The Federal Reserve Board said today it has adopted a 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 certain clarifying changes made in response to public comments.
LIBOR, which stands for the London Interbank Offered Rate, was the main benchmark rate used in financial contracts for decades. It was, however, fragile and subject to manipulation, and U.S. dollar LIBOR panels will end after June 30.
Congress enacted the LIBOR Act in March to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR after June 30, 2023, the Federal Reserve said.
Under the law, the final rule identifies benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the act. These contracts include U.S. contracts that do not mature before LIBOR ends and that lack adequate "fallback" provisions that would replace LIBOR with a practicable replacement benchmark rate.
In response to comments, the Fed said, the final rule restates safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected by the Federal Reserve Board, and clarifies who would be considered a "determining person" able to choose to use the replacement benchmark rate selected by the board for use for certain LIBOR contracts.
Consistent with the LIBOR Act, the final rule also ensures that LIBOR contracts adopting a benchmark rate selected by the board will not be interrupted or terminated following LIBOR's replacement.
The final rule goes into effect 30 days after publication in the Federal Register. You can read the full final rule here.
