US Libor transition unlikely to get swift legal help sought from New York

23 March 2020 4:48pm

20 March 2020 by Neil Roland

US Libor transition authorities are unlikely to get a change in law they hoped would come this year from New York state authorities who are giving urgent priority to the coronavirus pandemic and its economic impacts.

That puts federal policymakers in a corner as they try to determine what to do about many existing Libor-linked financial contracts that lack an alternative provision to kick in when the benchmark is discontinued.

Thousands of lawsuits could be filed by counterparties to derivatives cash contracts such as securitizations and floating rate notes without more legal certainty.

“You’d have no clues as an investor what’s going to happen,” David Bowman, a senior US Federal Reserve official, told a Securities and Exchange Commission committee forum last month. “I assume you’d all go to court, and they’d get tied up for a long time, and it is a huge systemic problem.”

This Fed’s Alternative Reference Rates Committee drafted a bill earlier this month that it hoped would be passed to yield more legal certainty when Libor ceases publication, targeted for the end of 2021. “Legislative action in New York is urgently needed,” said the committee, which is overseeing the transition to the market-based Secured Overnight Financing Rate.

The proposed law would, among other things, prohibit any party to a contract from refusing to carry out its obligations as a result of Libor’s discontinuation. The vast majority of Libor-linked contracts fall under New York law.

Market participants have been pushing for a remedy for the challenge posed by many existing Libor-linked cash products. Changing the benchmark requires approval by 100 percent of noteholders. It’s very difficult, if not impossible, to identify all these noteholders.

New York legislature

It appears unlikely that the draft Libor bill will draw the attention to be introduced, passed by the New York State Legislature by its June 2 recess, and signed by Governor Andrew Cuomo.

That still leaves the possibility that lawmakers could address the Libor problem next year, depending on what happens with the pandemic and its economic impact.

But it has been ravaging New York state, which has the worst viral outbreak in the country with more than one-third of the 11,723 confirmed US cases.

Governor Cuomo and the Democrat-led legislature have responded with alacrity, but much remains on their agenda. The governor today ordered all non-essential businesses to close and all non-essential members of the workforce to stay home.

Earlier this week, he announced a tentative agreement with legislative leaders to provide employees with sick leave and job protection if they have to stay home.

Lawmakers last week approved a $40 million appropriation to help fight the spread of the virus. Meanwhile, a state budget is due by the end of the month.

“Every single thing, every single assumption that we’ve had has got to be challenged, and it’s got to be adjusted for the reality we are in,” Senate Majority Leader Andrea Stewart-Cousins said this week, according to Spectrum local news service. “So I’m not assuming anything. We are all looking at everything a day at a time.”