IBOR transition: USD LIBOR tough legacy legislation signed into law

On 6 April 2021, the State of New York's legislative solution to the problem of "tough legacy" USD LIBOR contracts, securities, and instruments was signed into law, with immediate effect.

The new law largely replicates draft proposals published by the Alternative Reference Rates Committee (ARRC) last year, and amends the New York General Obligations Law to introduce new statutory provisions that will apply upon the discontinuation or loss of representativeness of USD LIBOR. As announced by IBA¹  and the UK's Financial Conduct Authority in March 2021, these dates (each, a cessation date) are now confirmed, as follows:

• on 31 December 2021, publication of one-week and two-month USD LIBOR will cease;
• on 30 June 2023, publication of overnight and twelve-month USD LIBOR will cease; and
• on 30 June 2023, one-month, three-month and six-month USD LIBOR will cease to be representative of the underlying market.

The new legislative provisions apply to New York law governed contracts, securities and instruments under which USD LIBOR is used to make any calculation or determination. The core of the new legislation is the mandatory replacement, by operation of law, of the applicable USD LIBOR rate under any New York law governed contract, security or instrument that either contains no fallback provisions or falls back to a replacement rate based on USD LIBOR (e.g. to the last reported rate). These "tough legacy" contracts, securities and instruments will be automatically amended on the applicable cessation date, so that references to USD LIBOR are replaced with references to SOFR, as adjusted to incorporate any spread adjustment and to make any conforming changes recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the ARRC with respect to that particular type of contract, security or instrument (Adjusted SOFR). However, contracts, securities, and instruments in respect of which either (i) interpolation between unaffected tenors is available, or (ii) the documentation permits the selection of an alternative, unaffected, tenor, are excluded from the scope of the automatic replacement provisions.

Further, where a USD LIBOR-referencing contract, security or instrument requires or permits fallback to either (i) an alternative USD LIBOR-based rate, or (ii) a broadly comparable or commercially equivalent rate, the new legislation explicitly permits (but does not oblige) the "determining person" to replace the relevant USD LIBOR rate with Adjusted SOFR, provided that any such replacement is:

• irrevocable;
• made by the earlier of the applicable cessation date and the permitted date under the relevant documentation; and
• used for all relevant determinations after the applicable cessation date.

Finally, following the occurrence of a "LIBOR discontinuance event" under the new law (which, for certain tenors, will include the cessation announcements discussed above), fallback provisions in any in-scope contract, security, or instrument that provide for a benchmark replacement based on a poll, quotes, interbank lending, or similar methods, are to be disregarded and deemed null and void without any effect.

The legislation includes substantial safe harbor and continuity of contract provisions.

Adoption of this legislation by the State of New York is another important milestone in the LIBOR transition process. Nationally, there appears to be widespread support for U.S. Congress to adopt federal laws based on the new legislation, though it remains to be seen whether other states will follow New York's lead.

Similar regimes are also being implemented in the UK and the EU by way of amendments to the UK Benchmarks Regulation and the EU Benchmarks Regulation, respectively. For more information, see our LIBOR Transition Hub.

1. ICE Benchmark Administration, LIBOR's administrator.