N.Y. Governor Signs Libor Fix Into Law to Avert Transition Chaos

(Bloomberg) -- New York Governor Andrew Cuomo late Tuesday signed into law a measure that will help prevent hundreds of billions of dollars of financial contracts from descending into chaos when the London interbank offered rate starts phasing out at the end of the year.

The measure, passed by the state Senate and Assembly last month, would allow existing contracts to use replacement indexes recommended by regulators.

The New York law establishes that the recommended benchmark replacement is a “commercially reasonable substitute for and a commercially substantial equivalent to Libor” and that using the recommended benchmark replacement “provides a safe harbor from litigation.”

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 the benchmark is no longer used.

Almost $2 trillion of debt pegged to dollar Libor won’t mature until after the discredited rate expires in mid-2023, according to the Alternative Reference Rates Committee, the Federal Reserve-backed group guiding the transition.

Federal legislation may still be needed. Fed Chair Jerome Powell said last month that national legislation is necessary to ensure a smooth transition.

©2021 Bloomberg L.P.