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SFVegas: NY legislative route gains steam as Libor fix

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LAS VEGAS - The time left to resolve the Libor benchmark replacement predicament for $1.8 trillion in outstanding securitizations is getting short.

In less than two years, the ubiquitous London interbank offered rate is expected to expire – which is beforethe maturity date on more than $900 billion in existing asset-backed securities that currently reference Libor.

But the industry appears to be getting behind a fix that has yet to be officially proposed – and has only been under consideration for little more than a year: New York state legislative action.

At a panel during day two of the Structured Finance Association’s ABS trade show in Las Vegas, guest speakers said a strong consensus is building toward asking lawmakers in upstate New York to enact mandatory “fallback” language for Libor replacement in financial contracts that mostly fall under New York’s legal jurisdiction.

Kristi Leo, president of the SFA, showcased the trade association’s recent survey showing that at least half of all investors and broker-dealers prefer a legislative fix to the Libor replacement question … and trustees were unanimous in choosing legislation over any plan to extend Libor beyond 2021 (if available) or to create a “synthetic” version of Libor to govern the contracts.

And if presented as a Plan B should their preferred fallback options dissipate, “all the diversified financial institutions, broker-dealers and issuers/securitizers/servicers … 100% said yes” to the legislative path, Leo said at the conference, which was held at the Aria Resort & Casino. For investors, the legislative preference as a second option improved to 80% approval, she said.

Andrew Bailey

Involving New York legislators was first raised as a possibility in October 2018 by the Alternative Reference Rates Committee, a New York Fed-convened industry work group that has been studying and proposing alternatives to Libor in anticipation of the benchmark’s eventual demise. The ARRC's recommended replacement benchmark is a term-based version that will be adapted from the Secured Overnight Financing Rate the New York Fed publishes.

Libor is currently published from overnight interbank lending quotes from several panel banks by the ICE Benchmark Administration, but is expected to go dark after 2021 when the U.K.’s Financial Conduct Authority under Chief Executive Andrew Bailey stops requiring the major banks to submit quotes.

Jennifer Earyes, another panelist who is director of corporate development for student-loan servicer Navient, said the ARRC publicly presented the New York legislative option last November with a proposal of what potential legislation could entail.

According to Earyes, the ARRC proposal would call for uniform fallback language for contracts that don’t already have some provision for a new reference rate. Issuers of contracts that are “silent” on fallback language, for example, could either gather their own Libor quotes, or failing that “would fall back to the last reset of Libor, said Earyes, who heads Navient’s Libor transition office. “That's the peek behind the curtain that we've been given here.”

“One of the interesting things about the ARRC approaching the state of New York, though, is it gives a leadership issue,” said Chris Creed, a managing director and portfolio manager for Goldman Sachs, who also appeared on the panel. “If the ARRC publishes their fallback language and the state of New York says securitizations under New York law will default to this ... all of a sudden, there is industry consensus, right?”

As favorable as the option should be, timing is getting critically short to pursue that avenue, however. No Libor replacement legislation has been formally proposed, and without immediate action, the options might have to wait until next year.

“In New York, legislation like this is frequently put in the budget …[and] the budget is dealt with in March,” said another panelist, Howard Altarescu, a partner with Orrick Herrington & Sutcliffe. “It must be passed … by April 1. So it's either a ‘this-year’ issue or, if it’s not a ‘this-year’ issue in New York, it may be a year from now, which is very tight to Dec. 31, 2021.”

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