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Financial Services Law Insights and Observations


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  • Fed issues NPRM for default rules on certain LIBOR contracts

    On July 19, the Federal Reserve Board announced in a notice of proposed rulemaking (NPRM) that it is soliciting comments on a proposal that provides default rules for certain contracts that use LIBOR, which would implement the Adjustable Interest Rate (LIBOR) Act. As previously covered by InfoBytes, LIBOR will be discontinued after June 30, 2023. The NPRM would establish benchmark replacements for the one-, three-, six-, and 12-month “tenors” of LIBOR where a given contract does not have terms that provide for the use of any substitute for the specified LIBOR rate. According to the NPRM, “[o]f particular concern are so-called ‘tough legacy contracts,’ which are contracts that reference USD LIBOR and will not mature by June 30, 2023, but which lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of USD LIBOR.” The proposal identifies separate Fed-selected replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. As required by the law, each proposed replacement rate is based on the Secured Overnight Financing Rate. Comments on the proposal are due 30 days after publication in the Federal Register.

    Find continuing InfoBytes coverage on LIBOR here.

    Bank Regulatory Federal Reserve LIBOR Federal Issues ARRC SOFR

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  • ARRC recommends transition steps for legacy USD LIBOR cash product contracts

    Federal Issues

    On July 11, the Alternative Reference Rates Committee (ARRC) released the LIBOR Legacy Playbook to help support the transition away from legacy LIBOR cash products. ARRC estimated that approximately $74 trillion in legacy USD LIBOR exposures will mature after June 30, 2023, when the remaining USD LIBOR panels will cease. Of this amount, roughly $5 trillion are in cash products, which do not carry the benefit of a protocol process that will allow market participants to adopt a uniform set of robust fallbacks or a simple mechanism to determine which contracts are covered by those fallbacks. Rather, cash products have a range of fallbacks, the ARRC said, explaining that “currently there is no simple way, other than in many cases manual effort, to determine what the fallback for each contract is. Careful work will be needed to communicate the associated rate changes to counterparties to these contracts.”

    The Playbook includes a compilation of publications by the ARRC and other available reference material to assist market participants in ensuring that the transition from LIBOR is operationally successful. The Playbook also recommends steps for market participants to take to successfully implement fallbacks for cash products, including: (i) thoroughly assessing the fallbacks that are embedded (either contractually or through legislation) in every USD LIBOR contract; (ii) remediating these contracts where feasible to reference the Secured Overnight Financing Rate prior to June 30, 2023; and (iii) adopting plans to communicate each contract’s fallback with affected parties for remaining LIBOR contracts, and making sure sufficient resources are allocated to ensure that rate changes are successfully implemented. The ARRC stressed that its recommendations are voluntary and that market participants must make independent decisions about how best to transition existing contracts to an alternative rate upon the cessation of USD LIBOR.

    Find continuing LIBOR InfoBytes coverage here.

    Federal Issues ARRC LIBOR SOFR

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  • CFPB finalizes LIBOR transition rule

    Agency Rule-Making & Guidance

    On December 7, the CFPB issued a final rule facilitating the transition from LIBOR for consumer financial products. (Corrected rule published February 16, 2022.) The final rule amends Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans.

    • Closed-end provision amendments provide examples of indices that meet certain Regulation Z standards, which may be used to replace LIBOR indices. To assist creditors in determining a comparable index for closed-end loans, the final rule identifies certain Secured Overnight Financing Rate (SOFR)-based spread-adjusted indices recommended by the Alternative Reference Rates Committee (ARRC) for consumer products. The final rule also provides a non-exhaustive list of factors for creditors to use when determining whether a replacement index meets the Regulation Z “comparable” standard.
    • Updated post-consummation disclosure sample forms for certain adjustable-rate mortgage loan products replace LIBOR references with a SOFR index.
    • Amendments related to open-end loans add LIBOR-specific provisions, which allow creditors for home equity lines of credit (HELOCs) and credit card issuers to transition existing accounts using a LIBOR index to a replacement index on or after April 1, 2022, provided certain conditions are met. Creditors and card issuers are provided a non-exhaustive list of factors to consider when determining whether a replacement index meets Regulation Z’s “historical fluctuations are substantially similar” standard. In addition to identifying certain ARRC recommended SOFR-based spread-adjusted indices for consumer products, the final rule also lists the Prime rate as an example of an index that also meets this standard.
    • The final rule also addresses change-in-terms notice provisions for HELOCs and credit card accounts related to the disclosure of margin reductions once LIBOR ends. Additionally, the final rule discusses how the requirement for reevaluating rate increases on credit card accounts applies to the transition from using LIBOR indices to a replacement index.

    The final rule takes effect April 1, 2022, with the exception of certain provisions related to an amendment to appendix H which is effective October 1, 2023. Additionally, while the mandatory compliance date for change-in-terms notice requirement revisions is October 1, 2022, the mandatory compliance date for all other final rule provisions is April 1, 2022. Furthermore, the Bureau “is reserving judgment about whether to include references to a 1-year USD LIBOR index and its replacement index in various comments; the Bureau will consider whether to finalize comments proposed on that issue in a supplemental final rule once it obtains additional information.”

    CFPB Director Rohit Chopra warned that “[n]o new financial contracts may reference LIBOR as the relevant index after the end of 2021,” and that beginning June 2023, “LIBOR can no longer be used for existing financial contracts.” Chopra further emphasized that creditors and servicers must continue to prepare for LIBOR’s cessation and should take clear and orderly steps to reduce risk and mitigate compliance, legal, financial, and operational risks. 

    Agency Rule-Making & Guidance CFPB LIBOR SOFR ARRC Consumer Finance Regulation Z TILA

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  • ARRC recommends SOFR fallbacks for one-week, two-month LIBOR contracts

    Federal Issues

    On December 3, the Alternative Reference Rates Committee (ARRC) under the New York and Alabama LIBOR Relevant Recommending Body, released a statement recommending forms of the Secured Overnight Financing Rate (SOFR) and associated spread adjustments to replace references to 1-week and 2-month USD LIBOR in certain contracts affected by New York and Alabama state LIBOR legislation. The statement comes “with just one month until no new LIBOR and the cessation of these two USD LIBOR tenors,” noting that these recommendations are “important for the legacy contracts that rely on those tenors.”  Under the states’ LIBOR legislation, ARRC serves as the “Relevant Recommending Body,” while SOFR is the recommended rate and alternative to USD LIBOR.

    As previously covered by InfoBytes, ARRC announced its recommendation of CME Group’s forward-looking SOFR term rates, following the completion of key changes in trading conventions on July 26 under the SOFR First initiative. According to the recently released statement, ARRC recommends applying SOFR only to the narrow set of LIBOR-based contracts that are affected by the states’ LIBOR legislation, which are generally contracts with no fallbacks or fallbacks that reference LIBOR. For contracts with fallbacks that give a party discretion to decide on a replacement rate, the state laws also provide a safe harbor if that party chooses the SOFR-based rate and conforming changes recommended by ARRC. ARRC also published a set of frequently asked questions regarding the application of New York state law.

    Federal Issues LIBOR ARRC New York Alabama SOFR

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  • OCC to focus supervisory efforts on non-SOFR rates after LIBOR ends

    Federal Issues

    On October 26, acting Comptroller of the Currency Michael J. Hsu warned banks not to be complacent when transitioning away from LIBOR. Hsu reiterated that federal regulators will not allow new contracts that use LIBOR as a reference rate after December 31. Hsu stressed that banks must look outside of activities that directly involve LIBOR exposure, such as lending, derivatives activities, and market-making capacities, to screen for LIBOR exposure in other contexts, such as LIBOR-based loan participation interests or as part of an instrument for a bank’s investment or liquidity portfolio paying LIBOR-based income or otherwise reflecting LIBOR exposures. As previously covered by InfoBytes, the CFPB, Federal Reserve Board, FDIC, NCUA, and OCC recently released a joint statement providing supervisory considerations for institutions when choosing an alternative reference rate. Hsu addressed the use of these alternative reference rates and reminded banks that they are expected to be able to demonstrate that their replacement rate is robust and appropriately tailored to their risk profile. He further commented that because the Secured Overnight Financing Rate (SOFR) “provides a robust rate suitable for use in most products, with underlying transaction volumes that are unmatched by other alternatives,” the OCC will initially focus its supervisory efforts on non-SOFR rates.

    Federal Issues OCC LIBOR Bank Regulatory Agency Rule-Making & Guidance CFPB Federal Reserve FDIC NCUA SOFR

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  • ARRC recommends firms reduce use of LIBOR before year end

    Federal Issues

    On October 14, the Alternative Reference Rates Committee (ARRC) recommended that all market participants take proactive action now to reduce their use of U.S. dollar LIBOR to promote a smooth end to new LIBOR contracts by year end. ARRC referred to a joint statement issued last November by the Federal Reserve Board, FDIC, and OCC encouraging banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable, but by December 31, 2021 at the latest. (Covered by InfoBytes here.) According to the agencies, entering into contracts after this date will create safety and soundness risks given consumer protection, litigation, and reputation risks at stake. ARRC recommended that firms adopt its selected alternative, the Secured Overnight Financing Rate, which is consistent with steps that several firms have already taken to ensure they are in the position to meet the supervisory guidance. This includes “setting targets for reductions in new LIBOR activity, limiting the range of LIBOR offerings, and implementing internal escalation exceptions processes around new LIBOR contracts for narrow cases in line with supervisory guidance.” 

    Federal Issues ARRC LIBOR SOFR Federal Reserve FDIC OCC Bank Regulatory

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  • HUD and Fed consider transition from LIBOR

    Agency Rule-Making & Guidance

    On October 5, HUD issued an advanced notice of proposed rulemaking (ANPRM) seeking comments regarding the transition from the London Interbank Offered Rate (LIBOR) to alternate indices on adjustable rate mortgages (ARMs). According to the ANPRM, most ARMs insured by FHA are based on LIBOR, which is likely to become uncertain after December 31 and to no longer be published after June 30, 2023. Due to the uncertainty, HUD has begun to transition away from LIBOR and has approved the Secured Overnight Financing Rate (SOFR) index in some circumstances. In recognizing that there may be certain difficulties for mortgagees transitioning to a new index, HUD “is considering a rule that would address a Secretary-approved replacement index for existing loans and provide for a transition date consistent with the cessation of the LIBOR index.” Furthermore, HUD “is also considering replacing the LIBOR index with the SOFR interest rate index, with a compatible spread adjustment to minimize the impact of the replacement index for legacy ARMs.” Comments on the ANPRM are due by December 6.

    The same day, Federal Reserve Vice Chair for Supervision Randal K. Quarles spoke at the Structured Finance Association Conference in Las Vegas, Nevada, reminding participants that they should cease utilizing LIBOR by the end of the year, “no matter how unhappy they may be with their options to replace it,” and further warned that the Fed will supervise firms accordingly. Quarles emphasized that, “[g]iven the availability of SOFR, including term SOFR, there will be no reason for a bank to use [LIBOR] after 2021 while trying to find a rate it likes better.”

    Agency Rule-Making & Guidance HUD LIBOR Federal Register Federal Reserve SOFR Adjustable Rate Mortgage Mortgages Bank Regulatory

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  • SEC’s Gensler supports SOFR

    Federal Issues

    On September 20, SEC Chair Gary Gensler issued remarks before the Alternative Reference Rates Committee (ARRC) regarding the transition from the London Interbank Offered Rate (LIBOR) to a “preferable” Secured Overnight Financing Rate (SOFR). Gensler expressed his concerns for the Bloomberg Short-Term Bank Yield Index (BSBY), citing that BSBY's flaws are similar to those of LIBOR, including that “[b]oth benchmarks are based upon unsecured, term, bank-to-bank lending.” He also pointed out that the BSBY term is “underpinned primarily by trades of commercial paper and certificates of deposit issued by 34 banks,” and “the median trading volume behind three-month BSBY is less than $10 billion per day.” In expressing his support for SOFR, Gensler stated that SOFR is based on an approximate trillion-dollar market.

    Federal Issues LIBOR SEC ARRC SOFR

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  • ARRC announces recommendation for SOFR term rate

    Federal Issues

    On July 29, the Alternative Reference Rates Committee (ARRC) announced its recommendation of CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates, following the completion of key changes in trading conventions on July 26 under the SOFR First initiative. As previously covered by InfoBytes, ARRC announced in March that it “will not be in a position to recommend a forward-looking [SOFR term rate] by mid-2021.” However, the success of the SOFR First convention change, “along with the continued growth in SOFR cash and derivatives markets, has allowed the ARRC to recommend SOFR Term Rates, consistent with the principles and indicators it established to do so.” Federal Reserve Board Vice Chair for Supervision Randal K. Quarles noted that “[a]ll firms should be moving quickly to meet our supervisory guidance advising them to end new use of LIBOR this year.”

    In addition to the announcement, ARRC released a factsheet outlining past milestones, SOFR’s strengths, and anticipated milestones. ARRC noted that SOFR is “the best replacement” for USD LIBOR because it is (i) deep enough to “not dry up in times of market stress”; (ii) resilient against market evolution; and (iii) entirely transaction-based, and therefore cannot be easily manipulated.

    Federal Issues ARRC LIBOR SOFR Federal Reserve Bank Regulatory

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  • Agencies call for "robust" alternate reference rates

    Agency Rule-Making & Guidance

    On June 11, the Treasury Department, OCC, SEC, and the FDIC released separate statements following the meeting of the Financial Stability Oversight Council concerning the LIBOR transition. Acting Comptroller of the Currency Michael Hsu said it is “imperative that banks continue careful planning” for the transition away from LIBOR to an alternate reference rate, such as the Secured Overnight Financing Rate (SOFR), the Alternate Reference Rates Committee’s (ARRC) preferred LIBOR alternative. As previously covered by InfoBytes, the ARRC released the SOFR “Starter Kit” in August 2020, which includes three factsheets that are the result of a series of educational panel discussions held by ARRC. The various panel discussions were designed to educate on “the history of LIBOR; the development and strengths of SOFR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR.” SEC Chairman Gary Gensler also expressed support for SOFR, calling it a “preferable” alternate rate. In addition, Gensler shared his concerns regarding the Bloomberg Short-Term Bank Yield Index (BSBY), which some commercial banks are advocating as a replacement for LIBOR. Gensler said the BSBY is based upon unsecured, term, bank-to-bank lending, which is like LIBOR. Treasury Secretary Janet Yellen encouraged market participants to “act promptly to support the switch in derivatives from LIBOR to SOFR.” She noted that “[w]hile important progress is being made in some segments of the market, other segments, including business loans, are well behind where they should be at this stage in the transition.” FDIC Chairman Jelena McWilliams pointed out that the “FDIC continues to focus on the LIBOR transition and to assess institutions’ practices and plans to adopt a replacement rate and address legacy contracts before December 31 of this year.” However, she disclosed that “the FDIC does not endorse any particular alternative reference rate.”

    Agency Rule-Making & Guidance Department of Treasury OCC SEC FDIC LIBOR SOFR ARRC Of Interest to Non-US Persons Bank Regulatory

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