Libor Transition Panel Recommends Fallback Language for Key Instruments

The Alternative Reference Rates Committee today issued its fallback language recommendations for floating rate notes and syndicated business loans that reference the U.S. dollar London Interbank Offer Rate. With Libor’s future beyond 2021 uncertain, the ARRC—a group of market participants convened by the Federal Reserve—is developing plans to facilitate the transition to its recommended alternative rate, the Secured Overnight Financing Rate.

Despite the looming deadline, “Libor-based products continue to be issued and . . . most contracts referencing Libor do not appear to have envisioned a permanent or indefinite cessation of Libor and have fallbacks that would not be economically appropriate if this event occurred,” the ARRC said. The ARRC said it would release its recommended fallback language for bilateral business loans and securitizations soon and that it will consult “in the future” with a broad array of stakeholders on draft fallback language in consumer products.

The documents released today came after draft language released last fall for public comment. For floating-rate notes, they include key definitions, events that may trigger a fallback, successor rates and spread adjustments to account for differences with Libor. For syndicated commercial loans, the fallback language includes the trigger events but offers two sets of fallback language: a “hardwired” approach in which replacement benchmarks and spread adjustments are defined and an “amendment approach” that does not specify successor rates or adjustments but provides a streamlined process for negotiating a future benchmark replacement. For more information, contact ABA’s Hu Benton.