Libor Wall Street Fix Gets a Boost as N.Y. Senator Backs Move

A key New York state lawmaker is supporting legislation intended to protect hundreds of billions of dollars of contracts from legal chaos when Libor is phased out as an interest-rate benchmark, marking a potentially crucial step toward securing its passage.

Democrat Senator Liz Krueger, the head of the finance committee, said in an interview that she is in favor of provisions contained in Governor Andrew Cuomo’s proposed budget that would allow existing contracts to use replacement indexes recommended by regulators. She said failing to enact that could give large companies power to impose their own changes instead, potentially to the peril of consumers.

Bankers, investors and regulators see such proposals -- which will help troublesome Libor-linked contracts switch to replacement rates -- as crucial to ensuring that a large swath of the global financial system isn’t disrupted.

Krueger’s support matters because she previously challenged similar reforms proposed by the Alternative Reference Rates Committee, the Federal Reserve-backed body guiding the transition, on the grounds that they could put retail consumers at a disadvantage.

Krueger said in the interview that she has thoroughly examined the plan in Cuomo’s budget and concluded it is “legitimate” and adequately protects consumers. The deadline for passing the budget is April 1.

“It still needs to be negotiated,” she said, adding that she’s hopeful it will make it into the final budget.

While most Libor indexes will be retired at year-end, various tenors of the dollar-denominated benchmark may be given a reprieve from the phase out until mid-2023, in part to allow older contracts that lack a clear replacement rate to expire 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 be in place after Libor is no longer used, making legislation critical.

Backing from the committee head makes the law more likely to pass, according to Priya Misra, global head of interest rate strategy at TD Securities and a member of the ARRC, the Fed-backed transition planning group.

“We are down to the wire with the New York state legislation and it is extremely important to address the problem of legacy cash products with inappropriate fallback language,” she said. Passing the law “would be a win-win since it helps bring clarity for issuers and investors.”

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Tom Wipf, vice chairman of institutional securities at Morgan Stanley and chairman of the ARRC, said the body “welcomes all support for the legislation, which is essential to providing legal certainty and financial stability.”

Lawyers say even if the law passes, separate legislation is likely to be needed to protect sections of the market that fall beyond Wall Street. Federal Reserve Chair Jerome Powell said in February that national legislation would be the best solution.

“Once you have legislation in New York, you have a template that other states can piggy back off and hopefully even have a federal legislative solution,” said Y. Daphne Coelho-Adam, a counsel at Seward & Kissel LLP. “It gives everyone ability to look forward without hitting that wall or going off a cliff.”

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