Federal Reserve issues proposal on default rules for LIBOR reference rate

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The Federal Reserve Board is seeking public comment on a proposal that provides default rules for certain contracts that use the LIBOR reference rate, which will be discontinued next year.

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LIBOR, formerly known as the London Interbank Offered Rate, was the dominant reference rate used in financial contracts in recent decades. However, the rate in its current form will be discontinued after June 30, 2023.

In response, Congress enacted the Adjustable Interest Rate LIBOR Act to provide a uniform, nationwide solution for replacing references to LIBOR in existing contracts without adequate fallback provisions — or provisions related to identifying an alternative reference rate.

This new Fed proposal implements the LIBOR Act. Consistent with the law enacted this year, 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.

Further, the Fed proposal identifies separate board-selected replacement rates for derivatives transactions, contracts where a government-sponsored enterprise is a party, and all other affected contracts. In addition, each proposed replacement rate is based on the Secured Overnight Financing Rate, which is required by the law.

Comments on the proposal will be accepted for 30 days after publication in the Federal Register.

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