Federal Reserve Board invites comment on proposal that provides default rules for certain contracts that use LIBOR reference rate

The Federal Reserve Board on Tuesday invited comment on a proposal that provides default rules for certain contracts that use the LIBOR reference rate, which will be discontinued next year. The proposal implements the Adjustable Interest Rate (LIBOR) Act, which Congress enacted earlier this year.

LIBOR, formerly known as the London Interbank Offered Rate, was the dominant reference rate used in financial contracts in recent decades, but the rate in its current form will be discontinued after June 30, 2023. In response to the planned end of LIBOR, Congress enacted the LIBOR Act to provide a uniform, nationwide solution for replacing references to LIBOR in existing contracts without adequate fallback provisions, which are provisions in the contract related to the identification of an alternative reference rate.

Consistent with the law, the proposal would replace references to LIBOR in certain contracts with the applicable Board-selected replacement rate after June 30, 2023. The contracts include those governed by domestic law that do not mature before LIBOR ends and that lack adequate fallback provisions.

The proposal identifies separate Board-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 attached proposal will be accepted for 30 days after publication in the Federal Register.

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