Cuomo Proposes LIBOR Transition Plan

New York Governor Andrew Cuomo has proposed legislation that would help prevent hundreds of billions of dollars of financial contracts from descending into chaos when the London interbank offered rate (LIBOR) expires.

Provisions to help troublesome LIBOR-linked contracts switch to replacement rates are contained in Cuomo’s state budget plan, which was published on Tuesday. Bankers, investors, and regulators see such proposals as crucial to ensuring that a large swath of the global financial system isn’t disrupted.

Various tenors of dollar LIBOR may be given a reprieve until mid-2023, in part to allow legacy contracts that lack a clear replacement rate to die off naturally. While that would help reduce the threat to financial stability, the most challenging floating-rate debt and securitizations—as well as LIBOR-based mortgages and student loans—will run on past the new deadline, making legislation critical. As home to the world’s biggest financial center, much of the debt falls under New York law.

“This legislative proposal is essential in order to provide legal certainty and minimize the adverse economic impacts for legacy LIBOR contracts,” said Tom Wipf, vice chairman of institutional securities at Morgan Stanley and chairman of the Alternative Reference Rates Committee (ARRC), the Federal Reserve-backed body guiding the transition. The governor’s decision to include it in his budget plan “marks notable progress,” he said.

The U.K. hasn’t faced the same complications around sterling LIBOR, partly because of its different exit strategy. Proposals to keep publishing a “synthetic” LIBOR number that doesn’t require trading data from panel banks would help legacy contracts that can’t transition to avoid a cliff-edge scenario at the end of 2021, when the U.K. benchmark will likely retire.

In New York, the bill would allow contracts to instead use the replacement rate recommended by the Fed Board, New York Fed, or the ARRC. The proposal includes language providing some safety measures, allowing the use of the replacement rate only in situations where it is reasonable and comparable to LIBOR.

The replacement benchmark should not “prejudice, impair, or affect any person’s rights or obligations under or in respect of any contract, security, or instrument,” according to the bill language.

Policy is often negotiated alongside fiscal plans in the New York state budget process, which is kicked off by the governor. The final budget deal is due by March 31, the end of the state’s fiscal year. The LIBOR discontinuation legislation would take effect immediately after the passage of the budget, according to the bill language.

“It’s an important first step,” said Priya Misra, head of global rates strategy at TD Securities in New York and also a member of the ARRC. “Hopefully it passes in the New York legislature and then can become a template for other states, too.”

See also:

• LIBOR Chicken and Egg
• LIBOR Still Needs a Legislative Fix
• A Guide to the World’s Post-LIBOR Benchmarks

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