Experts Testify Before Senate Banking Committee On LIBOR Transition – Finance and Banking

At a hearing on the LIBOR transition before
the Senate Committee on Banking, Housing, and Urban Affairs,
Alternative Reference Rates Committee (“ARRC”) Chair
Thomas Wipf advocated for Congressional passage of
uniform, federal legislation to address LIBOR legacy contract
transition issues and “avoid the disruptions, market
uncertainties, and confusion that would otherwise occur when LIBOR
ends.”

Mr. Wipf explained that while New York and Alabama have passed
legislation at the state level, legacy contracts in other
jurisdictions are not covered by the laws of those states, and
federal legislation would ensure an equal outcome across the
country. Mr. Wipf also explained to the Committee that the
legislation’s choice of the Secured Overnight Financing Rate
(“SOFR”) to serve as the replacement rate for legacy
contracts was based on years of work by the ARRC to identify the
most robust replacement for LIBOR. Mr. Wipf said that the ARRC
supports legislation currently under consideration by the House of
Representatives.

Other witnesses included:

• Andrew G. Pizor, Staff Attorney at the National
  Consumer Law Center (“NCLC”), who agreed with Mr. Wipf
  that there is “no doubt” that SOFR has been
  “sufficiently vetted” and is the “most suitable
  replacement index” for legacy contracts. He urged Congress to
  go further than the legislation on the table in the House and
  mandate the use of SOFR as the replacement rate for all consumer
  contracts. Failing that, he agreed with the House approach of
  granting a safe harbor for voluntary use of a SOFR-based rate.
  While Mr. Pizor was generally supportive of such a safe harbor, he
  recommended that the Senate adjust the safe harbor’s scope to
  ensure that disreputable actors who attempt to take advantage of
  the LIBOR transition to harm consumers will not be protected. To
  address that concern, the NCLC and industry groups collaborated on
  new language and have shared a proposal with House and Senate
  staff;




• Christopher Giancarlo, former CFTC Chair, who agreed
  with Mr. Wipf and Mr. Pizor that passing federal legislation to
  designate SOFR as the replacement rate for legacy contracts that
  cannot be privately remediated is the best path forward. He
  recognized that there is a “clear consensus,” which he
  shares, that “federal legislation is necessary to ensure
  smooth and efficient transition away from LIBOR.” When it
  comes to new contracts – which are not within the scope of the
  proposed legislation – he arguedthat institutions should be able to
  choose between multiple, properly qualified benchmarks that meet
  IOSCO standards, and that this diversity will reduce systemic risk.
  He noted that the legislation under consideration in the House
  already contains “helpful language” to ensure that the
  legislation – which addresses only legacy contracts, not new
  contracts – will not be inadvertently construed to interfere with
  benchmark choice in new contracts; and




• Michael R. Bright, CEO of the Structured Finance
  Association, who distilledthe primary goals of the federal
  legislation: to minimize value transfer, to use a single
  replacement benchmark for similar LIBOR contracts, to reduce
  litigation risks through a narrow safe harbor, to be narrow in
  scope to prevent impact on other rights and protections, and to
  avoid disturbing contracts that already contain a working, fallback
  rate.

Speaking to the legislation under consideration in the House,
Ranking Member Pat Toomey (R-PA) stated that the Senate should consider
“targeted” amendments to ensure that qualified non-SOFR
benchmark rates are not disfavored in new contracts. Senator Toomey
expressed concern over recent comments from Michael J. Hsu,
Acting Comptroller of the Currency, indicating that the OCC will
focus its initial supervisory efforts on the use of non-SOFR rates.
Senator Toomey warned that this approach would be akin to applying
“heightened scrutiny to non-SOFR rates” in new contracts,
which he characterized as part of a broader effort by “Biden
administration financial regulators” to criticize the use of
benchmarks other than SOFR. He agreed with several witnesses that,
when it comes to “tough legacy contracts,” it is
“appropriate to mandate a SOFR-based index.” He described
the legislation under consideration in the House as a
“reasonable approach” to dealing with legacy contracts
and urged the Senate to “carefully review” it.

Commentary

The Senate Committee’s hearing on the LIBOR transition
featured a rare display in Washington: bipartisanship. Strong
support for a federal legislative solution to address legacy LIBOR
contracts came from both sides of the aisle. The Committee Chair,
Senator Sherrod Brown (D-OH), emphasized that Congress “need[s] to act” and Ranking Member Toomey
agreed that the “unique and anomalous circumstances”
presented by the LIBOR transition “require action by
Congress.” A sense of shared purpose was on display at the
witness table as well. Andrew G. Pizor – a staff attorney at the
National Consumer Law Center – commented on the unlikely alliance
that has come together to support the legislation, remarking that
while consumer advocates “generally oppose safe harbors from
litigation,” his organization agreed that, in “this
unique situation,” a properly tailored one was the
“appropriate” way to ensure a smooth transition from
LIBOR. And when asked by Senator Catherine Cortez Masto (D-NV)
whether anyone at the witness table opposed the selection of SOFR
as the legislation’s replacement rate of choice for legacy
contracts in its scope, all of the witnesses voiced their support
for a SOFR-based solution. With the NCLC and industry groups having
worked out, in advance of the hearing, a compromise solution to one
of the NCLC’s last remaining concerns about the operation of
the safe harbor, the federal LIBOR legislation appears poised to
move swiftly toward passage.

Primary Sources

1. Senate Banking Committee Hearing: “The Libor
   Transition – Protecting Consumers and
   Investors”

1. Senate Banking Committee Statement, Sherrod Brown:
   “The Libor Transition – Protecting Consumers and
   Investors”




2. Senate Banking Committee Statemen, Patrick J.
   Toomey: “The Libor Transition – Protecting Consumers and
   Investors”




3. Congressional Testimony, Thomas Wipf: “The
   Libor Transition – Protecting Consumers and
   Investors”




4. Congressional Testimony, Andrew Pizor: “The
   Libor Transition – Protecting Consumers and
   Investors”




5. Congressional Testimony, J. Christopher Giancarlo:
   “The Libor Transition – Protecting Consumers and
   Investors”

7. Congressional Testimony, Michael R. Bright:
   “The Libor Transition – Protecting Consumers and
   Investors”

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