease the transition away from LIBOR. The meeting notes do not mention specific federal or state bills, but nearly a year ago the ARRC did endorse the signing into law of New York’s LIBOR legislation.
ARRC's meeting notes also observed that the LIBOR transition appears to be “progressing strongly,” an observation largely shared by the Fed’s semi-annual Monetary Policy Report recently delivered to the Senate Banking Committee by Fed Chair Pro Tempore Jerome Powell. The Monetary Policy Report, however, noted that the business lending sector of the market was lagging other financial market segments in moving away from LIBOR but that SOFR adoption in that segment had increased since the start of 2022.