Experts Testify Before Senate Banking Committee on LIBOR Transition

The recent Senate Committee's hearing on the LIBOR transition featured a rare display in Washington: bipartisanship. Strong support for a federal legislative solution to address legacy LIBOR contracts came from both sides of the aisle, writes Victor Bieger, an associate in Cadwalader’s Global Litigation Group. In this article, Mr. Bieger recaps the hearing and testimony, plus he offers his own analysis.

At a hearing on the LIBOR transition before the Senate Committee on Banking, Housing, and Urban Affairs, Alternative Reference Rates Committee (“ARRC”) Chair Thomas Wipf advocated for Congressional passage of uniform, federal legislation to address LIBOR legacy contract transition issues and “avoid the disruptions, market uncertainties, and confusion that would otherwise occur when LIBOR ends.”

Mr. Wipf explained that while New York and Alabama have passed legislation at the state level, legacy contracts in other jurisdictions are not covered by the laws of those states, and federal legislation would ensure an equal outcome across the country. Mr. Wipf also explained to the Committee that the legislation’s choice of the Secured Overnight Financing Rate (“SOFR”) to serve as the replacement rate for legacy contracts was based on years of work by the ARRC to identify the most robust replacement for LIBOR. Mr. Wipf said that the ARRC supports legislation currently under consideration by the House of Representatives.

Other witnesses included:

  • Andrew G. Pizor, Staff Attorney at the National Consumer Law Center (“NCLC”), who agreed with Mr. Wipf that there is “no doubt” that SOFR has been “sufficiently vetted” and is the “most suitable replacement index” for legacy contracts. He urged Congress to go further than the legislation on the table in the House and mandate the use of SOFR as the replacement rate for all consumer contracts. Failing that, he agreed with the House approach of granting a safe harbor for voluntary use of a SOFR-based rate. While Mr. Pizor was generally supportive of such a safe harbor, he recommended that the Senate adjust the safe harbor’s scope to ensure that disreputable actors who attempt to take advantage of the LIBOR transition to harm consumers will not be protected. To address that concern, the NCLC and industry groups collaborated on new language and have shared a proposal with House and Senate staff;
  • J. Christopher Giancarlo, former CFTC Chair, who agreed with Mr. Wipf and Mr. Pizor that passing federal legislation to designate SOFR as the replacement rate for legacy contracts that cannot be privately remediated is the best path forward. He recognized that there is a “clear consensus,” which he shares, that “federal legislation is necessary to ensure smooth and efficient transition away from LIBOR.” When it comes to new contracts – which are not within the scope of the proposed legislation – he argued that institutions should be able to choose between multiple, properly qualified benchmarks that meet IOSCO standards, and that this diversity will reduce systemic risk. He noted that the legislation under consideration in the House already contains “helpful language” to ensure that the legislation – which addresses only legacy contracts, not new contracts – will not be inadvertently construed to interfere with benchmark choice in new contracts; and
  • Michael R. Bright, CEO of the Structured Finance Association, who distilled the primary goals of the federal legislation: to minimize value transfer, to use a single replacement benchmark for similar LIBOR contracts, to reduce litigation risks through a narrow safe harbor, to be narrow in scope to prevent impact on other rights and protections, and to avoid disturbing contracts that already contain a working, fallback rate.

Speaking to the legislation under consideration in the House, Ranking Member Pat Toomey (R-PA) stated that the Senate should consider “targeted” amendments to ensure that qualified non-SOFR benchmark rates are not disfavored in new contracts. Senator Toomey expressed concern over recent comments from Michael J. Hsu, Acting Comptroller of the Currency, indicating that the OCC will focus its initial supervisory efforts on the use of non-SOFR rates. Senator Toomey warned that this approach would be akin to applying “heightened scrutiny to non-SOFR rates” in new contracts, which he characterized as part of a broader effort by “Biden administration financial regulators” to criticize the use of benchmarks other than SOFR. He agreed with several witnesses that, when it comes to “tough legacy contracts,” it is “appropriate to mandate a SOFR-based index.” He described the legislation under consideration in the House as a “reasonable approach” to dealing with legacy contracts and urged the Senate to “carefully review” it.

Commentary by Victor Bieger

The Senate Committee’s hearing on the LIBOR transition featured a rare display in Washington: bipartisanship. Strong support for a federal legislative solution to address legacy LIBOR contracts came from both sides of the aisle. The Committee Chair, Senator Sherrod Brown (D-OH), emphasized that Congress “need[s] to act” and Ranking Member Toomey agreed that the “unique and anomalous circumstances” presented by the LIBOR transition “require action by Congress.”

A sense of shared purpose was on display at the witness table as well. Andrew G. Pizor – a staff attorney at the National Consumer Law Center – commented on the unlikely alliance that has come together to support the legislation, remarking that while consumer advocates “generally oppose safe harbors from litigation,” his organization agreed that, in “this unique situation,” a properly tailored one was the “appropriate” way to ensure a smooth transition from LIBOR.

And when asked by Senator Catherine Cortez Masto (D-NV) whether anyone at the witness table opposed the selection of SOFR as the legislation’s replacement rate of choice for legacy contracts in its scope, all of the witnesses voiced their support for a SOFR-based solution. With the NCLC and industry groups having worked out, in advance of the hearing, a compromise solution to one of the NCLC’s last remaining concerns about the operation of the safe harbor, the federal LIBOR legislation appears poised to move swiftly toward passage.

This article,”Experts Testify Before Senate Banking Committee on LIBOR Transition,” first appeared on Cadwalader Cabinet on November 2, 2021.

Photo Credit: “US Capitol Building” by ttarasiuk is licensed under CC BY 2.0

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Victor Bieger is an associate in Cadwalader’s Global Litigation Group. He represents financial institutions, corporations, and their officers and directors in a range of complex litigation matters in state and federal court. Prior to joining Cadwalader, Victor served as a law clerk to the Honorable Gary F. Traynor of the Delaware Supreme Court and the Honorable Joseph F. Leeson Jr. of the U.S. District Court for the Eastern District of Pennsylvania. Prior to his clerkships, he was an associate in the New York office of Dechert LLP.

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