Global Financial Institutions Coverage

5 7 To accomplish these objectives, the proposed legislation has mandatory and permissive application depending on the nature of the agreement. On a mandatory basis, the proposed legislation: • overrides legacy fallback language that references a LIBOR-based rate, such as "last quoted LIBOR," in favor of the legislation's recommended benchmark rate; • nullifies legacy fallback language that requires polling for LIBOR or other interbank funding rates; and • inserts the legislation's recommended benchmark replacement as the LIBOR fallback in legacy contracts that do not contain fallback language. There is no override of legacy fallback language that expressly references a non-LIBOR in based rate (e.g., the prime rate) as is common in business loans. On a permissive basis, the proposed legislation: • allows parties with the right to select their agreements' governing fallback rates to avail themselves of the litigation safe harbor if they select the ARRC-recommended benchmark replacement rate; and • permits parties to mutually opt out of the proposed legislation's mandatory application at any time. The proposed legislation does not categorically exclude any product from its definitions. Accordingly, ARRC encourages parties for whom the legislation is not effective to exercise their opt-out rights and negotiate bilaterally. Further, the statute would provide safe-harbor protection with respect to conforming changes in documents made to accommodate administrative/operational adjustments for the statutory endorsed benchmark rate. This proposed US approach is based partly upon New York legislation enacted in 1998 to address the discontinuation of sovereign currencies being replaced by the euro. Several financial products have procedural and substantive aspects that complicate or prevent amending the underlying legacy contracts on which they are based. The proposed legislation would provide a solution for these products by amending their LIBOR-referencing fallback provisions statutorily. UK PROPOSALS TO ENHANCE REGULATORY POWERS In line with recommendations made by the UK RFR Working Group, the UK Government announced on June 23, 2020 its intention to bring forward legislation to alleviate the issues and risks around tough legacy contracts (contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended). 3 However, unlike the EU and the US (see below), the UK is not intending to amend LIBOR- referencing contracts governed by UK law by operation of law. Instead, the Government is proposing in the forthcoming Financial Services Bill to grant powers to the FCA by the end of 2021 under the UK's Benchmark Regulation to manage an orderly transition from LIBOR and manage and direct any wind-down period, pre-cessation of LIBOR, including requiring benchmark administrators to have plans in place to manage the orderly winddown of a benchmark. Other proposals include expanding the circumstances under which the FCA may require a benchmark administrator to change a benchmark's methodology, in particular where the FCA determines that the benchmark's representativeness will not be restored. UK legislation will also be brought forward to ban the use of a benchmark whose representativeness will not be restored. This will be accompanied by a power for the FCA to specify limited continued use in legacy contracts. The FCA issued a statement on the same day as the Chancellor released his statement, confirming that it would publish policy statements on how it would approach using its powers, particularly the power to direct an administrator to change a benchmark's methodology. 4 The FCA states that it will seek industry input on feasible and robust methodology changes to mitigate against the risk of published LIBOR values differing from the value of fallbacks that come into effect. This official intervention is controversial, in that the benchmark administrator and its committees could potentially lose control over how the benchmark operates, yet remain liable to regulators for its operation and face other legal risks resulting from external decisions. Notably, the regulator stressed that industry should continue with efforts to transition away from using LIBOR, including by putting arrangements in place to deal effectively with legacy contracts. According to the FCA, the purpose of the legislation is to reduce the risks associated with tough legacy contracts. In the FCA's view, the only path for certainty over contracts is for market participants to proactively transition away from LIBOR before the end of 2021. 3. Written statement by: Rishi Sunak, Chancellor of the Exchequer, Financial Services Legislation, June 23, 2020, HCWS307. 4. FCA statement on planned amendments to the Benchmarks Regulation, June 23, 2020 and the further statement issued by the FCA on the same day, "Benchmarks Regulation – proposed new powers." "[N]o one can guarantee that there will be a legislative Hail Mary. And even if there is, it would not displace non-LIBOR fallbacks that are written into existing contracts, which may not be the alternative you'd prefer. The lesson here is that for every exposure you have to LIBOR, do everything you can right now to make sure it provides for the end of LIBOR in clear terms. Do not wait for the state cavalry to ride to your rescue." — Michael Held, General Counsel, Federal Reserve Bank of New York (Speech at the IMN Virtual Investors' Conference on LIBOR, Sept. 29, 2020)

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