Economic Continuity and Stability Act

To establish a clear and uniform process, on a nationwide basis, for replacing the London interbank offered rate in existing contracts, and for other purposes. 1. Short title This Act may be cited as the Economic Continuity and Stability Act 2. Findings and purpose (a) Findings Congress finds that— (1) LIBOR is used as a benchmark rate in more than $200,000,000,000,000 worth of contracts worldwide; (2) a significant number of existing contracts that reference LIBOR do not provide for the use of a clearly defined or practicable replacement benchmark rate when LIBOR is discontinued; and (3) the cessation or nonrepresentativeness of LIBOR could result in disruptive litigation related to existing contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate. (b) Purpose It is the purpose of this Act— (1) to establish a clear and uniform process, on a nationwide basis, for replacing LIBOR in existing contracts the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate, without affecting the ability of parties to use any appropriate benchmark rate in new contracts; (2) to preclude litigation related to existing contracts the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate; (3) to allow existing contracts that reference LIBOR but provide for the use of a clearly defined and practicable replacement rate, to operate according to their terms; (4) to provide that modifications of existing contracts pursuant to this Act do not result in recognition of gain or loss for Federal income tax purposes; (5) to provide authority to the Secretary of the Treasury to provide clear guidance regarding the Federal income tax consequences for taxpayers with respect to IBOR contracts transitioning away from IBOR to an IBOR Benchmark Replacement; and (6) to address LIBOR references in Federal law. 3. Definitions In this Act: (1) Benchmark The term benchmark (2) Benchmark administrator The term benchmark administrator (3) Benchmark replacement The term benchmark replacement (4) Benchmark replacement conforming changes The term benchmark replacement conforming changes (A) the Board determines, in its discretion, would address 1 or more issues affecting the implementation, administration, and calculation of the Board-selected benchmark replacement in LIBOR contracts; or (B) solely with respect to a LIBOR contract that is not a consumer loan, in the reasonable judgment of a calculating person, are otherwise necessary or appropriate to permit the implementation, administration, and calculation of the Board-selected benchmark replacement under or with respect to a LIBOR contract after giving due consideration to any benchmark replacement conforming changes under subparagraph (A). (5) Board The term Board (6) Board-selected benchmark replacement The term Board-selected benchmark replacement (7) Calculating person The term calculating person (8) Consumer; credit The terms consumer credit 15 U.S.C. 1602 (9) Consumer loan The term consumer loan (10) Determining person The term determining person (11) Fallback provisions The term fallback provisions (12) IBOR The term IBOR (13) IBOR benchmark replacement The term IBOR benchmark replacement (14) IBOR contract The term IBOR contract (15) LIBOR The term LIBOR (A) means the overnight and 1-, 3-, 6-, and 12-month tenors of U.S. dollar LIBOR (formerly known as the London interbank offered rate) as administered by ICE Benchmark Administration Limited (or any predecessor or successor administrator thereof); and (B) does not include the 1-week or 2-month tenors of U.S. dollar LIBOR. (16) LIBOR contract The term LIBOR contract (17) LIBOR Replacement Date The term LIBOR replacement date (18) Security The term security 15 U.S.C. 77b(a) (19) SOFR The term SOFR (20) Tenor spread adjustment The term tenor spread adjustment (A) 0.00644 percent for overnight LIBOR; (B) 0.11448 percent for 1-month LIBOR; (C) 0.26161 percent for 3-month LIBOR; (D) 0.42826 percent for 6-month LIBOR; and (E) 0.71513 percent for 12-month LIBOR. 4. LIBOR contracts (a) In general On the LIBOR replacement date, the Board-selected benchmark replacement shall be the benchmark replacement for any LIBOR contract that, after giving any effect to subsection (b)— (1) contains no fallback provisions; or (2) contains fallback provisions that identify neither— (A) a specific benchmark replacement; nor (B) a determining person. (b) Fallback provisions On the LIBOR replacement date, any reference in the fallback provisions of a LIBOR contract to— (1) a benchmark replacement that is based in any way on any LIBOR value, except to account for the difference between LIBOR and the benchmark replacement; or (2) a requirement that a person (other than a benchmark administrator) conduct a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates, shall be disregarded as if not included in the fallback provisions of such LIBOR contract and shall be deemed null and void and without any force or effect. (c) Authority of determining person (1) In general Subject to subsection (f)(2), a determining person may select the Board-selected benchmark replacement as the benchmark replacement. (2) Selection Any selection by a determining person of the Board-selected benchmark replacement pursuant to paragraph (1) shall be— (A) irrevocable; (B) made by the earlier of the LIBOR replacement date and the latest date for selecting a benchmark replacement according to the terms of the LIBOR contract; and (C) used in any determinations of the benchmark under or with respect to the LIBOR contract occurring on and after the LIBOR replacement date. (3) No selection If a determining person does not select a benchmark replacement by the date specified in paragraph (2)(B), the Board-selected benchmark replacement, on and after the LIBOR replacement date, shall be the benchmark replacement for the LIBOR contract. (d) Conforming changes (1) In general If the Board-selected benchmark replacement becomes the benchmark replacement for a LIBOR contract pursuant to subsection (a) or (c), all benchmark replacement conforming changes shall become an integral part of the LIBOR contract. (2) No consent required A calculating person shall not be required to obtain consent from any other person prior to the adoption of benchmark replacement conforming changes. (e) Adjustment by Board (1) In general Except as provided in paragraph (2), on the LIBOR replacement date, the Board shall adjust the Board-selected benchmark replacement for each category of LIBOR contract that the Board may identify to include the relevant tenor spread adjustment. (2) Consumer loans For LIBOR contracts that are consumer loans, the Board shall adjust the Board-selected benchmark replacement as follows: (A) During the 1-year period beginning on the LIBOR replacement date, incorporate an amount, to be determined for any business day during that period, that transitions linearly from the difference between the Board-selected benchmark replacement and the corresponding LIBOR tenor determined as of the day immediately before the LIBOR replacement date to the relevant tenor spread adjustment. (B) On and after the date that is 1 year after the LIBOR replacement date, incorporate the relevant tenor spread adjustment. (f) Rule of construction Nothing in this Act may be construed to alter or impair— (1) any written agreement specifying that a LIBOR contract shall not be subject to this Act; (2) except as provided in subsection (b), any LIBOR contract that contains fallback provisions that identify a benchmark replacement that is not based in any way on any LIBOR value (including the prime rate or the effective Federal funds rate); (3) except as provided in subsection (b) or (c)(3), any LIBOR contract subject to subsection (c)(1) as to which a determining person does not elect to use a Board-selected benchmark replacement pursuant to that subsection; (4) the application to a Board-selected benchmark replacement of any cap, floor, modifier, or spread adjustment to which LIBOR had been subject pursuant to the terms of a LIBOR contract; (5) any provision of Federal consumer financial law that— (A) requires creditors to notify borrowers regarding a change-in-terms; or (B) governs the reevaluation of rate increases on credit card accounts under open-ended (not home-secured) consumer credit plans; or (6) except as provided in section 5(c), the rights or obligations of any person, or the authorities of any agency, under Federal consumer financial law, as defined in section 1002 of the Consumer Financial Protection Act of 2010 ( 12 U.S.C. 5481 5. Continuity of contract and safe harbor (a) In general A Board-selected benchmark replacement and the selection or use of a Board-selected benchmark replacement as a benchmark replacement under or with respect to a LIBOR contract, and any benchmark replacement conforming changes, shall constitute— (1) a commercially reasonable replacement for and a commercially substantial equivalent to LIBOR; (2) a reasonable, comparable, or analogous rate, index, or term for LIBOR; (3) a replacement that is based on a methodology or information that is similar or comparable to LIBOR; (4) substantial performance by any person of any right or obligation relating to or based on LIBOR; and (5) a replacement that has historical fluctuations that are substantially similar to those of LIBOR for purposes of the Truth in Lending Act ( 15 U.S.C. 1601 (b) No impairment Neither the selection or use of a Board-selected benchmark replacement as a benchmark replacement nor the determination, implementation, or performance of benchmark replacement conforming changes under section 4 may— (1) be deemed to impair or affect the right of any person to receive a payment, or to affect the amount or timing of such payment, under any LIBOR contract; or (2) have the effect of— (A) discharging or excusing performance under any LIBOR contract for any reason, claim, or defense (including any force majeure or other provision in any LIBOR contract); (B) giving any person the right to unilaterally terminate or suspend performance under any LIBOR contract; (C) constituting a breach of any LIBOR contract; or (D) voiding or nullifying any LIBOR contract. (c) Safe harbor No person shall be subject to any claim or cause of action in law or equity or request for equitable relief, or have liability for damages, arising out of— (1) the selection or use of a Board-selected benchmark replacement; (2) the implementation of benchmark replacement conforming changes; or (3) with respect to a LIBOR contract that is not a consumer loan, the determination of benchmark replacement conforming changes, in each case after giving effect to the provisions of section 4; provided, however, that in each case any person (including a calculating person) shall remain subject to the terms of a LIBOR contract that are not affected by this Act and any existing legal, regulatory, or contractual obligations to correct servicing or other ministerial errors under or with respect to a LIBOR contract. (d) Selection The selection or use of a Board-selected benchmark replacement or the determination, implementation, or performance of benchmark replacement conforming changes under section 4 shall not be deemed to— (1) be an amendment or modification of any LIBOR contract; or (2) prejudice, impair, or affect the rights, interests, or obligations of any person under or with respect to any LIBOR contract. (e) No negative inference Except as provided in subsection (a), (b), or (c)(1) of section 4, nothing in this Act may be construed to create any negative inference or negative presumption regarding the validity or enforceability of— (1) any benchmark replacement (including any method for calculating, determining, or implementing an adjustment to the benchmark replacement to account for any historical differences between LIBOR and the benchmark replacement) that is not a Board-selected benchmark replacement; or (2) any changes, alterations, or modifications to or with respect to a LIBOR contract that are not benchmark replacement conforming changes. 6. Tax treatment and tax regulations for LIBOR transition (a) In general None of— (1) the selection or use of a Board-selected benchmark replacement as a benchmark replacement, (2) the determination, implementation, or performance of benchmark replacement conforming changes, or (3) the application to any LIBOR contract of, or the agreement by parties thereto to terms consistent with, section 4, shall be treated as a sale, exchange, or other disposition of property for purposes of section 1001 (b) Guidance The Secretary of the Treasury (or the Secretary’s delegate) shall issue such regulations or other guidance as may be necessary or appropriate to carry out subsection (a) and address the Federal income tax consequences for taxpayers with respect to IBOR contracts transitioning away from IBOR to an IBOR benchmark replacement. 7. Benchmark for loans (a) Definitions In this section: (1) Bank The term bank (2) Covered action The term covered action (A) the initiation by a Federal supervisory agency of an enforcement action, including the issuance of a cease-and-desist order; or (B) the issuance by a Federal supervisory agency of a matter requiring attention, a matter requiring immediate attention; or a matter requiring board attention resulting from a supervisory activity conducted by the Federal supervisory agency. (3) Federal financial institutions regulatory agency The term Federal financial institutions regulatory agencies 12 U.S.C. 3302 (4) Federal supervisory agency The term Federal supervisory agency 12 U.S.C. 3401(7) (5) Non-IBOR loan The term non-IBOR loan (b) Benchmarks used by banks With respect to a benchmark used by a bank— (1) the bank, in any non-IBOR loan made before, on, or after the date of enactment of this Act, may use any benchmark, including a benchmark that is not SOFR, that the bank determines to be appropriate for the funding model of the bank; the needs of the customers of the bank; and the products, risk profile, risk management capabilities, and operational capabilities of the bank; provided, however, that the use of any benchmark shall remain subject to the terms of the non-IBOR loan, and applicable law; and (2) no Federal supervisory agency may take any covered action against the bank solely because that benchmark is not SOFR. 8. Preemption This Act, and regulations promulgated under this Act, shall supersede any provision of any State or local law, statute, rule, regulation, or standard— (1) relating to the selection or use of a benchmark replacement or related conforming changes; or (2) expressly limiting the manner of calculating interest, including the compounding of interest, as that provision applies to the selection or use of a Board-selected benchmark replacement or benchmark replacement conforming changes. 9. Trust Indenture Act of 1939 Section 316(b) of the Trust Indenture Act of 1939 ( 15 U.S.C. 77ppp(b) (1) by striking , except as (1) as ; (2) in paragraph (1), as so designated, by striking (a), and except that (2) that ; (3) in paragraph (2), as so designated, by striking the period at the end and inserting ; and (4) by adding at the end the following: (3) that the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security shall not be deemed to be impaired or affected by any change occurring by the application of section 4 of the Economic Continuity and Stability Act . 10. Amendment to the Higher Education Act of 1965 Section 438(b)(2)(I) of the Higher Education Act of 1965 ( 20 U.S.C. 1087–1(b)(2)(I) (viii) Revised calculation rule to address instances where 1-month USD LIBOR ceases or is non-representative (I) Substitute reference index The provisions of this clause apply to loans for which the special allowance payment would otherwise be calculated pursuant to clause (vii). (II) Calculation based on SOFR For loans described in subclause (III) or (IV), the special allowance payment described in this subclause shall be substituted for the payment provided under clause (vii). For each calendar quarter, the formula for computing the special allowance that would otherwise apply under clause (vii) shall be revised by substituting of the quotes of the 30-day Average Secured Overnight Financing Rate (SOFR) in effect for each of the days in such quarter as published by the Federal Reserve Bank of New York (or a successor administrator), adjusted daily by adding the tenor spread adjustment, as that term is defined in the Economic Continuity and Stability Act of the 1-month London Inter Bank Offered Rate (LIBOR) for United States dollars in effect for each of the days in such quarter as compiled and released by the British Bankers Association (III) Loans eligible for SOFR-based calculation Except as provided in subclause (IV), the special allowance payment calculated under subclause (II) shall apply to all loans for which the holder (or, if the holder acts as an eligible lender trustee for the beneficial owner of the loan, the beneficial owner of the loan) at any time after the effective date of this clause notifies the Secretary that the holder or beneficial owner affirmatively and permanently elects to waive all contractual, statutory, or other legal rights to a special allowance paid under clause (vii) or to the special allowance paid pursuant to any other formula that was previously in effect with respect to such loan, and accepts the rate described in subclause (II). Any such waiver shall apply to all loans then held, or to be held from time to time, by such holder or beneficial owner; provided that, due to the need to obtain the approval of, demonstrated to the satisfaction of the Secretary— (aa) one or more third parties with a legal or beneficial interest in loans eligible for the SOFR-based calculation; or (bb) a nationally recognized rating organization assigning a rating to a financing secured by loans otherwise eligible for the SOFR-based calculation, the holder of the loan (or, if the holder acts as an eligible lender trustee for the beneficial owner of the loan, the beneficial owner of the loan) may elect to apply the rate described in subclause (II) to specified loan portfolios established for financing purposes by separate notices with different effective dates. The special allowance rate based on SOFR shall be effective with respect to a portfolio as of the first day of the calendar quarter following the applicable effective date of the waiver received by the Secretary from the holder or beneficial owner and shall permanently and irrevocably continue for all subsequent quarters. (IV) Fallback provisions (aa) In the event that a holder or beneficial owner has not elected to waive its rights to a special allowance payment under clause (vii) with respect to a portfolio with an effective date of the waiver prior to the first of— (AA) the date on which the ICE Benchmark Administration ( IBA 1-month USD LIBOR (BB) the effective date of an official public statement by the IBA or its regulator that the 1-month USD LIBOR is no longer reliable or no longer representative; or (CC) the LIBOR replacement date, as defined in section 3 of the Economic Continuity and Stability Act the special allowance rate calculation as described in subclause (II) shall, by operation of law, apply to all loans in such portfolio. (bb) In such event— (AA) the last determined rate of special allowance based on 1-month USD LIBOR will continue to apply until the end of the then current calendar quarter; and (BB) the special allowance rate calculation as described in subclause (II) shall become effective as of the first day of the following calendar quarter and remain in effect for all subsequent calendar quarters. . 11. Rulemaking Not later than 180 days after the date of enactment of this Act, the Board shall promulgate regulations to carry out this Act.

Summary: Economic Continuity and Stability Act This bill provides for the transition of certain financial contracts away from the London Interbank Offered Rate (LIBOR), a reference interest rate based upon the lending terms certain banks offer to each other for various lengths of time. LIBOR is set to be retired in 2023. Various financial contracts reference LIBOR as a benchmark for prevailing interest rates and use LIBOR in calculating certain payments or obligations. In the event a contract referencing LIBOR does not have a fallback or replacement rate provision in effect when LIBOR is retired, or a replacement rate is not selected by a determining person as defined by the bill, the bill provides for a transition to a replacement rate selected by the Board of Governors of the Federal Reserve System. The bill also provides for conforming changes to these contracts, the continuity and enforceability of these contracts, tax treatment, and protections against liability as a result of such a transition.