LIBOR Transition

The President has signed into law legislation based on a House-passed bill1 to prevent the chaos feared when the use of the LIBOR benchmark ceases for legacy contracts that lack language authorizing reliance on an alternative, “fallback” rate. The measure in no way obviates the obligation U.S. financial institutions have to various regulators to abandon LIBOR where fallback language exists or in new contracts. Instead, the measure clarifies legal risk in eligible legacy contracts to prevent disruptive disputes that could expose financial institutions and even the system as a whole to significant operational or even credit risk. SOFR is the preferred benchmark replacement, providing considerable stability to derivatives contracts subject to U.S. law. Other legacy LIBOR contracts are likely to get like-kind certainty when the Fed exercises its authority to provide for relevant benchmarks and/or if various permissible adjustments to SOFR suffice. However, nothing in the legacy provisions applies to new contracts, where LIBOR is clearly prohibited but benchmark discretion remains.