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A00164 Summary:

BILL NOA00164B
 
SAME ASSAME AS S00297-B
 
SPONSORZebrowski
 
COSPNSRMcDonald, Griffin, Rajkumar
 
MLTSPNSR
 
Add Art 18-C §§18-400 - 18-403, Gen Ob L
 
Enacts provisions relating to the discontinuance of LIBOR (the London interbank offered rate); prohibits parties from refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement; establishes that the replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR; provides a safe harbor from litigation for the use of the recommended benchmark replacement.
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A00164 Actions:

BILL NOA00164B
 
01/06/2021referred to judiciary
03/09/2021amend (t) and recommit to judiciary
03/09/2021print number 164a
03/11/2021amend and recommit to judiciary
03/11/2021print number 164b
03/24/2021reported referred to rules
03/24/2021reported
03/24/2021rules report cal.43
03/24/2021ordered to third reading rules cal.43
03/24/2021passed assembly
03/24/2021delivered to senate
03/24/2021REFERRED TO JUDICIARY
03/24/2021SUBSTITUTED FOR S297B
03/24/20213RD READING CAL.523
03/24/2021PASSED SENATE
03/24/2021RETURNED TO ASSEMBLY
04/01/2021delivered to governor
04/06/2021signed chap.94
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A00164 Memo:

NEW YORK STATE ASSEMBLY
MEMORANDUM IN SUPPORT OF LEGISLATION
submitted in accordance with Assembly Rule III, Sec 1(f)
 
BILL NUMBER: A164B
 
SPONSOR: Zebrowski
  TITLE OF BILL: An act to amend the general obligations law, in relation to the discon- tinuance of the London interbank offered rate   PURPOSE OR GENERAL IDEA OF BILL: The purpose of this bill is to minimize costly and disruptive litigation by providing legal certainty for the issues arising in New York contracts resulting from the permanent discontinuance of LIBOR.   SUMMARY OF SPECIFIC PROVISIONS: Section 1 amends the general obligations law to add a new article 18-C relating to London Interbank Offered Rate ("LIBOR") discontinuance. Section 18-400 contains definitions. Section 18-401 provides that the recommended benchmark replacement is mandatory, upon LIBOR's discontinuance, for any contract, security or instrument that uses LIBOR and is silent as to fallback language or falls back to a LIBOR based rate. After LIBOR discontinuance, any contract, security or instrument with language that falls back to a LIBOR based rate or includes a fallback to polling for LIBOR or other interbank funding rate is void. The recom- mended benchmark replacement is optional, upon LIBOR's discontinuance, for any contract, security or instrument that gives a determining person the right to exercise discretion or judgment regarding fallback language. Nothing in this section overrides language in a contract, security or instrument that falls back to an express non-LIBOR based rate. Section 18-402 establishes that the recommended benchmark replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR. Using the recommended benchmark replacement does not discharge or excuse performance. Using the recommended benchmark replacement provides a safe harbor from litigation. Using the recom- mended benchmark replacement does not amend or modify the contract, security or instrument or impair or have a material or adverse effect on any person's rights or obligations. Section 18-403 contains a severability clause. Section 2 is the effec- tive date.   JUSTIFICATION: The London Interbank Offered Rate (LIBOR) is the most referenced short term interest rate in the world. It's estimated $200 trillion of finan- cial contracts and securities are tied to USD LIBOR. LIBOR is based on relatively few transactions and relies heavily on expert judgement in determining the rate. The scarcity of underlying transactions makes LIBOR potentially unsustainable and susceptible to manipulation. As a result, the regulator that oversees LIBOR, the U.K.'s Financial Conduct Authority, has announced that it will not compel the panel banks to continue to contribute to publication of LIBOR after 2021. This leaves financial markets in a situation where numerous products reference LIBOR but LIBOR is likely to cease, requiring alternative solutions. In the United States, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) to develop recommendations to facili- tate the transition away from U.S. dollar LIBOR. The ARRC is comprised of a diverse set of private sector entities and official-sector ex-offi- cio members including the Federal Reserve, the Treasury Department, the Consumer Finance Protection Bureau, the Commodity Futures Trading Commission and the Securities and Exchange Commission. The ARRC recommended a rate to replace LIBOR called the Secured Over- night Financing Rate (SOFR) which the Federal Reserve Bank of New York began publishing in 2018. SOFR is a broad measure of the cost of borrow- ing cash overnight collateralized by U.S. Treasury securities in repur- chase agreement (repo) markets. The overnight repo mark consists of approximately $1 trillion of transactions per day. Through the ARRC's promotion of SOFR over 25 institutions began volun- tarily transitioning to SOFR. However, existing contracts that reference LIBOR pose a unique problem when they do not include adequate "fallback language" provisions. Fallback language refers to legal provisions in a contract that apply if the underlying reference rate in the product (i.e. LIBOR) is discontinued or unavailable. When LIBOR is discontinued, consumers, businesses, lenders, and inves- tors in New York will be faced with legal uncertainty and adverse economic impacts on hundreds of thousands of affected financial contracts, including mortgages, student loans, credit cards, business loans, business contracts, and securities. To mitigate the risk of economic disruption, this bill would mandate the use of the recommended benchmark replacement for contracts that are silent on fall back language or fall back to a LIBOR based rate.   PRIOR LEGISLATIVE HISTORY: A11098 of 2020.   FISCAL IMPLICATIONS: None.   EFFECTIVE DATE: This act shall take effect immediately.
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A00164 Text:



 
                STATE OF NEW YORK
        ________________________________________________________________________
 
                                         164--B
 
                               2021-2022 Regular Sessions
 
                   IN ASSEMBLY
 
                                       (Prefiled)
 
                                     January 6, 2021
                                       ___________
 
        Introduced  by  M.  of  A.  ZEBROWSKI  --  read once and referred to the
          Committee on Judiciary -- committee discharged, bill amended,  ordered
          reprinted  as  amended  and recommitted to said committee -- committee
          discharged, bill amended, ordered reprinted as amended and recommitted
          to said committee
 
        AN ACT to amend the general obligations law, in relation to the  discon-
          tinuance of the London interbank offered rate
 
          The  People of the State of New York, represented in Senate and Assem-
        bly, do enact as follows:
 
     1    Section 1. The general obligations law is  amended  by  adding  a  new
     2  article 18-C to read as follows:
     3                                ARTICLE 18-C
     4                            LIBOR DISCONTINUANCE
     5  Section 18-400. Definitions.
     6          18-401. Effect of LIBOR discontinuance on agreements.
     7          18-402. Continuity of contract and safe harbor.
     8          18-403. Severability.
     9    §  18-400.  Definitions.  As  used in this article the following terms
    10  shall have the following meanings:
    11    1. "LIBOR" shall mean, for purposes of the application of this article
    12  to any particular contract, security or instrument,  U.S.  dollar  LIBOR
    13  (formerly known as the London interbank offered rate) as administered by
    14  ICE  Benchmark  Administration  Limited (or any predecessor or successor
    15  thereof), or any tenor thereof, as applicable, that is  used  in  making
    16  any calculation or determination thereunder.
    17    2.  "LIBOR  discontinuance  event" shall mean the earliest to occur of
    18  any of the following:
    19    a. a public statement or publication of information by or on behalf of
    20  the administrator of LIBOR announcing that such administrator has ceased
    21  or will cease to provide LIBOR, permanently  or  indefinitely,  provided

         EXPLANATION--Matter in italics (underscored) is new; matter in brackets
                              [ ] is old law to be omitted.
                                                                   LBD03775-05-1

        A. 164--B                           2
 
     1  that, at the time of the statement or publication, there is no successor
     2  administrator that will continue to provide LIBOR;
     3    b.  a public statement or publication of information by the regulatory
     4  supervisor for the administrator of LIBOR,  the  United  States  Federal
     5  Reserve System, an insolvency official with jurisdiction over the admin-
     6  istrator  for  LIBOR,  a resolution authority with jurisdiction over the
     7  administrator for LIBOR or a court or an entity with similar  insolvency
     8  or  resolution  authority over the administrator for LIBOR, which states
     9  that the administrator of LIBOR has ceased  or  will  cease  to  provide
    10  LIBOR  permanently  or  indefinitely,  provided that, at the time of the
    11  statement or publication, there is no successor administrator that  will
    12  continue to provide LIBOR; or 
    13    c.  a public statement or publication of information by the regulatory
    14  supervisor for the administrator of LIBOR announcing that  LIBOR  is  no
    15  longer  representative.   For purposes of this subdivision two, a public
    16  statement or publication of information that affects  one or more tenors
    17  of LIBOR shall not constitute a LIBOR discontinuance event with  respect
    18  to   any contract, security or instrument that (i) provides for only one
    19  tenor of LIBOR,  if  such  contract,  security  or  instrument  requires
    20  interpolation  and such tenor can be interpolated from LIBOR tenors that
    21  are not so affected, or (ii) permits a party to choose  from  more  than
    22  one  tenor of LIBOR and any of such tenors (A) is not so affected or (B)
    23  if such contract, security or instrument requires interpolation, can  be
    24  interpolated from LIBOR tenors that are not so affected.
    25    3. "LIBOR replacement date" shall mean:
    26    a.  in the case of a LIBOR discontinuance event described in paragraph
    27  a or b of subdivision two of this section, the later of (i) the date  of
    28  the  public  statement or publication of information referenced therein;
    29  and (ii) the date on which the administrator  of  LIBOR  permanently  or
    30  indefinitely ceases to provide LIBOR; and
    31    b.  in the case of a LIBOR discontinuance event described in paragraph
    32  c of subdivision two of this section, the date of the  public  statement
    33  or  publication of information referenced therein.  For purposes of this
    34  subdivision, a date that affects one or more tenors of LIBOR  shall  not
    35  constitute  a LIBOR replacement date with respect to any contract, secu-
    36  rity or instrument that (i) provides for only one  tenor  of  LIBOR,  if
    37  such  contract,  security  or instrument requires interpolation and such
    38  tenor can be interpolated from LIBOR tenors that are not so affected, or
    39  (ii) permits a party to choose from more than one tenor of LIBOR and any
    40  of such tenors (A) is not so affected or (B) if such contract,  security
    41  or  instrument  requires  interpolation,  can be interpolated from LIBOR
    42  tenors that are not so affected.
    43    4. "Fallback provisions" shall mean terms in a contract,  security  or
    44  instrument  that  set forth a methodology or procedure for determining a
    45  benchmark replacement, including any terms relating to the date on which
    46  the benchmark replacement becomes effective, without regard to whether a
    47  benchmark replacement can be determined in accordance with such  method-
    48  ology or procedure.
    49    5. "Benchmark" shall mean an index of interest rates or dividend rates
    50  that is used, in whole or in part, as the basis of or as a reference for
    51  calculating  or  determining any valuation, payment or other measurement
    52  under or in respect of a contract, security or instrument.
    53    6. "Benchmark replacement" shall mean a benchmark, or an interest rate
    54  or dividend rate (which may or may not be based in whole or in part on a
    55  prior setting of LIBOR), to replace LIBOR or any interest rate or  divi-

        A. 164--B                           3
 
     1  dend  rate  based on LIBOR, whether on a temporary, permanent or indefi-
     2  nite basis, under or in respect of a contract, security or instrument.
     3    7. "Recommended benchmark replacement" shall mean, with respect to any
     4  particular  type  of  contract,  security  or  instrument,  a  benchmark
     5  replacement based on SOFR, which shall include  any  recommended  spread
     6  adjustment  and any benchmark replacement conforming changes, that shall
     7  have been selected or recommended by a relevant recommending  body  with
     8  respect to such type of contract, security or instrument.
     9    8.  "Recommended spread adjustment" shall mean a spread adjustment, or
    10  method for calculating or determining such spread adjustment, (which may
    11  be a positive or negative value or zero) that shall have  been  selected
    12  or  recommended by a relevant recommending body for a recommended bench-
    13  mark replacement for a particular type of contract, security or  instru-
    14  ment and for a particular term to account for the effects of the transi-
    15  tion or change from LIBOR to a recommended benchmark replacement.
    16    9. "Benchmark replacement conforming changes" shall mean, with respect
    17  to any type of contract, security or instrument, any technical, adminis-
    18  trative  or  operational  changes, alterations or modifications that are
    19  associated with and reasonably necessary to the  use,  adoption,  calcu-
    20  lation  or  implementation  of  a  recommended benchmark replacement and
    21  that:
    22    a. have been selected or recommended by a relevant recommending  body;
    23  and
    24    b.  if,  in  the  reasonable  judgment  of the calculating person, the
    25  benchmark replacement conforming changes selected or recommended  pursu-
    26  ant  to  paragraph  a of this subdivision do not apply to such contract,
    27  security or instrument or are insufficient to permit administration  and
    28  calculation  of  the  recommended  benchmark replacement, then benchmark
    29  replacement conforming changes shall include such other changes,  alter-
    30  ations  or  modifications that, in the reasonable judgment of the calcu-
    31  lating person:
    32    (i) are necessary to permit  administration  and  calculation  of  the
    33  recommended  benchmark replacement under or in respect of such contract,
    34  security or instrument in a manner consistent with market  practice  for
    35  substantially  similar  contracts, securities or instruments and, to the
    36  extent practicable, the manner  in  which  such  contract,  security  or
    37  instrument  was  administered immediately prior to the LIBOR replacement
    38  date; and
    39    (ii) would not result in a disposition of such contract,  security  or
    40  instrument for U.S. federal income tax purposes.
    41    10.  "Determining  person"  shall  mean, with respect to any contract,
    42  security or instrument, in the following order of priority:
    43    a. any person specified as a "determining person"; or
    44    b. any person with the authority, right or obligation to:
    45    (i) determine the benchmark replacement that will take effect  on  the
    46  LIBOR replacement date,
    47    (ii)  calculate or determine a valuation, payment or other measurement
    48  based on a benchmark, or
    49    (iii) notify other persons of the occurrence of a LIBOR discontinuance
    50  event, a LIBOR replacement date or a benchmark replacement.
    51    11. "Relevant recommending body" shall mean the Federal Reserve Board,
    52  the Federal Reserve Bank of New York, or the Alternative Reference Rates
    53  Committee, or any successor to any of them.
    54    12. "SOFR" shall mean, with respect to any day, the secured  overnight
    55  financing rate published for such day by the Federal Reserve Bank of New

        A. 164--B                           4
 
     1  York,  as the administrator of the benchmark (or a successor administra-
     2  tor), on the Federal Reserve Bank of New York's website.
     3    13.  "Calculating  person"  shall  mean, with respect to any contract,
     4  security or instrument, any person (which may be the determining person)
     5  responsible for calculating or determining  any  valuation,  payment  or
     6  other measurement based on a benchmark.
     7    14. "Contract, security, or instrument" shall include, without limita-
     8  tion,  any contract, agreement, mortgage, deed of trust, lease, security
     9  (whether representing debt or equity, and including any  interest  in  a
    10  corporation,  a partnership or a limited liability company), instrument,
    11  or other obligation.
    12    § 18-401. Effect of LIBOR discontinuance  on  agreements.  1.  On  the
    13  LIBOR  replacement date, the recommended benchmark replacement shall, by
    14  operation of law, be the benchmark replacement for any contract, securi-
    15  ty or instrument that uses LIBOR as a benchmark and:
    16    a. contains no fallback provisions; or
    17    b. contains fallback provisions that result in  a  benchmark  replace-
    18  ment,  other  than a recommended benchmark replacement, that is based in
    19  any way on any LIBOR value.
    20    2. Following the occurrence of a LIBOR discontinuance event, any fall-
    21  back provisions in a contract, security, or instrument that provide  for
    22  a  benchmark  replacement based on or otherwise involving a poll, survey
    23  or inquiries for quotes  or  information  concerning  interbank  lending
    24  rates  or  any  interest  rate  or dividend rate based on LIBOR shall be
    25  disregarded as if not included in such contract, security or  instrument
    26  and shall be deemed null and void and without any force or effect.
    27    3.  This subdivision shall apply to any contract, security, or instru-
    28  ment that uses LIBOR as a benchmark  and  contains  fallback  provisions
    29  that permit or require the selection of a benchmark replacement that is:
    30    a. based in any way on any LIBOR value; or
    31    b.  the  substantive  equivalent of paragraph a, b or c of subdivision
    32  one of section 18-402 of this article.
    33    A determining person shall have the authority under this article,  but
    34  shall  not  be required, to select on or after the occurrence of a LIBOR
    35  discontinuance event the recommended benchmark replacement as the bench-
    36  mark replacement. Such selection of the recommended  benchmark  replace-
    37  ment shall be:
    38    (i) irrevocable;
    39    (ii)  made by the earlier of either the LIBOR replacement date, or the
    40  latest date for selecting a  benchmark  replacement  according  to  such
    41  contract, security, or instrument; and
    42    (iii)  used  in  any  determinations  of  the  benchmark under or with
    43  respect to such contract, security or instrument occurring on and  after
    44  the LIBOR replacement date.
    45    4.  If  a  recommended  benchmark  replacement  becomes  the benchmark
    46  replacement for any contract, security, or instrument pursuant to subdi-
    47  vision one or subdivision three of  this  section,  then  all  benchmark
    48  replacement  conforming  changes that are applicable (in accordance with
    49  the definition of benchmark  replacement  conforming  changes)  to  such
    50  recommended  benchmark replacement shall become an integral part of such
    51  contract, security, or instrument by operation of law.
    52    5. The provisions of this article shall not alter or impair:
    53    a. any written agreement by all requisite parties that, retrospective-
    54  ly or prospectively, a contract, security, or instrument  shall  not  be
    55  subject  to  this  article without necessarily referring specifically to
    56  this article. For purposes  of  this  subdivision,  "requisite  parties"

        A. 164--B                           5
 
     1  means  all  parties  required  to  amend  the  terms and provisions of a
     2  contract, security, or instrument that would  otherwise  be  altered  or
     3  affected by this article;
     4    b.  any  contract,  security  or  instrument  that  contains  fallback
     5  provisions that would result in a  benchmark  replacement  that  is  not
     6  based  on  LIBOR,  including,  but not limited to, the prime rate or the
     7  federal funds rate, except that such  contract, security  or  instrument
     8  shall be subject to subdivision two of this section;
     9    c.  any contract, security, or instrument subject to subdivision three
    10  of this section as to which a determining person does not elect to use a
    11  recommended benchmark replacement pursuant to subdivision three of  this
    12  section  or as to which a determining person elects to use a recommended
    13  benchmark replacement prior to the occurrence of a LIBOR  discontinuance
    14  event,  except  that  such  contract,  security,  or instrument shall be
    15  subject to subdivision two of this section; or
    16    d. the application to a recommended benchmark replacement of any  cap,
    17  floor,  modifier,  or  spread adjustment to which LIBOR had been subject
    18  pursuant to the terms of a contract, security, or instrument.
    19    6. Notwithstanding the uniform commercial code or  any  other  law  of
    20  this  state,  this  title  shall  apply to all contracts, securities and
    21  instruments, including contracts,  with  respect  to  commercial  trans-
    22  actions,  and  shall  not  be deemed to be displaced by any other law of
    23  this state.
    24    § 18-402. Continuity of contract and safe harbor. 1. The selection  or
    25  use  of  a  recommended benchmark replacement as a benchmark replacement
    26  under or in respect of a contract, security or instrument  by  operation
    27  of section 18-401 of this article shall constitute:
    28    a.  a  commercially  reasonable  replacement  for  and  a commercially
    29  substantial equivalent to LIBOR;
    30    b. a reasonable, comparable or analogous term for LIBOR  under  or  in
    31  respect of such contract, security or instrument;
    32    c. a replacement that is based on a methodology or information that is
    33  similar or comparable to LIBOR; and
    34    d.  substantial  performance  by any person of any right or obligation
    35  relating to or based on LIBOR under or in respect of a contract, securi-
    36  ty or instrument.
    37    2. None of: a. a LIBOR discontinuance event  or  a  LIBOR  replacement
    38  date,  b. the selection or use of a recommended benchmark replacement as
    39  a benchmark replacement; or c.   the  determination,  implementation  or
    40  performance  of  benchmark replacement conforming changes, in each case,
    41  by operation of section 18-401 of this article, shall:
    42    (i) be deemed to impair or affect the right of any person to receive a
    43  payment, or affect the amount or  timing  of  such  payment,  under  any
    44  contract, security, or instrument; or
    45    (ii)  have the effect of (A) discharging or excusing performance under
    46  any contract, security or instrument for any reason, claim  or  defense,
    47  including,  but  not limited to, any force majeure or other provision in
    48  any contract, security or instrument; (B) giving any person the right to
    49  unilaterally terminate or suspend performance under any contract,  secu-
    50  rity or instrument; (C) constituting a breach of a contract, security or
    51  instrument;  or  (D)  voiding  or  nullifying  any contract, security or
    52  instrument.
    53    3. No person shall have any liability for damages to any person or  be
    54  subject  to  any claim or request for equitable relief arising out of or
    55  related to the selection or use of a recommended  benchmark  replacement
    56  or   the  determination,  implementation  or  performance  of  benchmark

        A. 164--B                           6
 
     1  replacement conforming changes, in each case, by  operation  of  section
     2  18-401  of  this  article,  and such selection or use of the recommended
     3  benchmark replacement or such determination implementation  or  perform-
     4  ance  of benchmark replacement conforming changes shall not give rise to
     5  any claim or cause of action by any person in law or in equity.
     6    4. The selection or use of a recommended benchmark replacement or  the
     7  determination,  implementation,  or performance of benchmark replacement
     8  conforming changes, by operation of  section  18-401  of  this  article,
     9  shall be deemed to:
    10    a.  not  be  an amendment or modification of any contract, security or
    11  instrument; and
    12    b. not prejudice, impair or affect any person's rights,  interests  or
    13  obligations under or in respect of any contract, security or instrument.
    14    5.  Except  as provided in either subdivision one or subdivision three
    15  of section 18-401 of this article, the provisions of this article  shall
    16  not  be  interpreted  as  creating  any  negative  inference or negative
    17  presumption regarding the validity or enforceability of:
    18    a. any benchmark replacement that is  not  a  recommended  replacement
    19  benchmark;
    20    b.  any  spread adjustment, or method for calculating or determining a
    21  spread adjustment, that is not a recommended spread adjustment; or
    22    c. any changes, alterations or modifications to or  in  respect  of  a
    23  contract,  security  or  instrument  that  are not benchmark replacement
    24  conforming changes.
    25    § 18-403. Severability. If any provision of this article  or  applica-
    26  tion thereof to any person or circumstance is held invalid, the invalid-
    27  ity  shall  not  affect other provisions or applications of this article
    28  that can be given effect without the invalid provision  or  application,
    29  and to this end the provisions of this article shall be severable.
    30    § 2. This act shall take effect immediately.
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