(Bloomberg) — For the past seven months, an arcane financial-markets proposal has been collecting dust in the statehouse halls of Albany, New York. Between the pandemic and the racial-justice protests, lawmakers have been so preoccupied that no one in either chamber has even initiated the legislative process on it.
But to bankers, investors and regulators, this is no run-of-the-mill document. It’s a proposal that’s crucial to ensuring that a huge swathe of the global financial system, involving deals worth potentially trillions of dollars, doesn’t turn into a chaotic, lawsuit-riddled mess when the London interbank offered rate is officially discontinued at the end of next year.
And while that still leaves 15 months to hammer out a solution, Albany is not expected back in session until January, and anxiety is already mounting among those on Wall Street who had originally expected the proposal to sail through the legislative process in the Spring.
So many contracts will fall into legal limbo without the legislation — which would slide a comparable, new rate into deals that don’t have provisions for a backup — that bankers say there’s really no way to try to renegotiate all of them, or even a fraction of them, in the run-up to Libor’s expiration. Which leaves them with little recourse for now beyond lobbying state lawmakers.
“We continue to have conversations with key stakeholders and we’re trying to move this forward,” said Tom Wipf, vice chairman of institutional securities at Morgan Stanley and chairman of the Federal Reserve-backed group guiding the U.S. Libor transition. “We’ve put forward something that has broad benefits for a wide range of market participants.”
It is certainly rare for a decision like this — with such massive repercussions for the world of finance — to be made in upstate New York.
It’s a consequence of the outsize role state law plays in governing the roughly $200 trillion in securities and commercial transactions tied to U.S. dollar Libor. The draft bill would guarantee financial products that lack viable language to deal with the benchmark’s end are shifted to a replacement, known as the Secured Overnight Financing Rate. SOFR currently sits at about 0.1%, slightly below three-month Libor.
Global regulators have remained steadfast that the timetable for doing away with Libor remains on track, despite the coronavirus outbreak causing a number of near-term goals and milestones to be pushed back.
Yet it’s also clear that there’s growing concern over how long the legislative process is taking. The Fed-backed Alternative Reference Rates Committee had originally hoped the “urgently needed” legislation would pass by May.
“Substantial delay or uncertainty may lead to some pricing dislocations” in markets if it persists too deeply into 2021, said Michele Navazio, a partner at law firm Seward & Kissel LLP. “I don’t have to emphasize that increased uncertainty often leads to liquidity problems and volatility.”
The law would impact everything from adjustable-rate mortgages and