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Goodbye LIBOR — Hello Reg ZZ

On Friday, December 16, the Board of Governors of the Federal Reserve System (Board) adopted Regulation ZZ to implement the Adjustable Interest Rate (LIBOR) Act (Act). The Act was approved by Congress on March 15, to address references to LIBOR, formerly known as the Lender Interbank Offered Rate, in contracts that are governed by US law; will not mature before June 30, 2023; and most importantly, will lack fallback provisions providing for a clearly defined practical replacement for LIBOR. The final regulation is substantially similar to the proposal made in July.

The final rule replaces references to LIBOR in such contracts with one of five Board-selected benchmark replacements based on the Secured Overnight Financing Rate (SOFR), which may include spread adjustments specified in the Act. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities and published daily by the Federal Reserve Bank of New York. The final rule identifies Board-selected benchmark replacements for (1) derivative transactions, (2) Federal Housing Finance Agency (FHFA) regulated entity contracts, (3) Federal Family Education Loan Program (FFELP) asset-based securitizations (ABS), (4) consumer loans, and (5) all other LIBOR contracts for replacing the overnight and one-, three-, six-, and 12-month tenors of US dollar LIBOR in existing contracts that do not provide for use of a clearly defined or practical replacement benchmark rate.

“Board-selected benchmark replacement” refers to the benchmark replacements defined in Section 253.4 of Regulation ZZ. The Board-selected benchmark replacement shall be the replacement for LIBOR contracts with one of the following characteristics as of the LIBOR replacement date: (1) the LIBOR contract contains no fallback provisions; (2) the LIBOR contract contains fallback provisions that identify neither a specific benchmark replacement nor a determining person; or (3) the LIBOR contract contains a fallback provision that identifies a determining person but the determining person has not selected a benchmark. For a LIBOR contract other than a consumer loan, an FHFA regulated entity contract, an FFELP ABS contract, or a derivative contract, each of which has a separate benchmark replacement, the overnight LIBOR shall be replaced by SOFR plus the tenor spread and in place of the one-, three-, six-, and 12-month tenors of LIBOR, the benchmark replacement shall be the corresponding one-, three-, six-, and 12-month SOFR term plus the applicable tenor spread.

The above referenced tenor spread adjustments shall be included as part of the Board-selected benchmarks as follows:

  1. 0.00644 percent for overnight LIBOR

  2. 0.11448 percent for one-month LIBOR

  3. 0.26161 percent for three-month LIBOR

  4. 0.42826 percent for six-month LIBOR

  5. 0.71513 percent for 12-month LIBOR

All applicable benchmark replacement conforming changes shall become an integral part of the LIBOR contract by operation of law. Finally, the regulation supersedes any provision of any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or expressly limiting the manner of calculating interest as that provision applies to the selection or use of a Board-selected benchmark replacement or benchmark replacement conforming change.

© 2023 Jones Walker LLPNational Law Review, Volume XIII, Number 26

About this Author

Craig N. Landrum, Jones Walker, Banking Industry Lawyer, Insurance Representation Attorney

Craig Landrum is a partner in the firm's Banking & Financial Services Practice Group and practices from the firm's Jackson office. His practice focuses on bank regulatory law, corporate law, mergers and acquisitions law, and securities law. He also has experience representing insurance companies and agencies with regard to corporate and regulatory matters, including the licensing of bank subsidiaries as general insurance agencies and underwriters.

Mr. Landrum is a graduate of Mississippi State University, where he received a bachelor of...