On March 15, 2022, the Consolidated Appropriations Act, 2022 – which included the Adjustable Interest Rate (LIBOR) Act – was signed into law. The LIBOR Act is meant to address concerns with ceasing the use of LIBOR by creating a uniform process for replacing LIBOR in those existing contracts that do not provide for the use of a replacement benchmark rate. Currently, the LIBOR replacement date is set for the first London banking day after June 30, 2023.

Here are a few things that financial institutions need to know about the new law:

1. The LIBOR Act defines “LIBOR” as the overnight and the 1-, 3-, 6-, and 12-month tenors of U.S. dollar LIBOR. Excluded from the definition are the 1-week and 2-month tenors of U.S. dollar LIBOR.

2. While the LIBOR Act defines “IBOR” as LIBOR, any tenor of non-U.S. dollar currency rates formerly known as the London interbank offered rate as administered by ICE Benchmark Administration Limited, and any other interbank offered rates that are expected to cease, it is unclear whether the LIBOR tenor limitations also apply to non-LIBOR IBOR benchmarks.

3. The Board of Governors of the Federal Reserve System (Federal Reserve Board) will select the benchmark rate – which will be based on the Secured Overnight Financing Rate (SOFR) and will include the tenor spread adjustments defined in the Act – to be used for LIBOR contracts that do not have a fallback provision or where the fallback provision does not identify either a replacement benchmark or a person with the authority to determine the benchmark replacement.

4. Even if the LIBOR contract contains a fallback provision, the provision will be deemed void if the replacement benchmark rate is based on a LIBOR value (except to account for the difference between LIBOR and the benchmark replacement) or if the person with authority to determine the benchmark replacement is to do so through conducting “a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates[.]”

5. A person given authority to determine the benchmark replacement for LIBOR contracts may select the benchmark rate selected by the Federal Reserve Board; however, such a selection will be irrevocable. If the determining person does not select a benchmark replacement by the earlier of either the LIBOR replacement date (the first London banking day after June 30, 2023) or the latest date for selecting a benchmark replacement as required in the LIBOR contract, the Federal Reserve Board-selected benchmark replacement rate will apply (i.e. SOFR).

6. Use of the Federal Reserve Board-selected benchmark replacement rate affords financial institutions continuity of contract and safe harbor provisions. Specifically, financial institutions are protected against claims that arise from the selection, use, or implementation of the Board-selected benchmark replacement rate and conforming changes.

7. Banks are not required to use a SOFR-benchmark for non-IBOR loans. Rather, banks may use any benchmark that they deem appropriate based on the funding model, customer needs, the product, risk profile, risk management capabilities, and operational capabilities of the bank. Further, federal supervisory agencies may not initiate an enforcement action or issue a matter requiring attention (MRA) solely because the benchmark used is not SOFR.

The Federal Reserve Board is required to promulgate implementing regulations within 180 days after the enactment of the LIBOR Act. We will continue to keep you updated on the Federal Reserve Board’s progress towards implementing regulations and as we approach the benchmark replacement date.