Senate Bill Report SB 5946 — Protecting consumers from the discontinuance of the London interbank offered rate

Summary

Senate Bill Report on SB 5946, as of January 25, 2022, for the Senate Committee on Business, Financial Services & Trade, committee activity 1/27/22, sponsor Senator Mullet. The bill is titled an act relating to protecting consumers from the discontinuance of the London interbank offered rate. The summary of the proposed substitute says the bill provides for the transition of certain financial contracts away from LIBOR, and that if a contract has no fallback or replacement rate in effect when LIBOR is retired, the bill provides for a transition to a replacement rate selected by the Board of Governors of the Federal Reserve System. It also provides for conforming changes, continuity and enforceability of the contracts, and protections against liability.

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Full text

                            SENATE BILL REPORT
                                  SB 5946

                                      As of January 25, 2022

Title: An act relating to protecting consumers from the discontinuance of the London interbank
     offered rate.

Brief Description: Protecting consumers from the discontinuance of the London interbank
     offered rate.

Sponsors: Senator Mullet.

Brief History:
     Committee Activity: Business, Financial Services & Trade: 1/27/22.


                                     Brief Summary of Bill
           • Provides for the transition of certain financial contracts away from the
             London Interbank Offered Rate.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: Clinton McCarthy (786-7319)

     Background: The London Interbank Offered Rate (LIBOR) is an interest-rate average
     calculated from estimates submitted by the leading banks in London. Each bank estimates
     what it would be charged were it to borrow from other banks. It has been the primary
     benchmark, along with the Euribor, for short-term interest rates around the world. Effective
     December 31, 2021, LIBOR is no longer to be used to issue new loans in the U.S. It is
     being replaced by the Secured Overnight Financing Rate (SOFR). The main difference
     between SOFR and LIBOR is how the rates are produced. While LIBOR is based on panel
     bank input, SOFR is a broad measure of the cost of borrowing cash overnight collateralized
     by U.S. Treasury securities in the repurchase agreement—repo—market. The transaction
     volumes underlying SOFR regularly are around $1 trillion in daily volumes. There are
     certain contracts that rely on LIBOR and do not contemplate the cessation of its publication,



     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

Senate Bill Report                              -1-                                             SB 5946
     and do not have a fallback or replacement rate provision for the sunset of LIBOR.

     Timeline for London Interbank Offered Rate. In 2014 the U.S. Federal Reserve Board and
     the Federal Reserve Bank of New York announced the creation of the Alternative Rates
     Reference Committee (ARRC) to assess viable alternatives to LIBOR. In 2016 ARRC
     released its first report on the possible indices that could serve as a replacement to LIBOR.
     In 2017, ARRC announced a broad treasury repurchase financing rate, SOFR, as its
     recommended alternative to LIBOR. Beginning January 1, 2022, LIBOR will cease
     publishing the one-week and two month LIBOR. By the end of June, 2023, LIBOR will
     cease publishing 1-month, 3-month, 6-month, and 12-month LIBOR.

     Alabama and New York have passed bills to address the transition away from LIBOR. The
     Adjustable Interest Rate Act of 2021 passed the U.S. House of Representatives 415-9, and
     is in the U.S. Senate.

     Summary of Bill: The bill as referred to committee not considered.

     Summary of Bill (Proposed Substitute): This bill provides for the transition of certain
     financial contracts away from LIBOR, which is set to be retired in 2023. Various financial
     contracts reference LIBOR as a benchmark for prevailing interest rates and use LIBOR in
     calculating certain payments or obligations.

     If a contract referencing LIBOR does not have a fallback or replacement rate provision in
     effect when LIBOR is retired, or a replacement rate is not selected by a determining person
     as defined by the bill, the bill provides for a transition to a replacement rate selected by the
     Board of Governors of the Federal Reserve System. The bill also provides for conforming
     changes to these contracts, the continuity and enforceability of these contracts, and
     protections against liability as a result of such a transition.

     Appropriation: None.

     Fiscal Note: Not requested.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: Ninety days after adjournment of session in which bill is passed.




Senate Bill Report                              -2-                                          SB 5946


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