[Senate Hearing 117-357]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 117-357


        THE LIBOR TRANSITION: PROTECTING CONSUMERS AND INVESTORS

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING HOW THE FINANCIAL SYSTEM CAN MOVE ON FROM THE LIBOR SYSTEM
                               __________

                            NOVEMBER 2, 2021
                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
                                
                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                                


                Available at: https: //www.govinfo.gov/
                

                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
48-451   PDF               WASHINGTON : 2023   



            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                                  (ii)



                            C O N T E N T S

                              ----------                              

                       TUESDAY, NOVEMBER 2, 2021

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    26

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    27

                               WITNESSES

Thomas Wipf, Chair of The Alternative Reference Rate Committee 
  (ARRC) and Managing Director, Morgan Stanley...................     5
    Prepared statement...........................................    28
    Responses to written questions of:
        Senator Warren...........................................    43
Andrew Pizor, Staff Attorney, National Consumer Law Center.......     7
    Prepared statement...........................................    30
    Responses to written questions of:
        Senator Warren...........................................    44
J. Christopher Giancarlo, Senior Counsel, Willkie Farr & 
  Gallagher LLP, and Former Chairman, U.S. Commodity Futures 
  Trading Commission.............................................     8
    Prepared statement...........................................    34
Michael Bright, Chief Executive Officer, Structured Finance 
  Association....................................................    10
    Prepared statement...........................................    38

              Additional Material Supplied for the Record

ICBA letter......................................................    46
LIBOR letter.....................................................    47
CAMAC letter.....................................................    49
NAFCU letter.....................................................    50
Brookline Bank letter............................................    51
Statement submitted by SIFMA.....................................    52

                                 (iii)

 
        THE LIBOR TRANSITION: PROTECTING CONSUMERS AND INVESTORS

                              ----------                              


                       TUESDAY, NOVEMBER 2, 2021

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., via Webex and in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of 
the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Committee on Banking, Housing, and 
Urban Affairs will come to order. Welcome to the witnesses, who 
I will introduce in a moment.
    This hearing is in a hybrid format. Members have the option 
to appear either in person or virtually. I think all my 
colleagues know the rules of that and the procedures. Our 
speaking order will be as usual, that is by seniority of the 
Members who have checked in before the gavel comes down, either 
in person or virtually, and then by seniority of Members 
arriving later, alternating between Republicans and Democrats.
    I often begin these hearings by taking us back to 2008, and 
to the years that followed, because we are still living with 
the fallout, and in the case of the LIBOR scandal, we are still 
cleaning up a mess caused by the biggest banks in the world, 
still cleaning up a mess more than a decade later.
    As the housing market crashed and more than eight million 
workers lost their jobs, central bankers began to realize just 
how many markets were broken in the global economy.
    One of those was the interest rate system. Most people had 
never heard, maybe still have never heard of LIBOR. Like so 
much in the financial system, it is an opaque term for 
something that affects millions of people's bills and bank 
accounts and ultimately lives. LIBOR has been the most widely 
used interest rate benchmark around the world. It is used to 
set payments for millions of student loans, mortgages, and 
small business and auto loans. Some $300 trillion--three 
hundred thousand billion dollars--was tied to LIBOR at its 
peak. With that kind of money involved, it should surprise no 
one that bankers figured out a way to conspire to rig the 
interest rate, to enrich themselves.
    After the scandal broke in 2012, uncovering the banks' 
manipulation of LIBOR, this Committee and the Federal financial 
regulators studied the problems to determine who was at fault. 
U.S. and foreign regulators imposed billions of dollars in 
fines on several global banks for manipulating the interest 
rate and taking advantage of consumers and investors.
    Now, nearly a decade later, our financial system is finally 
transitioning away from LIBOR. Today we will consider how the 
financial system can move on from this benchmark set by a 
handful of the world's largest banks, a system we found out was 
ripe for exploitation. Part of that transition involves dealing 
with trillions of dollars in legacy contracts tied to LIBOR, 
and that will continue after the rate is discontinued in June 
of the year after next, of 2023.
    After a slow start, the Federal Reserve Bank of New York 
and the Federal Reserve Board here, along with industry 
stakeholders and consumer advocates, have established a path 
forward. They developed, as we know, a new, more reliable and 
transparent benchmark rate called SOFR, the Secured Overnight 
Financing Rate, and they have put forward a framework to 
address legacy loans and contracts that were written assuming 
that LIBOR would always exist.
    Because LIBOR is so widely used, homeowners and students 
who have never heard of LIBOR will be at risk when it is 
discontinued if we do not take action, and I am particularly 
appreciative of Senator Tester and Elizabeth and the work they 
are doing, and Senator Tillis also on that. If their loans do 
not have specific instructions about what happens if LIBOR 
disappears, or if their loans give loan servicers the 
discretion to pick a different rate, those borrowers would be 
in for a shock.
    Small and large businesses could be in a similar situation, 
forced to negotiate a loan tied to LIBOR at a time when they 
are just getting back on their feet from the pandemic.
    Banking agency officials and stakeholders have all said 
Federal legislation would help address those long-term loans 
and contracts, and reduce the potential for time-consuming and 
costly litigation.
    Our colleagues on House Financial Services began bipartisan 
work on a bill that addresses these problems, and as I 
mentioned, Senators Tester and Tillis are preparing a Senate 
companion. If done right, this legislation can help borrowers 
who do not have the ability to bargain with their student loan 
lender or mortgage banker, while also providing certainty to 
lenders. We know we need to act, and I appreciate these efforts 
by Members of our Committee.
    Under the current proposal, lenders with legacy contracts 
that do not specify a LIBOR alternative can transition to SOFR, 
so long as they do not make other changes that could harm 
borrowers. That would allow them to avoid potentially 
complicated litigation.
    It is frustrating that we are forced to spend taxpayers' 
time and money cleaning up after the biggest banks, again and 
again and again. Unfortunately, if we do not work to mitigate 
the damage from another big bank scandal it is always family 
businesses and homeowners and students and consumers who will 
pay the price.
    Our witnesses and their organizations have developed a 
narrow and consistent solution that protects small businesses, 
and families with mortgages, and Americans paying off student 
loans.
    I look forward to hearing from our witnesses, and to 
working with my colleagues to protect consumers and to protect 
the economy. We have proven we can come together on this 
Committee. We try to do it often and we succeed sometimes, to 
find areas of agreement, and to advance commonsense solutions 
for the people whom we serve. My hope is we can do the same on 
LIBOR.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman, and welcome, and 
thank you to our witnesses today.
    LIBOR, the London Interbank Offered Rate, has long been the 
most widely used U.S. dollar-denominated benchmark interest 
rate across all types of financial contracts. In 2013, the G20 
launched a global review of interest rate benchmarks after 
cases of misconduct in the reporting of LIBOR rates by a small 
number of banks and the significant decline in interbank 
lending volumes.
    As the breadth and depth of interbank loan deposit market 
liquidity greatly diminished it became clear that alternative 
rates with greater volume and a larger number of market 
participants would be more appropriate than LIBOR. In the 
United States, the Federal Reserve Board and the New York Fed 
convened the Alternative Reference Rates Committee, or ARRC, to 
identify an alternative to LIBOR.
    In 2017, the ARRC identified the Secured Overnight 
Financing Rate, or SOFR, as its recommended alternative. SOFR 
measures the cost of overnight or short-term borrowings 
collateralized by U.S. Treasury securities.
    Last year, the Fed, FDIC, and OCC directed banks to stop 
entering into new LIBOR contracts as soon as possible and no 
later than the end of 2021. The administrator of LIBOR will 
stop publishing all LIBOR settings by June 30, 2023. And 
although most existing contracts referencing LIBOR will have 
matured by that date, a number of contracts will not, and some 
lack the fallback language to replace LIBOR with a non-LIBOR 
index. As a result, many have called for Federal legislation to 
address these so-called ``tough legacy contracts.''
    Now I agree banks should stop writing new LIBOR contracts 
as soon as it is practical, and Federal legislation is likely 
needed to address tough legacy contracts. The unique and 
anomalous circumstances related to the LIBOR transition 
probably require action by Congress to amend contracts between 
private parties, but such congressional action should be a last 
resort.
    As we consider this measure, any legislation that addresses 
these tough legacy contracts must be very narrowly tailored, 
should not change the equities of these contracts, and they 
certainly should not affect any new contracts.
    In July, the House Financial Services Committee approved a 
bill that would replace LIBOR in these legacy contracts with a 
Fed-selected, SOFR-based benchmark. The bill takes a reasonable 
approach, and the Senate should carefully review it. In so 
doing, we should consider targeted amendments, such as ensuring 
that qualified non-SOFR benchmark rates are not disfavored in 
future contracts.
    While it is appropriate to mandate a SOFR-based index for 
this relatively small universe of tough legacy contracts, for 
new contracts banks should have the option to choose among 
qualified benchmark rates, including credit-sensitive rates, to 
the extent they are appropriate for their business models. 
Risk-free rates like SOFR may work well for some derivatives 
contracts and for some institutions active in the Treasury repo 
market, but they may not be well-suited for loans or certain 
community or regional banks.
    The funding costs for such banks typically increase 
relative to SOFR during periods of stress, which could create 
an asset-liability mismatch if loans were required to reference 
only SOFR. The Fed, FDIC, and OCC have previously acknowledged 
this dynamic. They have said the use of SOFR is voluntary and a 
bank may use, and I quote, ``any reference rate for its loans 
that the bank determines to be appropriate for its funding 
model and customer needs,'' end quote.
    An even broader group of regulators said, in the context of 
bank lending, that, and I quote, ``supervisors will not 
criticize firms solely for using a reference rate (or rates) 
other than SOFR,'' end quote. I think that is very important, 
which is why I am concerned this may be what the Biden 
administration financial regulators are actually not pursuing.
    Just last week, the Acting Comptroller of the Currency said 
the OCC's supervisory efforts will, quote, ``initially focus on 
non-SOFR rates,'' end quote, which suggests to me that the OCC 
may apply heightened supervisory scrutiny to non-SOFR rates. 
And last month, a senior New York Fed official said that banks 
that use a non-SOFR rate must do, quote, ``extra work,'' end 
quote, to ensure that the bank is, quote, ``demonstrably making 
a responsible decision,'' end quote.
    The SEC Chairman, Gary Gensler, has been even more 
explicit. On multiple occasions he has criticized one 
particular credit-sensitive rate. So these statements raise 
serious concerns that regulators, some regulators, are pressing 
all banks to use SOFR without any transparency or public input. 
It seems to me if a bank wants to price its loan off a rate it 
believes is a better reflection of its cost of funding or its 
customer needs than SOFR and regulators should not prohibit the 
bank from doing so.
    This pressure, however, pales in comparison to the 
preferred approach of President Biden's proposed nominee to 
lead the OCC. Professor Saule Omarova has written that widely 
used benchmark rates should either be preapproved by the 
Government, or worse, subject to, quote, ``utility-style 
regulation,'' end quote. In other words, the Government, not 
the market, would have a direct role in actually setting 
benchmark rates as it deems appropriate.
    This is just one example of the many radical ideas that 
Professor Omarova has proposed that demonstrate a clear 
aversion for democratic capitalism, and a clear preference for 
an administrative State where economic and market decisions are 
made by technocrats who think they know more than the market.
    Regulators should never disfavor qualified rates, and banks 
should have the choice to use any rate that meets well-
established criteria for benchmark rates.
    I hope to hear from today's witnesses about the transition 
from LIBOR, the potential for targeted Federal legislation to 
address these tough legacy contracts, and ways to preserve 
benchmark rate choice.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    I will introduce today's witnesses. Mr. Thomas Wipf serves 
as Chair of the Alternative Reference Rate Committee, which was 
convened by the Federal Reserve Board to help ensure successful 
transition from LIBOR to a more modest reference rate. Mr. Wipf 
is a Managing Director at Morgan Stanley.
    Mr. Andrew Pizor is Staff Attorney at the National Consumer 
Law Center's Washington office, where he works on issues 
related to mortgage financing and defending homeowners from 
foreclosures. He has served as an expert witness on mortgage 
origination and servicing issues.
    The Honorable Christopher Giancarlo is a Senior Counsel at 
Willkie Farr & Gallagher and previous Chair of the Commodity 
Futures Trading Commission. I often saw him on the Agriculture 
Committee and sometimes here. In that role, he oversaw 
regulation of futures options and swaps derivatives markets. He 
has testified often about financial and derivatives markets 
before Congress and to the EU Parliament.
    Mr. Michael Bright, also no stranger here, is Chief 
Executive Officer of the Structured Financial Association. He 
is Executive Vice President and COO of Government National 
Mortgage Association, Ginnie Mae. He was a director at the 
Milken Institute Center for Financial Markets, and we first 
worked with him when he worked in the office of Senator Robert 
Corker.
    Mr. Wipf, please begin. You are recognized for 5 minutes.

 STATEMENT OF THOMAS WIPF, CHAIR OF THE ALTERNATIVE REFERENCE 
  RATE COMMITTEE (ARRC) AND MANAGING DIRECTOR, MORGAN STANLEY

    Mr. Wipf. Thank you, Chairman Brown, Ranking Member Toomey, 
and Members of the Committee. I am honored to be here today on 
behalf of the Alternative Reference Rates Committee, the ARRC, 
to testify on the need for Federal legislation to address U.S. 
dollar LIBOR transition for legacy products and support the 
efforts of the Committee to bring that to fruition.
    The ARRC is comprised both of a broad set of private-sector 
firms and associations representing a range of perspectives on 
the LIBOR transition as well as a broad set of U.S. agencies, 
including the Federal Reserve, the CFTC, the SEC, Treasury, the 
OCC, the FDIC, and the FHFA, who observe our work. We were 
convened by the Federal Reserve Board and the Federal Reserve 
Bank of New York in 2014, in order to help address the 
financial stability risks that the Financial Stability 
Oversight Council had publicly identified concerning the use of 
LIBOR in the financial system.
    ARRC working groups have involved thousands of participants 
across more than 300 different institutions including lenders, 
borrowers, investors, and consumer advocacy groups. The ARRC 
has estimated that U.S. dollar LIBOR is referenced in over $200 
trillion notional financial contracts alone, and that roughly a 
third of these contracts will remain outstanding as of June 30, 
2023, when LIBOR will cease.
    The ARRC was convened to help facilitate a smooth 
transition and was asked to identify a robust alternative to 
U.S. dollar LIBOR, one that was appropriate to base trillions 
of dollars of contracts on, and to address risks to legacy 
LIBOR contracts.
    The ARRC selected the Secured Overnight Financing Rate, or 
SOFR, which is the U.S. Treasury repo market, as its 
recommended alternative, based on the fact that it is by far 
the most robust alternative to LIBOR available.
    There will always be a U.S. Treasury repo market both in 
good times and bad, and based on the widespread support from a 
broad range of market participants including end users and 
borrowers, we now expect that many market participants will 
choose to use SOFR, and many have already done so or are 
actively preparing to do so. However, we also support choice, 
and we have been clear since our inception that our 
recommendations are voluntary. At the end of the day, the 
market will determine which rates are used in the future.
    For many existing legacy contracts that reference LIBOR, 
however, things are much less simple. Many legacy non-financial 
corporate contracts referencing LIBOR have no fallback language 
whatsoever. Many financial contracts have fallbacks that would 
require parties to poll an unnamed set of banks in an attempt 
to recreate LIBOR, which we believe would be both burdensome 
and unsuccessful. Others refer only to the last published value 
of LIBOR, effectively converting what were floating-rate 
instruments into fixed-rate instruments. These contracts are 
difficult or impossible to change in the absence of a 
legislative solution. Without legislation, parties to these 
tough legacy contracts will face significant operational and 
market disruptions, contractual disputes, and economic 
hardship.
    To help address this risk to these tough legacy contracts, 
the ARRC developed and promoted legislation for contracts 
governed by New York law to avoid the disruptions, market 
uncertainties, and confusion that would otherwise occur when 
LIBOR ends. The passage of State legislation in New York, and 
subsequently also in Alabama, has been extraordinarily 
important, helping to address the risks of the LIBOR 
transition. In particular, many financial contracts are covered 
under New York law. However, we know that many nonfinancial 
corporate contracts, consumer loans, and securitizations are 
not covered.
    So while the ARRC is prepared to advocate for similar 
legislation in other States, we cannot reasonably hope for a 
comparable legislative solution in all 50 States and the 
District of Columbia. Federal legislation can help to ensure an 
equal outcome for all Americans. The legislative proposal 
before your Committee would help to ensure that equal outcome.
    As with the legislation passed in New York and Alabama, the 
legislative proposal is purposefully narrow, intended only to 
address contracts that could not otherwise be changed. For 
contracts that already allow one party the right to choose a 
new rate, a feature of most consumer contracts referencing 
LIBOR, the proposed legislation does not alter the right of the 
designated party to determine the successor rate, but the 
legislation does provide safe harbor to encourage a choice 
based on SOFR, which has had the strong support of consumer 
advocacy groups in addition to lenders and investors, and this 
is intended to help ensure that consumers are treated fairly in 
this transition.
    For contracts that have no fallback language or language 
that only refers only to a poll of banks or some past value of 
LIBOR, the proposed legislation recognizes that a unique 
successor rate must be named in order to avoid legal conflict. 
We believe that this form of tailored legislation is 
appropriate and necessary to avoid disruption to the economy.
    We support the legislative proposal before your Committee, 
are grateful for your consideration of it, and on behalf of the 
ARRC I thank you.
    Chairman Brown. Thank you, Mr. Wipf. Mr. Pizor, you are 
recognized for 5 minutes. Thank you for joining us.

 STATEMENT OF ANDREW PIZOR, STAFF ATTORNEY, NATIONAL CONSUMER 
                           LAW CENTER

    Mr. Pizor. Chairman Brown, Senator Toomey, and Members of 
the Committee, we thank you for the opportunity to testify 
today on the importance of protecting consumers from 
potentially higher loan costs that could be triggered when the 
benchmark LIBOR index ends. I provide my testimony here today 
on behalf of NCLC's low-income clients.
    My primary message is to encourage the Senate to support 
H.R. 4616 but within a central change, a more limited safe 
harbor. With this change, H.R. 4616 will protect both consumers 
and the credit industry from possibly devastating consequences 
from the transition away from the LIBOR.
    The LIBOR is used to adjust the rate on more than $1 
trillion of consumer mortgages, student loans, and other credit 
contracts. When LIBOR ends in less than 2 years, the credit 
industry must substitute a new index. If the transition is not 
done correctly the resulting higher loan payments could force 
millions of consumers into default and lead to widespread 
litigation against industry.
    The typical adjustable-rate loan allows the creditor broad 
discretion to choose a replacement index, but there is no exact 
replacement for the LIBOR. So without clear legal protections, 
both consumers and industry could be at risk, consumers from 
higher payments that could trigger defaults and industry from 
lost profits and litigation.
    Additionally, some contracts require other adjustments when 
a new index is used. These adjustments are called conforming 
changes because they bring the contract into conformity with 
the replacement index. However, there is no consensus on how to 
determine what these conforming changes are or their legality.
    Based on our experience with predatory lending and problems 
in the loan servicing industry, we are concerned that some 
companies may abuse or mismanage their discretion by trying to 
gouge consumers. There are several possible scenarios for how 
this could happen. Our biggest fear is that the lender could 
pick a replacement index that unfairly increases the loan 
payments, or under the guise of conforming changes a lender 
might change the method for calculating payments or the margin 
used to set the interest rate. Consumers have no control over 
this process. If harmed, their only recourse will be to sue.
    Because this issue affects such a broad range of the 
economy, industry participants, Government regulators, and 
consumers groups have been meeting to discuss possible 
solutions. These meetings have produced a consensus that the 
best replacement for the LIBOR is the SOFR. But these groups 
cannot force anyone to use it, and it is not clear how many 
companies will voluntarily adopt it for legacy contracts. We 
understand that note-holders are delaying this decision because 
of concern over litigation risk.
    Currently the House is considering H.R. 4616. This bill 
includes several provisions that deal with replacing the LIBOR. 
For consumers, the single most important creates a safe harbor 
for note-holders that voluntarily use the appropriate version 
of the SOFR to replace the LIBOR.
    The current bill includes broad immunity from lawsuits when 
SOFR is selected and the related conforming changes are made. 
We support the concept of a safe harbor, but the current 
language is just too broad and could allow bad actors to escape 
responsibility, even when they hurt consumers.
    Now we have discussed this problem with industry and we 
have agreed on some adjustments to the safe harbor language 
that would enable us to support it. My written testimony has 
the details on this point.
    But overall, it is very important for Congress to adopt 
legislation that encourages note-holders to use the SOFR in 
legacy contracts when the LIBOR ends. This is important enough 
that we are actually supporting creating a safe harbor for 
note-holders, something we would not normally do, but it is 
equally important that the safe harbor be narrowly tailored so 
it is not abused.
    I want to conclude by thanking industry, the Members of 
this Committee, and the House Committee for working with us to 
find a solution that helps everyone, and I am happy to answer 
any questions you may have. Thank you.
    Chairman Brown. Thank you. Mr. Giancarlo, you are 
recognized for 5 minutes. Thank you for joining us.

STATEMENT OF J. CHRISTOPHER GIANCARLO, SENIOR COUNSEL, WILLKIE 
   FARR & GALLAGHER LLP, AND FORMER CHAIRMAN, U.S. COMMODITY 
                   FUTURES TRADING COMMISSION

    Mr. Giancarlo. Chairman Brown, Ranking Member Toomey, and 
Members of the Committee, thank you very much. It is good to be 
before you once again.
    I am Chris Giancarlo, Senior Counsel at Willkie Farr & 
Gallagher. I am the former Chairman of the CFTC, an agency that 
has led and continues to lead the transition away from LIBOR. I 
am also an independent director of the American Financial 
Exchange.
    I have extensive experience both as a market regulator and 
as a business executive with financial benchmarks, and 
particularly with LIBOR. During my 5 years at the CFTC I 
traveled across the country to meet with Americans and 
businesses who depend on futures markets to hedge the prices of 
products and commodities they produce. I walked factor floors 
in Illinois, pecan farms in Georgia, grain elevators in 
Montana, feed lots in Kansas, and power plants in Ohio. I went 
900 feet underground in a Kentucky coal mine, 90 feet in the 
air in a North Dakota natural gas rig, and flew 900 feet in the 
air in an Arkansas crop duster.
    Almost all of the small and medium-sized businesses that I 
met were supported by America's community, minority, and 
regional banks. I support open and competitive U.S. markets, 
but my comments today are frankly less about the need for 
competition but more about choice of complementary benchmarks.
    America's trading markets feature a diverse set of pricing 
benchmarks serving different needs. In our grain futures 
markets, there are multiple pricing benchmarks, including 
Chicago's soft red winter wheat, Kansas City hard red winter 
wheat, and Minneapolis hard red spring wheat. The different 
benchmarks serve to establish the cost of different varieties 
of wheat used in different bread products. Pizza dough, for 
example, is made from different wheat than breakfast cereals.
    In our oil markets there are also different benchmarks. 
West Texas Intermediate and Brent crude oil, again, setting 
distinct prices for different fuel products like domestic auto 
gas or industrial oil.
    And, of course, in our equity markets there are multiple 
benchmarks like the Dow Jones Industrials, the S&P 500, and the 
Russell 2000 to measure the different performance of large 
multinationals compared to early stage growth companies.
    Such variety of specifically designed benchmarks allows 
market participants to make choices that are right for their 
investment needs rather than a one-size-fits-all approach. 
Choice of benchmarks is a reason why U.S. futures and equity 
markets are the envy of the world.
    Strangely, one U.S. market that has not a similar range of 
choice of benchmarks is bank lending, where LIBOR has been 
dominant for decades. In fact, the ubiquity of LIBOR in 
American commercial lending is one of the reasons why ending it 
presents such a potential crisis today. Lack of choice of 
benchmark is itself a systemic risk.
    The United States banking industry is unlike any other in 
the world. On one hand, our large money center and Wall Street 
investment banks lead the world in global trading, investment 
banking, and large project finance. But on the other hand, our 
community, our minority, and our regional banks spread out 
across the urban, suburban, and rural landscape finance the 
everyday needs of America's consumers, small and medium-sized 
businesses, minority communities, and domestic job creators.
    A banking industry that is so varied, so complex, and so 
essential to our economy needs the diversity and durability 
that comes from choice of interest rate benchmark. A one-size-
fits-all approach would be a source of systemic risk to the 
U.S. economy.
    As we move away from LIBOR, we must be clear that lending 
institutions, be they large money center banks or local, 
regional, or MDI banks, should have the flexibility to choose 
amongst appropriate benchmark alternatives that meet their 
customer needs.
    I urge you to consider legislation ensuring that America's 
community lenders have the ability to choose among sound and 
properly qualified benchmark replacement that meet the 
international standards based upon robust markets with 
transparent price discovery. Having choice among multiple 
qualified benchmarks not only facilitates the transition away 
from LIBOR but it also enhances efficiency, reduces systemic 
risk, and encourages economic growth for generations to come.
    Thank you.
    Chairman Brown. Thank you. Mr. Bright, welcome to the 
Committee. You are recognized for 5 minutes.

     STATEMENT OF MICHAEL BRIGHT, CHIEF EXECUTIVE OFFICER, 
                 STRUCTURED FINANCE ASSOCIATION

    Mr. Bright. Chairman Brown, Ranking Member Toomey, and 
other Members of the Committee, my name is Michael Bright, CEO 
of the Structured Finance Association, or SFA. On behalf of the 
member companies of SFA I thank you for inviting me to testify. 
I also thank you for your focus on finalizing the transition 
away from LIBOR for millions of consumers and investors.
    The Structured Finance Association is a consensus-driven 
trade association with over 370 institutional members. SFA 
members include issuers and investors, data and analytic firms, 
law firms, servicers, accounting firms, and trustees. 
Importantly, our investor firms are fiduciaries to their 
clients. Unlike some trade associations, before we take any 
advocacy position our governance requires us to achieve 
consensus rather than a simple majority.
    Let me first make abundantly clear that many of SFA member 
companies were impacted by the LIBOR scandal. We need to ensure 
that this never happens again. Contracts based on a floating 
rate index must be able to rely on the integrity of that index. 
This is a critical component of the work SFA is engaged in 
today.
    The cessation of LIBOR has been an enormous challenge 
overhanging the capital markets since 2017. At that time, the 
Financial Conduct Authority, LIBOR's regulator based in London, 
announced that the production of LIBOR would likely end in 
2021. Over the subsequent years, extensive progress has been 
made to move away from these rates. Today, out of over $200 
trillion of contracts that are tied to LIBOR in the U.S., 
nearly all have managed to put in place a plan for transition.
    Even with this multiyear effort, however, SFA estimates 
that roughly $16 trillion of contracts have no realistic means 
to be renegotiated and amended. These so-called ``tough legacy 
contract'' were made prior to knowing LIBOR was going away. 
These include mortgages, student loans and business loans, and 
therefore impact a broad range of American households and 
communities. Sixteen trillion dollars is a large sum, posing 
serious risk to the financial system.
    After lengthy deliberation and debate, a consensus position 
across the entire market has emerged that a Federal safe harbor 
for the transition of these tough legacy contracts is the only 
option to avoid costly litigation and consumer disruption. The 
many other alternatives examined simply did not work. We now 
see that absent Federal legislation to provide a safe harbor, 
retirees and savers will be forced to absorb tens of billions 
of dollars in legal costs.
    But legislation can offer a solution. A tailored safe 
harbor can provide certainty for all parties in a LIBOR 
contract. If done properly, SFA believes that legislation will 
respect some important principles. For one, legislation to 
address LIBOR should not create any value transfer among 
contractual parties. The safe harbor should be as narrow as 
possible. Legislation should not impact choices of rates for 
new contracts but should instead focus solely on legacy 
contracts. And finally, legislation should not disrupt 
contracts that have adequate fallback language in them already.
    With these principles in mind, SFA is strongly supportive 
of the bill that recently passed out of the House Financial 
Services Committee. Simultaneously, on behalf of the entire 
membership of SFA, I specifically want to thank Senators Tester 
and Tillis for the leadership they are providing on this issue 
in the Senate. We are here to provide any assistance that you 
all need.
    Timing is critical. While market participants are working 
tirelessly to transition contracts that allow it, loans and 
tough legacy contracts are in limbo. Rulemaking by the Fed 
takes time, as will implementation of those rules. So while the 
formal date for the end of most LIBOR rates is now mid-2023, 
the problems and legal costs begin much sooner.
    In conclusion, let me thank you all again for your focus on 
helping to move our markets away from LIBOR once and for all. 
This work is critical to ensuring that all investors, 
consumers, and businesses are treated fairly. It also will help 
to prevent billions of dollars of potential litigation where no 
one wins but savers and retirees foot the bill.
    Thank you, and I look forward to answering any questions 
that you have.
    Chairman Brown. Thank you, Mr. Bright. All of you obviously 
have been essential in your work on the LIBOR transition. I 
would like to ask each of you, and I will start with Mr. Wipf, 
to concisely and briefly just tell us why it is important to 
have Federal legislation to deal with the problematic legacy 
loans and contracts. Mr. Wipf.
    Mr. Wipf. Thank you, Senator. As it relates to tough 
legacy, as we work through this, there have been many, many 
contracts that will be amended bilaterally by market 
participants. As we get down to the most challenging contracts 
with a tough legacy it is critical that we have legislation to 
the extent that it will help smooth that over, and as has been 
mentioned here, minimize value transfer, and present a fair, 
effective, and clear approach. And that clarity to reduce 
uncertainty for those borrowers and lenders in those contracts 
will be critical, and I think time is of the essence because we 
are really in a position where absent a solution, many of those 
note-holders and others may have to take action away from that.
    So our goal really here is to present that fair, effective, 
and clear solution to those toughest legacy contracts, which 
really is one of the final pieces of this transition puzzle and 
will help us close the book on this.
    Chairman Brown. Mr. Pizor.
    Mr. Pizor. Thank you. We are concerned that the industry is 
just paralyzed by litigation risk at this point. They need some 
clarity because they are worried that no matter what index they 
choose they are going to be sued. If payments go up or if 
payments go down, consumers and investors will be affected.
    So our first choice would be that Congress require use of 
the SOFR in legacy contracts, but we understand that is not 
going to happen. So we think a safe harbor will be a good 
inducement to choose the SOFR. It will eliminate the litigation 
risk and we are confident that it has been carefully vetted 
that it is the closest to the LIBOR.
    Congress needs to do this because there just is not time 
for all 50 States to do it, and that will provide the clear 
guidance, clear playing field for the legacy contracts to move 
forward until they are terminated.
    Chairman Brown. Thank you. Mr. Giancarlo.
    Mr. Giancarlo. Quite briefly, it is about moving away from 
the benchmark that is deeply engrained to the U.S. economy and 
has been for four or five decades now, underlying so much of 
what we do, from the consumer level all the way up to our large 
institutions, and to do so in a way to move away from this with 
a minimum amount of adverse impact on our economy, legal costs, 
legal uncertainty, economic costs. So it is about clarity, 
legal certainty, and reducing the trauma to the economy of this 
transition.
    Chairman Brown. Mr. Bright.
    Mr. Bright. Yeah. Echoing everything everyone here has 
said, without legislation, contractual parties are going to see 
court guidance on what rates to use, and if they do that, 
consumers will get different rates and maybe disparate 
treatment there, and also importantly, that costs a lot of 
money, tens of billions of dollars, we estimate. Those costs 
float down through to the investor because often savers, 
retirees, and so it is just court costs that we should avoid.
    Chairman Brown. Thank you. Mr. Pizor, you mentioned the 
discussions among consumer and industry groups on consensus 
language to further tailor the legislation to better protect 
consumers. Give me your thoughts on why that is important, 
benefiting borrowers and lenders.
    Mr. Pizor. I am sorry. I did not hear your quite----
    Chairman Brown. Why those changes protecting consumers are 
important and why they would benefit borrowers and lenders?
    Mr. Pizor. Well, there are certain expectations that all 
the parties have had going into these contracts. And again, I 
just want to emphasize we are focusing on the legacy contracts. 
People have had expectations about what the LIBOR would do, 
what their rates would be like in the future. And so it is 
appropriate that whatever index replaces that should be as 
close as possible to the LIBOR to match those expectations, and 
that will be the SOFR.
    Now we are willing to support a safe harbor to encourage 
companies to do this, but it needs to be properly tailored so 
the safe harbor only encourages selection of the SOFR and 
making appropriate conforming changes. We do not want bad 
actors to see this as an opportunity to encourage some extra 
transfer of value.
    The current language in the House bill, we are concerned, 
is so broad that it would allow bad actors to escape liability 
for taking opportunity to gouge consumers. But we think we have 
agreed with industry on some substitute language that will meet 
everyone's needs. It will give a safe harbor for doing the 
proper conforming changes, for choosing the SOFR, but it will 
not allow people to run amok. And we think it is a very viable 
option.
    Chairman Brown. Thank you. Mr. Wipf, last question. LIBOR 
will not be published until June 2023, as you know, and you and 
ARRC and other stakeholders have indicated it is important for 
Congress to act soon, even though that is 2 years away. Mr. 
Bright said timing is critical just a moment ago. What will 
that lead time allow for? Is there a risk of acting too slowly?
    Mr. Wipf. Yes, I think there is. I think our history in the 
New York legislation gives us a sense that that builds a lot of 
confidence. So as market participants see these outcomes taking 
place and they see progress on these legislative paths that 
gives comfort to the market and I think allows good market 
functioning while these things take place. But we are in a 
pretty short time zone with 18 months after the end of this 
year that, you know, you think about investors that hold these 
securities, borrowers and lenders who do not have the ability 
to amend these contracts may have to take other action, whether 
that be--you know, and we want to reduce the prospect of fire 
sale on these securities and we want to reduce the prospect of, 
you know, litigation as we get there.
    But the goal really is to provide that confidence to the 
market that we are moving down a path, and I think that 
certainly the New York State legislation showed us that that 
can be helpful, so I think we are in a pretty tight shot clock 
right now.
    Chairman Brown. Thank you. Thank you all. Senator Toomey.
    Senator Toomey. Thanks, Mr. Chairman. For Chairman 
Giancarlo, in your testimony you talked about two fatal flaws 
that required and led to the transition of LIBOR. One was the 
shallowness of liquidity, by which I think you were referring 
to a thin trading volume. The other one was the narrowness of 
liquidity, as you put it, by which I think you meant a small 
number of banks that would participate in establishing LIBOR.
    So it seems that a problem with inadequate liquidity is 
that the rate that is determined might not accurately reflect 
actual borrowing and lending costs, and therein lies problem. 
So could you help explain for us how it is that SOFR, Ameribor, 
and maybe other alternatives rates avoid these pitfalls, which 
is the shallowness and narrowness of liquidity not a problem in 
these other rates?
    Mr. Giancarlo. Thank you, Senator Toomey. You know, both at 
my 5 years at the CFTC but also the decade and a half I spent 
before that as a senior executive of a firm that actually 
managed marketplaces for market makers, one of the largest 
marketplaces for a range of sophisticated financial products 
called swaps, and others, so I have spent part of my 
professional career considering the challenge of liquidity in 
trading markets.
    And there is a phrase called the ``liquidity puzzle,'' that 
people that are active in marketplaces understand. Liquidity is 
never one number or one feature. There are a number of facets 
that go into liquidity. And LIBOR suffered from a failure in at 
least two of the most important facets, and that is that the 
trading volume was actually quite shallow. In a number of the 
tenors of LIBOR there is less than a dozen trades a day. But 
another factor was the limited number of actually participants 
in that market, a half dozen or so Wall Street banks.
    So there is a lot that goes into healthy liquidity. As we 
talked about, depth is one. Breadth and diversity of market 
participants is another. Concentration is another. Is the 
liquidity provision concentrated amongst a small number of 
firms?
    And then there is the question of access to the liquidity. 
Is the liquidity available to all participants, and if so, at 
what cost? Are there different cost factors for some 
participants? And then finally dynamics. Under what market 
conditions does that liquidity diminish or does it expand?
    Senator Toomey. And just briefly, do these other indices, 
are they clearly superior in all of these aspects of liquidity 
to LIBOR?
    Mr. Giancarlo. Indeed. I think a lot of the qualified 
benchmarks that we are talking about today address a lot of the 
shortcomings of LIBOR, but address it in different ways, 
because--and the point I am looking to make is that market 
participants have different needs for liquidity at different 
times and different types of liquidity, and the different 
alternative benchmarks present superior aspects to LIBOR and a 
number of these different liquidity factors.
    Senator Toomey. And I think you shared the view that that 
is part of the reason why it is important that financial 
institutions have a range of choices in setting a benchmark 
that suits their business model, their customers' needs, and so 
on.
    Let me move on to another issue, which is, as I mentioned 
earlier. President Biden's nominee to lead the OCC, Professor 
Saule Omarova has proposed a fundamentally different approach 
to benchmark rate regulations. In a paper on, quote, 
``systemically important prices,'' end quote, or SIPIs, as she 
calls them, she proposes, and I quote, ``requiring licensure or 
preapproval of private institutions that establish or maintain 
widely used benchmarks which receive SIPI designation,'' end 
quote. And alternatively she suggests something that she 
describes as utility-style regulation of benchmark rates, for 
example, through a SIPI rates ports.
    So, in other words, what she is advocating is that the 
Government, not just the market but the Government play a 
direct role in actually setting interest rates to be used in 
commercial contracts.
    Given your experience as a regulator in the private sector, 
do you think it is a good idea for the Government to decide 
what interest rates are generally on a given day?
    Mr. Giancarlo. So I have experience with this, because the 
European approach, the continental EU approach, is often to 
dictate what components go into a benchmark and what the 
formula must be. And the problem with that is benchmark 
providers then design their benchmark to meet regulatory 
standards, as opposed to what I might call the more American 
approach is that benchmark developers develop the benchmark to 
meet commercial standards.
    And there is a big difference between a benchmark that is 
designed to meet the commercial needs and where commercial 
enterprises, if they do not feel that benchmark adequately 
reflects the characteristics they are looking to can go to a 
different benchmark, as opposed to regulators saying, ``We are 
only going to let there be so many benchmarks and they need to 
meet these regulatory requirements,'' which then can be abused 
politically, because you could see that regulators say, ``Well, 
we have a constituent here who feels he is underweighted in 
your benchmark so you need to adjust your benchmark to meet 
these political--''
    Senator Toomey. I get that distinction in how you design 
the benchmark, but is it not an order of magnitude beyond that 
if you are advocating that there be some Government 
representation in terms of the actual setting of the rate on a 
given day?
    Mr. Giancarlo. Yes, indeed.
    Senator Toomey. Yeah. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey. Senator Reed of 
Rhode Island is recognized for 5 minutes.
    Senator Reed. Thank you very much, Mr. Chairman. Let me 
thank the witnesses for their very hard and thoughtful work on 
this very important topic. I appreciate all you have done.
    Mr. Pizor, what kind of protections should Congress and the 
banking agencies consider in order of prioritizing interest of 
consumers during this transition?
    Mr. Pizor. Well, I think it is very important that Congress 
prioritize fairness in the selection of the rates. As I 
mentioned, people who have the LIBOR already in their contract, 
they know what their payments are going to be, they have 
expectations about how much the payments are going to change, 
and the SOFR is really the only one that can match those 
expectations going forward for legacy contracts.
    So we need Congress to ensure that this fairness in the 
selection of the rate, that no one uses that as an opportunity 
to, you know, seek it as a profit-making opportunity. It is 
really just about fairness of continuing these contracts on the 
standards that are already in place.
    Senator Reed. So essentially one of the goals would be to 
maintain a constant, in parentheses, rate, one that a borrower 
expected to have throughout the course of the contract. Is that 
fair?
    Mr. Pizor. Yes, exactly.
    Senator Reed. Thank you. Mr. Wipf--let me find my notes 
here--what design features of SOFR ensure that the 
vulnerability of LIBOR will not reappear down the road, that we 
will not reinvent a LIBOR?
    Mr. Wipf. Thank you, Senator. When the ARRC began our work 
we looked at what we saw were the fault lines within LIBOR, and 
the single biggest, I say, point of failure was the reliance on 
expert judgment. So as Mr. Giancarlo described, if we have a 
very few underlying transactions that represent the interbank 
lending market the rest was filled in by expert judgment by the 
panel banks. So we knew that our path at the ARRC was to 
determine a rate that will be robust and transaction-based, and 
have no reliance on expert judgment.
    That path that led us to SOFR over a 2-year public 
consultation period was defined at the top priority, that we 
could construct a rate that consisted of actual transactions 
that could be administered and transparent, durable, robust 
over good times and bad. So we identified SOFR as the most 
suitable alternative for LIBOR for institutions of all sizes. 
It is based on over $800 to $1 trillion in daily transactions 
in the highly liquid, overnight U.S. Treasury repo market, from 
a wide range of market participants, and is administered by the 
New York Fed.
    So based on the daily repo market transactions, SOFR is, by 
intent and construction, a reliable representative indicator, 
and most importantly, puts no reliance on expert judgment, is 
entirely transaction based, is robust, durable, and will work 
in good times and bad.
    Senator Reed. Thinking back to the LIBOR crisis, it was not 
expert, it was self-interest that caused the deviations from 
what everyone thought was a completely interest-free measure. 
And in the mechanism you are setting up there is no financial 
self-interest in any of the rate setters. Is that fair?
    Mr. Wipf. By having a large dataset of transactions we 
reduce that significantly to near zero. The goal really is to 
make sure that this is transaction-based, no reliance on expert 
judgment, and has a wide dataset, so that $800 to a trillion, 
put that side by side with, as Mr. Giancarlo said, less, 
perhaps, than $1 billion that was underpinning LIBOR and that 
reliance on expert judgment, which we have removed.
    Senator Reed. Final question, that is, this has been 
adopted in Alabama and New York. Is there any experience yet in 
those two States? Has it gone into effect?
    Mr. Wipf. So I think at this point what we have seen is 
that, you know, certainly contracts are covered by New York law 
and provide a lot of confidence for those market participants, 
but until we get to the end of LIBOR we are not going to see 
how those play out. But the actual fallbacks that are in place 
are the same fallbacks that we are talking about here today.
    Senator Reed. So you have seen that contracts have been 
rewritten already to include SOFR in New York State?
    Mr. Wipf. Yes. So that would be the fallback that would be 
applied at the end of LIBOR.
    Senator Reed. Well, thank you all again very much for the 
hard work you have done. This is a very important topic. Thank 
you.
    Chairman Brown. Thank you, Senator Reed. Senator Hagerty 
from Tennessee is recognized for 5 minutes.
    Senator Hagerty. Thank you, Chairman Brown and Ranking 
Member Toomey. I appreciate your holding this hearing. And I 
want to thank our esteemed panel. I appreciate you being here, 
making your testimony today. This is indeed an important topic, 
as we all know.
    It is important to discuss what is potentially needed from 
Congress here, as our financial sector transitions from the 
LIBOR benchmark rate, which is embedded, literally, in 
trillions of dollars of contracts. This issue impacts everyone. 
It includes mortgages, student loans, small business loans, and 
it needs to be addressed.
    The question is how do we accomplish this transition in an 
orderly and timely fashion? How do we do it in a manner that 
minimizes cost and uncertainty? How do we do it in a way that 
protects the interest of consumers and investors? And let me be 
clear here. To the extent that preemption of State law is 
necessary here, it should be done in a narrowly tailored 
manner, one that minimizes adverse Presidential effects.
    I am deeply concerned by the potential ramifications if 
third-party trustees, who administer certain contractual 
provisions in the structured finance market are required to 
seek direction through protracted judicial proceedings. I have 
seen the estimates that there may be roughly $16 trillion of 
legacy contracts, including mortgages, student loans, small 
business loans still outstanding after mid-2023, that would not 
contain fallback language that would address this transition 
from LIBOR.
    I have also heard that certain transaction parties, such as 
trustees and fixed income deals, have already begun to notify 
bond-holders that they will indeed approach the courts for 
guidance some 12 to 18 months out prior to the cessation of 
LIBOR so that they can be ensured to have legally protected 
resolution to continue to make bond payments on time.
    So I would like to ask each of the panelists, in turn, to 
opine on why legislation is required to fix this as well as the 
potential costs and the impact of not getting Federal 
legislation and the importance of getting this done very 
quickly.
    First, Mr. Bright, I would like to turn to you.
    Mr. Bright. Thank you, Senator. I think you articulated it 
exceptionally well. The reason is that trustees will need to 
seek judicial guidance in order to select what rate, you know, 
they are going to administer for these contracts that are 
silent or that do not have adequate fallback language embedded 
in them. And that process is lengthy, which means it will be 
very disruptive and confusing for consumers----
    Senator Hagerty. And not necessarily consistent either.
    Mr. Bright. Completely inconsistent. There is absolutely no 
certainty that there is anything that would be followed as a 
precedent in these contracts. We have analyzed this in great 
detail. These contracts are all very different. They have 
slight differences that could lead, you know, one judge to see 
it differently than someone else. And so yes, consumers would 
not be treated equally. So that is absolutely critical.
    The other point that you make, which I completely agree 
with, is that these court costs, not only are they lengthy but 
they are expensive, and the way these trustee contracts are set 
up, these securitization deals are set up, those costs will 
flow through to the end investor, and the end investor, these 
are fixed-income deals, these are largely retirees, these are, 
you know, stable, pension, 401(k) type investors, and they are 
going to bear the costs. We have put some estimates down that 
we have it in the tens of billions of dollars that just seems 
needless, and hopefully with everybody's work we can avoid 
that.
    Senator Hagerty. Got it. Mr. Wipf, I will turn to you next.
    Mr. Wipf. Thank you. I think the way we have looked at this 
is that with the work of the ARRC and the work across the 
industry on the voluntary solutions to these problems that when 
we look at the numbers of $200-plus trillion a third of that 
remaining post June of 2023, and working down to this tough 
legacy, that what we have seen is an ability for counterparties 
to amend these contracts, working all the way through, and we 
get down to this small--not relatively small but very large 
tough legacy position, where the parties to those contracts 
need to take action and need to do something soon.
    So I think to the extent that we have seen, again, the 
history of the New York State legislation shows us that when 
that legislation is in place we can create confidence, and I 
think that the legislation that will provide sort of fair, 
effective, and clear conclusions. So that is certainty, and 
removing that uncertainty from these contracts is absolutely 
mission critical to the transition, and as I said earlier, 
really one of the last pieces of the puzzle to help us close 
the book.
    Senator Hagerty. Got it. Mr. Pizor.
    Mr. Pizor. The problem with everyone going to court to try 
and get a solution to this is it is time consuming, there are 
going to be various decisions across the country, and the 
delay, all those factors are going to create instability, which 
will harm access to credit in the future, it could affect the 
price of credit. And those things are certainly bad for 
consumers and they are bad for industry as well. So the sooner 
Congress can address this the sooner everyone will know what 
the roadmap is going forward, and that is just going to make 
for a smoother transition.
    Senator Hagerty. I appreciate the sense of urgency. I would 
like to finish with my good friend, my former classmate, the 
Honorable Chris Giancarlo.
    Mr. Giancarlo. It is nice to address you as Senator. The 
last time I did I think it was as Ambassador, so it is a 
delight to see you here in the Senate.
    As a great fan of our Federalist system, which I think has 
provided so many benefits to our citizens, I think, like you, 
cautious whenever we take up Federal legislation that would 
override States' rights. But I think this is one case where, 
done properly, done in a very narrowly tailored way, I think 
this can provide great benefit to the very market participants 
you have mentioned, trustees and others, that need legal 
certainty here and do not have to overly burden our court 
system to try to work out what is the intent here.
    But the narrow tailoring is very important. You know, the 
American people do not like it when they feel the Federal 
Government or others are tipping the scales in favor of perhaps 
winners or losers, and I think it is very important we make 
clear, outside of tough legacy contracts, that market 
participants have choice of benchmark to suit their unique 
needs.
    Senator Hagerty. Got it. Thank you. Thank you, Mr. 
Chairman.
    Chairman Brown. Senator Menendez of New Jersey is 
recognized for 5 minutes.
    Senator Menendez. Thank you, Mr. Chairman. Let me welcome 
Mr. Giancarlo, a fellow New Jerseyan, to the Committee, and I 
certainly thank you for your previous service.
    Today, 3.3 million private student loan borrowers owe an 
estimated $80 billion in loans that reference LIBOR. As lenders 
transition away from LIBOR, I am concerned about a lack of 
protections for borrowers in private student loan contracts. 
Mr. Pizor, as lenders transition away from LIBOR does the 
existing language in many private student loan contracts allow 
those private lenders to choose a replacement reference rate 
that is systematically higher than LIBOR, thereby increasing 
the borrowers' interest rates?
    Mr. Pizor. Yes, it does, and that is one of our concerns.
    Senator Menendez. So how can Congress and regulators ensure 
that lenders choose a replacement rate that is fairest to the 
borrower?
    Mr. Pizor. Well, short of mandating the rate, the best 
thing Congress can do is to offer a safe harbor from litigation 
that will encourage investors to choose that particular rate. 
That eliminates the risk of litigation to them, which is costly 
and destabilizing. The end result will work for consumers. And 
as long as it is narrowly tailored and does not create an 
opportunity for other misconduct we think a safe harbor is the 
best way to go to for SOFR.
    Senator Menendez. In addition, as you know, the CFPB 
proposed rules in June of 2020 that would help facilitate the 
transition away from LIBOR. Those rules were supposed to go 
into effect back in March of 2021, but they still have not been 
finalized. How important would it be for the CFPB to finish its 
guidance to private lenders as they transition away from LIBOR, 
to ensure that borrowers are not stuck permanently paying 
higher interest rates?
    Mr. Pizor. That is very important. The guidance cannot be 
left to the last minute. Industry needs time to adapt, and so 
we hope they will release them as soon as possible.
    Senator Menendez. Let me also ask you, most private student 
loan contracts include a mandatory arbitration provision which 
says that borrowers cannot sue lenders if a problem comes up. 
Instead, borrowers have to undergo a one-sided, back-door 
arbitration process. Is it possible that a lender could game 
the transition away from LIBOR in a way that leads borrowers to 
face higher interest loans?
    Mr. Pizor. Yes, it is certainly possible, and the existence 
of the arbitration clauses in class waivers heightens that 
risk, because it effectively eliminates consumers' recourse if 
there is misconduct.
    Senator Menendez. And would a mandatory arbitration clause 
and a class action waiver, both which are common in private 
student loan contracts, leave the borrower with no meaningful 
path to challenge a lender's actions?
    Mr. Pizor. That is correct. Although industry characterizes 
arbitration as fair and neutral in practice, we have seen 
evidence that it is put into the contracts to essentially 
eliminate the opportunity for consumers to challenge 
misconduct.
    Senator Menendez. Well, our Republican colleagues 
successfully repealed the CFPB's arbitration rule. Student 
borrowers have little recourse if industry chooses to force 
them into higher reference rates. And it is up to Congress and 
the CFPB to ensure that student borrowers are not stuck paying 
higher interest rates as it goes. We are talking about $80 
billion. These are young people who are trying to get underway 
in their careers, but between the debt and then the potential 
multiplier of the interest rates the consequences are you have 
to delaying maybe the purchase of your home, delay the start of 
a family, the delay of being an entrepreneur. And that is why I 
raise these questions.
    Finally, as the Committee discusses LIBOR, I think it is 
important to keep the average consumer in mind. Mr. Pizor, is 
the average consumer aware that their loan references the LIBOR 
rate?
    Mr. Pizor. No, I do not think so. It is a complicated issue 
and people are not aware of it.
    Senator Menendez. Is the average consumer going to have a 
say in choosing their replacement rate?
    Mr. Pizor. No. None at all.
    Senator Menendez. If the lender chooses a rate that causes 
a borrower's payment to become unaffordable, do many lenders 
offer flexible repayment options?
    Mr. Pizor. Unfortunately not.
    Senator Menendez. And these are all the consequences that I 
am fearful of on the consumer side of the equation, which is 
one of the reasons I appreciate your testimony. Thank you very 
much.
    Mr. Pizor. Thank you.
    Senator Menendez. And, Mr. Chairman, I have yielded back 30 
seconds.
    Chairman Brown. Thank you. That is very generous of you.
    Senator Tillis is recognized from his office, remote.
    [No response.]
    Chairman Brown. Senator Tester, who I have tried to avoid, 
is recognized.
    Senator Tester. Yeah, thanks. I do appreciate the extra 30 
seconds that the Chairman is putting on my time to ask 
questions. Thanks for having this hearing, Mr. Chairman and 
Ranking Member. Thank you all for being here today. I 
appreciate your testimony.
    I am going to start with you, Mr. Pizor. LIBOR does impact 
everybody's lives and families in ways that most people do not 
realize. Can you talk to me about how a LIBOR ending is going 
to impact regular folks' lives?
    Mr. Pizor. Well, it actually remains to be seen what will 
happen, but the risk is pretty significant that payments will 
go up, the changes in payments could become more volatile and 
unpredictable, and that affects people's ability to budget. And 
people are just recovering from the financial trauma of the 
pandemic, and to have this instability in monthly payments that 
are pretty critical to their lives--home, student loans--it is 
a very significant issue.
    Senator Tester. Mr. Bright, do you have anything to add to 
that?
    Mr. Bright. No. I mean, I think you are all addressing the 
right concerns. It is going to be very confusing for consumers. 
Once they realize this happens, I think the prior question 
mentioned that a lot of consumers do not even know that their 
rates are tethered to LIBOR. I mean, this would be very 
disconcerting, I think, information to get. So if we can all 
align on a similar replacement rate with similar communication 
strategy, all working together, I think that would really help 
quite a bit.
    Senator Tester. Mr. Giancarlo.
    Mr. Giancarlo. Yes. Thank you. You know, it is important to 
remember, as we talk about this, that all borrowers are not the 
same. All loans are not the same. Some loans are highly secured 
with very liquid capital and collateral. Other loans are 
unsecured or secured with fairly illiquid collateral.
    You know, the real economy of home builders and auto 
dealerships and small manufacturers use collateral that is 
quite illiquid. They put plant and equipment liens up, or auto 
leases, or home mortgages. And so that type of collateral 
causes the borrowers to hold that collateral that they then 
need to use--sorry, the lenders--to fund their own operations.
    And so one of the reasons why diversity of choice of 
benchmark is so important is because those lenders need to be 
able to use what collateral they have, relatively illiquid in 
many cases, to fund their own operations. And so there needs to 
be choice of both credit-sensitive and risk-free borrowing for 
an economy as diverse and as deep and as important as the U.S. 
economy.
    Senator Tester. OK. Mr. Wipf, with your work on ARRC, are 
there any other impacts that you think will happen?
    Mr. Wipf. What we believe is that the legislation would 
provide a structural bridge where these contracts fail, and 
remove uncertainty, minimize value transfer, reduce disruption, 
and preserve good market functioning. And we think that for the 
legacy piece of this we think that SOFR is, you know, far and 
away the best choice. We think a single rate is the best 
choice. And on a go-forward basis, the ARRC's message has 
always been know what is in your reference rate and give the 
market those opportunities.
    Senator Tester. And I will just stay with you, Mr. Wipf. Do 
you see it necessarily as it is just going to happen, that 
rates will go up?
    Mr. Wipf. I cannot comment on that.
    Senator Tester. OK. And does anybody want to comment on 
that? Bright, you always comment on something.
    Mr. Bright. With the transition from LIBOR to SOFR?
    Senator Tester. With the transition with LIBOR going away 
and choice being there.
    Mr. Bright. So I think if we transition from LIBOR to SOFR, 
the recommendations that have come out of a the ARRC committee 
and the recommendations that we are looking at, there is, with 
a smoothing mechanism of a look-back period so that the spread 
between SOFR and LIBOR is calculated over this 5-year average, 
and then there is a 1-year onramp to move to that.
    So every effort is being made to ensure that there is no 
payment shock, rate shock, that those disruptions are as 
minimum as possible. You know, since there are still 2 years of 
interest rate fluctuations that are getting included in the 
calculation of that 5-year lookback, that is hard to predict, 
but nobody wants that. That would be very bad.
    Senator Tester. OK. So, Michael, I will just stick with 
you. So let's just say we have got two folks that live side by 
side, and they each have a mortgage, pretty equivalent 
mortgage. It is possible that those two neighbors, with LIBOR 
going away, is it possible those two neighbors, both at the 
same rate today, could end up with different rates as the 
benchmark goes away?
    Mr. Bright. Without the safe harbor legislation?
    Senator Tester. Yes.
    Mr. Bright. Yes, that is a real possibility and a concern. 
The safe harbor would greatly minimize to eliminate that as a 
risk.
    Senator Tester. OK. Well, thank you all for your testimony. 
I will yield back my 10 seconds, Mr. Chairman.
    Chairman Brown. Thank you, Senator Tester. Senator Cortez 
Masto is recognized from her office.
    Senator Cortez Masto. Thank you. Thank you, Mr. Chairman. 
Thank you to the panel members. This is such an important 
conversation. And let me also echo what Bob Menendez said, and 
I think a panel member said. Most consumers really do not 
understand the significance of what LIBOR means and the 
transition away from it. So what you all are doing and what we 
get right here is so important.
    I do commend ARRC's work on making SOFR a robust rate, on a 
durable basis. But let me ask you this because we are talking 
about the risks right now. Does anybody on the panel not 
support transitioning to SOFR? I am just curious. And if you do 
not support it, why not?
    Mr. Bright. For legacy contracts I do not think anybody has 
a problem with SOFR. But I know the Honorable Giancarlo would 
like to comment.
    Mr. Giancarlo. Agree, but for tough legacy contracts only. 
I think Americans traditionally enjoy and benefit from 
diversity of choice to suit their individual needs. As I 
explained in my testimony, we have a very diverse U.S. economy. 
We have large Wall Street banks and we have small community and 
minority depository institutions that make loans against very 
little or very illiquid collateral, and they have to have the 
flexibility that comes from benchmarks that reflect their cost 
of funding and not necessary the cost of funding of Wall Street 
banks.
    So having choice, for everything but tough legacy LIBOR 
contracts is critically important, I believe, to the U.S. 
economy.
    Senator Cortez Masto. And when you talk about choice, Mr. 
Giancarlo--and thank you for those comments--choice based on 
what? I mean, whose decision? Who gets to determine the rate? 
How do you determine that choice?
    Mr. Giancarlo. Well, benchmarks have traditionally been 
choice by the marketplace. It is actually rare to have 
Government authorization of benchmarks. I mean, our lenders are 
in the best position to know what benchmarks are probably most 
appropriate for their customers and for their cost of funding.
    We have both risk-free rates, which are very important and 
serve very well for large banks that are primary dealers of 
Treasury securities and have large inventory of Treasury 
securities, but for our minority, our urban banks, our rural 
banks that are not primary dealers of Treasury or hold illiquid 
securities, credit-sensitive rates serve their needs quite 
well.
    And so I think it is not important that we do not put our 
fingers on the scale. Now, that does not mean every benchmark 
is suitable. I mean, banks are subject to appropriate 
prudential standards. They have got to have the right benefits. 
And benchmarks that are widely based, all these facets of 
liquidity that I talked about, a number of participants not 
concentrated amongst a few large dealers, is a very important 
aspect, and one of the dynamics of that liquidity as well.
    So there are a lot of factors that go in, and I think the 
legislation in the House talks about qualified benchmarks, 
meaning benchmarks that meet certain global standards. The 
International Association of Securities Commissions has put out 
global standards that most of the major benchmarks meet, and I 
think those standards are important.
    So it is not just any willy nilly benchmark. Banks, though, 
do know best what meets the needs of their borrowers and their 
own cost of funding.
    Senator Cortez Masto. And so Mr. Pizor and Mr. Wipf, do you 
agree with that, that the banks and financial institutions and 
other agencies should have that choice? And if you do not agree 
with it, why?
    Mr. Wipf. Our view at the ARRC has been, from the 
beginning, we go back to first principles. We go back to what 
was wrong with LIBOR. And our path to SOFR was to find 
something that was robust and durable that other things could 
be built upon. So when we look at SOFR, and why we chose this 
path, it is the most robust, durable, transparent over time.
    Our guidance from the ARRC has been know what is in your 
reference rate, because I think if we look back and we look at 
the history of LIBOR, that has always been good advice. So when 
we look at some of these other rates that are out there, we 
would encourage market participants--borrowers, lenders, 
issuers, investors--to understand what is in those reference 
rates, to know how they are constructed, to understand how they 
perform over time--I think we have a reference point back to 
March of 2020, that could provide real data--and how do these 
things hold up?
    We know what SOFR does, and that is why we had a 2-year 
public consultation to get to the point of selecting SOFR in 
2017. So from the ARRC's perspective, we believe it is far and 
away the best choice. As it relates to things that can happen 
over and above that for different products, we think that SOFR 
still stands as the foundation. Nonetheless, you know, the 
ARRC's message is if you are going to use other rates, know 
your reference rate.
    Senator Cortez Masto. Well, and is not the point here also 
to guard against any type of manipulation, like we have seen in 
the past with LIBOR?
    Mr. Wipf. Our view has been that when we did our work at 
the ARRC, and we began our work, we looked at what we thought 
the fault lines of LIBOR were. We felt that that is what 
brought us to a rate that is entirely based on transactions, 
and certainly the most liquid product, the overnight Treasury 
repo market, $800 to $100 trillion in transactions, and we 
believe that we have minimized that risk as much as can 
possibly be minimized.
    So because of that, we believe that that solves the problem 
that we were trying to solve, which was the ARRC was never set 
out to recreate LIBOR. We were trying to find a better solution 
to go forward, and we believe SOFR is the best solution.
    Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Cortez Masto. Senator 
Sinema from Arizona is recognized from her office.
    Senator Sinema. Thank you, Chairman Brown, and thank you to 
Ranking Member Toomey for holding this hearing today.
    LIBOR and other benchmark interest rates play an important 
role in our global financial system. They enable banks and 
other financial institutions to manage interest rate risk and 
to anticipate changing loan costs. These rates, including 
LIBOR, have a very real impact on Arizonans who have taken out 
student loans, or mortgages, who have opened lines of credit, 
or who have started or invested in a business. So the 
transition from LIBOR to the SOFR will be a challenging but 
important step toward securing the stability of our financial 
system for all investors and consumers.
    My first question is for Mr. Bright. Thank you for being 
here. There has been some concern about how prepared financial 
institutions are to make the transition from LIBOR to SOFR, and 
how prepared is the industry to make this transition by the 
currently prescribed deadline?
    Mr. Bright. Yeah. Thank you very much, Senator, for the 
question. It is an important one. So for all contracts that 
allow this transition to take place, that is contracts that 
have fallback language or are clear that the trustee can make 
decisions, or that, you know, the lender can make decisions, an 
enormous amount of work has gone into this.
    So I feel reasonably confident that industry is there. I 
think it is worth everybody being, you know, continuing to be 
diligent. The bureau is continuing to promulgate rules for the 
industry to use to make sure it communicates with consumers 
clearly, and we will follow all of those, and I think that is 
important work.
    It is the legacy contracts that have been--you know, that 
do not have clarity around what rate to transition to, that is 
the subject of a lot, I think, of discussion today, and on that 
one we are in limbo and we need to get safe harbor passed so 
that we can borrow from the preparation work that has been 
done, you know, in the other contracts and other loans.
    Senator Sinema. Thank you. So my understanding is that the 
optical character recognition technology, or OCR, will be 
useful in helping companies identify and amend large volumes of 
contracts at a relatively low cost. So what other innovative 
products or services exist on the market that will help 
companies transition from LIBOR to SOFR?
    Mr. Bright. So I had not heard of that technology until 
your staff mentioned it to us this week, so we researched it a 
little. It looks like a helpful tool in helping to identify 
what contracts could fall into the umbrella of needing legacy 
help or you can do word search and the smart AI type stuff. So 
I am not an expert on that but it seems really interesting.
    I think as far as technology, you know, you want to look at 
the exchanges. So the Chicago Mercantile Exchange and the 
Chicago Board of Options Exchange, the CBOE and the CME, 
respectively, have done a lot of groundbreaking work to prepare 
the markets for this transition. And so those are two places 
that I think technology is helpful as well.
    Senator Sinema. Well, that is encouraging to hear, but 
making this transition more logistically feasible does not 
fully resolve the challenges of the tough legacy contracts that 
reference LIBOR. So to help Arizonans and Americans make this 
transition, what ambiguities need to be clarified by Congress?
    Mr. Bright. Again, I think that the legislation that passed 
the House does this. It clarifies that if you are in a contract 
that is inadequate or lack of clear fallback language that you 
have a safe harbor in your transition to SOFR. The Fed will 
promulgate rules for that transition. And if the safe harbor is 
appropriately tailored, all consumer protections will stay in 
place to ensure that communication with consumers is done in 
the appropriate and adequate manner.
    So I think that I would look to that bill, and Senator 
Tester's and Tillis' work in the Senate as well. So that is 
probably the best framework.
    Senator Sinema. Thank you.
    Mr. Giancarlo. And, Senator, if I could just add to that 
answer, I think that in addition to the legal certainty for 
tough legacy contracts, I think it is very important the 
legislation make clear that for all other contracts that there 
is freedom of choice for market participants to choose 
qualified benchmarks that suit their needs. I think it is very 
important that there not be a Government imprimatur place upon 
one benchmark or another outside of the tough legacy area, that 
for outside of the tough legacy area that consumers and their 
bankers have choice of benchmark that suits their particular 
needs.
    Senator Sinema. Thank you. You know, for my last question I 
will ask Mr. Pizor. So I want to ask you, why is this type of 
legislative clarity that I was just discussing with Mr. Bright 
important to consumers in Arizona, including those who hold 
student loans and mortgages?
    Mr. Pizor. Well, clarity is especially important for those 
two groups of consumers because those payments tend to be very 
significant and as a result have a large impact on your monthly 
budget. Clarity is also needed in terms of selecting the rate, 
that most contracts do not give guidance, and the concept of 
conforming changes, which need to be made in conjunction with 
changing the rates. The proposed bill, we are hoping, will ask 
the Federal Reserve to define conforming changes, and that will 
reduce a lot of the ambiguity.
    Senator Sinema. Thank you. Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Sinema. We will conclude 
the hearing. Thank you to the witnesses for being here. Thank 
you for providing the testimony that you gave.
    For Senators who wish to submit questions for the record 
they are due 1 week from today, on Tuesday, November 9th. To 
the witnesses, please submit your response to questions for the 
record within 45 days from the day you receive them.
    Thank you again so much for being here. The hearing is 
adjourned.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    I often begin these hearings by taking us back to 2008, and to the 
years that followed, because we are still living with the fallout--and 
in the case of the Libor scandal, we are still cleaning up a mess 
caused by the biggest banks in the world, more than a decade later.
    As the housing market crashed and more than eight million workers 
lost their jobs, central bankers began to realize just how many markets 
were broken in the global economy.
    One of those was the interest rate system. Most people have never 
heard of Libor--like so much in the financial system, it's an opaque 
term for something that affects millions of people's bills and bank 
accounts.
    Libor has been the most widely used interest rate benchmark around 
the world, used to set payments for millions of student loans, 
mortgages, and small business and auto loans. Over three hundred 
trillion dollars was tied to Libor at its peak.
    With that kind of money involved, it should surprise no one that 
bankers figured out a way to conspire to rig the interest rate, to 
enrich themselves.
    After the scandal broke in 2012 uncovering the banks' manipulation 
of Libor, this Committee and the Federal financial regulators studied 
the problems with Libor, and who was at fault. U.S. and foreign 
regulators imposed billions of dollars in fines on several global banks 
for manipulating the interest rate and taking advantage of consumers 
and investors.
    Now, nearly a decade later, our financial system is finally 
transitioning away from Libor. Today we will consider how the financial 
system can move on from this benchmark set by a handful of the world's 
largest banks--a system we found out was ripe for exploitation. Part of 
that transition involves dealing with trillions of dollars in legacy 
contracts that are tied to Libor, and that will continue after the rate 
is discontinued in June of 2023.
    After a slow start, the Federal Reserve Bank of New York and the 
Federal Reserve Board, along with industry stakeholders and consumer 
advocates, have established a path forward. They developed a new, more 
reliable and transparent benchmark rate called SOFR--the Secured 
Overnight Financing Rate. And they have put forward a framework to 
address legacy loans and contracts that were written assuming that 
Libor would always exist.
    Because Libor is so widely used, homeowners and students who have 
never heard of Libor will be at risk when it's discontinued if we don't 
take action.
    If their loans don't have specific instructions about what happens 
if Libor disappears, or if their loans give loan servicers the 
discretion to pick a different rate, those borrowers could be in for a 
shock.
    Small and large businesses could be in a similar situation--forced 
to renegotiate a loan tied to Libor at a time when they're just getting 
back on their feet from the pandemic.
    Banking agency officials and stakeholders have all said Federal 
legislation would help address those long-term loans and contracts, and 
reduce the potential for time-consuming and costly litigation.
    Our colleagues on the House Financial Services Committee began 
bipartisan work on a bill that addresses these legacy problems, and 
Senator Tester, working with Senator Tillis, is preparing a Senate 
companion.
    If done right, this legislation can help borrowers who don't have 
the ability to bargain with their student loan lender or mortgage 
banker, while also providing certainty to lenders. We know we need to 
act, and I appreciate these efforts by Members of our Committee.
    Under the current proposal, lenders with legacy contracts that 
don't specify a Libor alternative can transition to SOFR--so long as 
they don't make other changes that could harm borrowers. That would 
allow them to avoid potentially complicated litigation.
    It's frustrating that we are forced to spend taxpayers' time and 
money cleaning up after the biggest banks, over and over again. 
Unfortunately, if we don't work to mitigate the damage from another big 
bank scandal, it's family businesses and homeowners and students who 
will pay the price.
    Our witnesses and their organizations have developed a narrow and 
consistent solution that protects small businesses, and families with 
mortgages, and Americans paying off student loans.
    I look forward to hearing from our witnesses, and to working with 
my colleagues to protect consumers and to protect the economy.
    We have proven we can come together on this Committee to find areas 
of agreement, and to advance commonsense solutions for the people we 
serve.
    My hope is we can do the same on Libor.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Thank you, Mr. Chairman.
    The London Interbank Offered Rate--or LIBOR--has long been the most 
widely used U.S. dollar-denominated benchmark interest rate across all 
types of financial contracts. LIBOR is the rate at which large banks 
report they can borrow from one another in the interbank market on a 
short-term, unsecured basis.
    At the end of 2020, over $223 trillion in contracts referenced 
LIBOR, including loans, bonds, derivatives, and securitizations. In 
2013, the G20 launched a global review of interest rate benchmarks 
after cases of misconduct in the reporting of LIBOR rates by a small 
number of banks and the significant decline in interbank lending 
volume.
    As the breadth and depth of interbank loan market liquidity greatly 
diminished, it became clear that alternative rates with greater volume 
and a larger number of market participants would be more appropriate 
than LIBOR. In the United States, the Federal Reserve Board and the New 
York Fed convened the Alternative Reference Rates Committee--or ARRC--
to identify an alternative to LIBOR.
    In 2017, the ARRC identified the Secured Overnight Financing Rate--
or SOFR--as its recommended alternative to LIBOR. SOFR measures the 
cost of overnight, or short-term, borrowing collateralized by U.S. 
Treasury securities.
    In 2020, daily volumes underlying SOFR were consistently above $1 
trillion. Last year, the Fed, FDIC, and OCC directed banks to stop 
entering into new LIBOR contracts as soon as possible and no later than 
the end of 2021.
    Earlier this year, the administrator of LIBOR announced that it 
will stop publishing all LIBOR settings by June 30, 2023. Although most 
existing contracts referencing LIBOR will mature by that date, a number 
of contracts will not, and lack fallback language to replace LIBOR with 
a non-LIBOR rate. As a result, many have called for Federal legislation 
to address these so-called ``tough legacy contracts.''
    I agree banks should stop writing new LIBOR contracts as soon as 
possible, and Federal legislation is likely needed to address tough 
legacy contracts. The unique and anomalous circumstances related to the 
LIBOR transition require action by Congress to amend contracts between 
private parties. Such congressional action should be a last resort.
    As we consider this measure, any legislation that addresses tough 
legacy contracts must be very narrowly tailored, not change the 
equities of these contracts, and not affect any new contracts.
    In July, the House Financial Services Committee approved a bill 
that would replace LIBOR in tough legacy contracts with a Fed-selected, 
SOFR-based benchmark. This bill takes a reasonable approach, and the 
Senate should carefully review it. In doing so, we should consider 
targeted amendments, such as ensuring that qualified non-SOFR benchmark 
rates are not disfavored in future contracts.
    While it's appropriate to mandate a SOFR-based index for this 
relatively small universe of tough legacy contracts, for new contracts 
banks must have the option to choose among qualified benchmark rates--
including credit-sensitive rates--as appropriate for their business 
models. Risk-free rates like SOFR may work well for derivatives 
contracts and institutions active in the Treasury repo market, but they 
may not be well-suited for loans or certain community or regional 
banks.
    The funding costs for such banks typically increase relative to 
SOFR during periods of stress, which could create an asset-liability 
mismatch if loans were required to reference SOFR. The Fed, FDIC, and 
OCC have previously acknowledged this problem. They have said the use 
of SOFR is voluntary and a bank may use ``any reference rate for its 
loans that the bank determines to be appropriate for its funding model 
and customer needs.''
    An even broader group of regulators said, in the context of bank 
lending, that ``supervisors will not criticize firms solely for using a 
reference rate (or rates) other than SOFR.'' However, I am concerned 
this is exactly what Biden administration financial regulators are now 
seeking to do.
    Just last week, the Acting Comptroller of the Currency said the 
OCC's supervisory efforts will ``initially focus on non-SOFR rates.'' 
This suggests that the OCC may apply heightened supervisory scrutiny to 
non-SOFR rates. And last month, a senior New York Fed official said 
that banks that use a non-SOFR rate must do ``extra work'' to ensure 
that the bank is ``demonstrably making a responsible decision.''
    SEC Chair Gensler has been even more explicit. On multiple 
occasions, he has criticized one particular credit-sensitive rate. 
These statements raise serious concerns that regulators are pressing 
all banks to use SOFR without any transparency or public input. If a 
bank wants to price its loan off a rate it believes is a better 
reflection of its cost of funding or customer needs than SOFR, 
regulators should not prohibit the bank from doing so.
    This pressure, however, pales in comparison to the preferred 
approach of President Biden's nominee to lead the OCC. Professor Saule 
Omarova has written that widely used benchmark rates should either be 
pre-approved by the Government or, worse, subject to ``utility-style 
regulation.'' In other words, the Government--not the market--would 
have a direct role in actually setting benchmark rates as it deems 
appropriate.
    This is just one example of the many radical ideas that Professor 
Omarova has proposed that demonstrate a clear aversion for democratic 
capitalism, and a clear preference for an administrative State where 
decisions are made by technocrats who think they know more than the 
market.
    Regulators should never disfavor qualified rates, and banks should 
have the choice to use any rate that meets well-established criteria 
for benchmark rates.
    I hope to hear from today's witnesses about the transition from 
LIBOR, the potential for targeted Federal legislation to address tough 
legacy contracts, and ways to preserve benchmark rate choice.
                                 ______
                                 
                   PREPARED STATEMENT OF THOMAS WIPF
 Chair of The Alternative Reference Rate Committee (ARRC) and Managing 
                        Director, Morgan Stanley
                            November 2, 2021
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee. I am honored to be here today on behalf of the Alternative 
Reference Rates Committee (or ARRC) to testify on the need for Federal 
legislation to address the LIBOR transition for legacy products and 
support the efforts of this Committee to bring that to fruition.
    The ARRC is comprised both of a broad set of private-sector firms 
and associations representing a range of perspectives on the LIBOR 
transition as well as a broad set of U.S. agencies, including the 
Federal Reserve, the CFTC, the SEC, Treasury, the OCC, the FDIC, and 
FHFA, who provide oversight to our work. \1\ We were convened by the 
Federal Reserve Board and Federal Reserve Bank of New York in 2014 in 
order to help address the financial stability risks that the Financial 
Stability Oversight Council had publicly identified concerning the use 
of LIBOR in the financial system.
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     \1\ Reflecting the importance of its work, the ARRC's ex officio 
members include the Commodity Futures Trading Commission, Consumer 
Financial Protection Bureau, Federal Deposit Insurance Corporation, 
Federal Housing Finance Agency, Federal Reserve Bank of New York, 
Federal Reserve Board, National Association of Insurance Commissioners, 
New York Department of Financial Services, Office of Financial 
Research, Office of the Comptroller of the Currency, U.S. Department of 
Housing and Urban Development, U.S. Securities and Exchange Commission, 
and the U.S. Treasury. As the ARRC has explained, this ``structure 
facilitates collaboration between the market and the official sector'' 
and ``allows the group to have diverse participation across financial 
services.''
---------------------------------------------------------------------------
    Over time, LIBOR had grown to be a pervasive part of our economy; 
it has been referenced in nearly every floating rate business and 
consumer loan, floating rate debt and securitization contract, in 
nonfinancial corporate contractual agreements, and in a staggering 
amount of derivatives. The ARRC has estimated that U.S. dollar LIBOR is 
referenced in over $200 trillion financial contracts alone, roughly ten 
times the size of the annual U.S. gross domestic product. But despite 
the fact that so much of the financial system depended on LIBOR, few if 
any bothered to understand what this rate was based on, and in fact we 
now understand that it was based on very little. LIBOR had both a weak 
and opaque governance structure and was based on what had become a very 
thin market. As a result of these shortcomings, LIBOR was in danger of 
failing, and the official sector had to step in to prevent a sudden and 
disruptive end to it and instead has sought an orderly winddown. The 
ARRC was convened to help facilitate a smooth transition and was asked 
to identify a robust alternative to U.S. dollar LIBOR, one that was 
appropriate to base trillions of dollars of contracts on, and to 
address risks to legacy LIBOR contracts. I believe that the ARRC is a 
truly successful example of public-private sector cooperation, but it 
is important to understand that all of the ARRC's recommendations are 
voluntary; no one is required to follow them, and no one is required to 
use the ARRC's recommended rate, the Secured Overnight Financing Rate, 
or SOFR.
    SOFR is based on overnight borrowing transactions in the U.S. 
Treasury repo market, the largest interest rates market in the world, a 
key source of secured financing for a broad range of financial market 
participants, and a key component of overall Treasury markets in the 
United States. The ARRC selected SOFR after several years of work 
examining all potential alternatives and public consultation. The ARRC 
selected SOFR as its recommended alternative based on the fact that it 
is by far the most robust alternative to LIBOR available--there will 
always be a U.S. Treasury repo market both in good times and bad--and 
based on the widespread support from a broad range of market 
participants including end users and borrowers.
    The ARRC believes that SOFR is an appropriate rate for new use in 
products that have historically referenced LIBOR, and that it is robust 
enough to ensure that we do not recreate the problems that we have had 
to deal with in LIBOR. We expect that many market participants will in 
fact choose to use SOFR, and many have already done so or are actively 
preparing to. However, we also support choice, and we have been clear 
since our inception that our recommendations are voluntary. At the end 
of the day, the market will determine which rates are used.
    For many legacy products things are much less simple and will 
create additional challenges and considerations. The ARRC's Second 
Report, published in March 2018, provided a survey of contractual 
fallbacks in various cash products referencing LIBOR and noted that 
many of these contracts did not envision the possibility that LIBOR 
might permanently cease or had fallbacks that would not be economically 
appropriate if such an event occurred. Unlike derivatives, which are 
covered by standardized documentation and have developed efficient 
mechanisms allowing for contractual amendments, many cash instruments, 
such as floating rate bonds and securitizations, have fallback language 
that is difficult or impossible to change after they have been issued.
    Based on the ARRC's work, we know that many legacy nonfinancial 
corporate contracts referencing LIBOR have no workable fallback 
language or no fallback language whatsoever and that many financial 
contracts have fallbacks that would require parties to poll an unnamed 
set of banks in an attempt to recreate LIBOR, which we believe would be 
both burdensome and unsuccessful, or refer only to the last published 
value of LIBOR, effectively converting what were intended to be 
floating rate instruments to fixed-rate instruments.
    The ARRC established several working groups to work with market 
participants to develop more robust fallback language and publish 
consensus recommendations on such language. ARRC working groups have 
involved more than 300 different institutions, including lenders, 
borrowers, investors, and consumer advocacy groups. Recognizing the 
single importance of clarity and certainty with respect to fallbacks 
for consumer contracts, the ARRC published a separate set of Guiding 
Principles specifically designed for its work on consumer products. The 
ARRC's work on fallback recommendations included numerous consultations 
with market participants, each of which is publicly available. Many new 
issuances now contain ARRC-recommended fallback language thanks to this 
work. \2\
---------------------------------------------------------------------------
     \2\ Following the work of each working group and the 
consultations, the ARRC published recommended contractual fallback 
language for floating rate notes, syndicated and bilateral loans, 
securitizations, consumer adjustable rate mortgages, and student loans.
---------------------------------------------------------------------------
    While developing recommended fallback language that could be 
adopted in new contracts referencing LIBOR, the ARRC also recognized 
that not all contracts can or will be amended by the time of LIBOR 
cessation and that there will be a significant amount of legacy 
contracts outstanding that will have no clear or effective reference 
rate when the main tenors of U.S. dollar LIBOR cease or become no 
longer representative immediately after June 30, 2023. To help to 
address this, the ARRC developed and promoted legislation for contracts 
governed by New York law to avoid the disruptions, market 
uncertainties, and confusion that would otherwise occur when LIBOR 
ends.
    In March 2021, the New York State legislature passed legislation 
supported by the ARRC that provided clear fallbacks to any contract 
referencing LIBOR governed by New York law that otherwise has no 
effective fallback language, either because it is has no fallback or 
because it falls back to a LIBOR-based rate (or to a dealer poll to 
determine a LIBOR rate). The State of Alabama subsequently passed 
similar legislation. The passage of State legislation has been 
extraordinarily important in helping to address the risks of the LIBOR 
transition. In particular, many financial contracts are covered under 
New York law. However, we know that many nonfinancial corporate 
contracts, consumer loans, and securitizations are not covered by New 
York or Alabama State law. While the ARRC is prepared to advocate for 
similar legislation in other States, we cannot reasonably hope for 
comparable legislative solutions in all 50 States and the District of 
Columbia. Federal legislation can help to ensure an equal outcome for 
all Americans.
    The legislative proposal that I understand Members of this 
Committee are working on and that a House committee passed earlier in 
the year would help to ensure that equal outcome. As with the 
legislation passed in New York and Alabama, the legislative proposal is 
purposefully narrow, intended only to address contracts that could not 
otherwise be changed. For contracts that already allow one party the 
right to choose a new rate, a feature of most consumer contracts 
referencing LIBOR, the proposed legislation does not alter the right of 
the designated party to determine the successor rate, but it does 
provide a safe harbor to encourage a choice based on SOFR, which has 
had the strong support of consumer advocacy groups in addition to 
lenders and investors. For contracts that do not grant a particular 
party the right to name a successor rate to LIBOR and have no fallback 
language or language that refers only to a poll of banks or some past 
value of LIBOR, the proposal recognizes that a unique successor rate 
must be named in order to avoid legal conflict and it names a successor 
rate based on SOFR for that purpose, but again only for those contracts 
that will not otherwise work in the absence of a legislative solution. 
The proposed legislation has no impact for contacts that already 
specify a non-LIBOR floating rate if LIBOR is unavailable, which is the 
case for most legacy business loans. Parties may also opt out of the 
legislation at any time.
    As I have noted, the ARRC represents a very diverse set of 
participants. We have worked by consensus to develop recommendations to 
help ensure that the U.S. economy can successfully transition from 
LIBOR. ARRC members have for some time strongly held the consensus view 
that legislation addressing legacy LIBOR contracts is an important 
component of the transition. We support your efforts to introduce 
legislation in the Senate and, in conjunction with your counterparts in 
the House, urge you to pass it as expeditiously as possible. We thank 
you in advance for your consideration and stand ready to be a resource 
in any way we can.
                                 ______
                                 
                   PREPARED STATEMENT OF ANDREW PIZOR
              Staff Attorney, National Consumer Law Center
                            November 2, 2021
    Chairman Brown, Senator Toomey, and Members of the Committee, thank 
you for the opportunity to testify today on the importance of 
protecting consumers when the benchmark LIBOR index comes to an end. I 
have been an attorney with the National Consumer Law Center (NCLC) \1\ 
for 12 years. I provide my testimony here today on behalf of NCLC's 
low-income clients.
---------------------------------------------------------------------------
     \1\ Since 1969, the nonprofit National Consumer Law Centerr 
(NCLCr) has used its expertise in consumer law and energy policy to 
work for consumer justice and economic security for low-income and 
other disadvantaged people, including older adults, in the United 
States. NCLC's expertise includes policy analysis and advocacy; 
consumer law and energy publications; litigation; expert witness 
services, and training and advice for advocates. NCLC works with 
nonprofit and legal services organizations, private attorneys, 
policymakers, and Federal and State Government and courts across the 
Nation to stop exploitive practices, help financially stressed families 
build and retain wealth, and advance economic fairness.
---------------------------------------------------------------------------
Introduction
    My primary message here today is to encourage the Members of this 
Committee, as well as the full Senate, to support H.R. 4616 but with a 
more limited safe harbor, as I will explain today. This bill will 
protect consumers and the credit industry from potentially devastating 
consequences that could otherwise occur as the credit world transitions 
away from the LIBOR index.
    The LIBOR is currently written into more than a trillion dollars of 
outstanding consumer mortgages, student loans, and other consumer 
credit contracts. But it will cease to exist on June 30, 2023. \2\ When 
that happens the companies that own and service those contracts must be 
ready to adapt by substituting a new index for the LIBOR. If the 
transition goes smoothly, few people will notice. But if they get it 
wrong, the consequences could force millions of consumers into default 
and lead to widespread litigation.
---------------------------------------------------------------------------
     \2\ Fed. Reserve. Bd., CFPB, FDIC, et al., Joint statement on 
Managing the LIBOR Transition at 1 (Oct. 20, 2021), available at 
https://files.consumerfinance.gov/f/documents/cfpb--interagency-libor-
transition-statement-2021-10.pdf.
---------------------------------------------------------------------------
Replacing the LIBOR Is a Complex Problem Fraught With Risk for Industry 
        and Consumers
    The LIBOR is a benchmark interest rate compiled and maintained by 
ICE, a private corporation based in London, U.K. According to ICE, the 
LIBOR is ``designed to produce an average rate that is representative 
of the rates at which large, leading internationally active banks with 
access to the wholesale, unsecured funding market could fund themselves 
in such market in particular currencies for certain tenors.'' \3\ 
Currently the U.S. Dollar version of the LIBOR is based on data 
submitted voluntarily by sixteen contributor banks. \4\ Due to various 
problems with the LIBOR, the U.K.'s Financial Conduct Authority has 
announced that on December 31, 2023, ICE will stop publishing the 
versions commonly used in consumer contracts. \5\
---------------------------------------------------------------------------
     \3\ ICE website, available at https://www.theice.com/iba/libor.
     \4\ Id.
     \5\ U.K. Financial Conduct Authority, FCA announcement on future 
cessation and loss of representativeness of the LIBOR benchmarks (Mar. 
3, 2021), available at https://www.fca.org.uk/publication/documents/
future-cessation-loss-representativeness-libor-benchmarks.pdf.
---------------------------------------------------------------------------
    In relation to consumer transactions, the LIBOR is commonly used as 
an index in adjustable rate home mortgages and student loans. 
Typically, a loan contract will specify a starting interest rate that 
will change at regular intervals over the life of the loan. The new 
interest rate at each change is based on the current value of a 
benchmark index named in the contract. The index value is then added to 
a ``margin'' (a fixed number written into the contract), and that total 
becomes the new interest rate on the contract. The servicer then 
recalculates the monthly payment based on the new interest rate.
    The typical contract also has a clause, known as ``fallback 
language,'' that authorizes the noteholder to replace the index if the 
original one becomes unavailable. The fallback language is central to 
replacing the LIBOR. But it has never been used before, and the 
standard language in almost all legacy contracts is too vague. For 
example, until recently the fallback language in Fannie Mae and Freddie 
Mac's contract forms said: ``If the Index is no longer available, the 
Note Holder will choose a new index that is based upon comparable 
information.'' Most non-GSE and student loan contracts use similar 
language. A minority of contracts give the noteholder unlimited 
discretion to select a replacement. Significantly, there is no accepted 
understanding or definition of what is ``comparable.'' And the few 
regulations addressing the selection of a replacement index only apply 
to a small portion of the market. \6\
---------------------------------------------------------------------------
     \6\ See, e.g., Reg. Z, 12 CFR 1026.40(f)(3)(ii) (replacing index 
for home equity line of credit); Reg. Z Off'l Interpretations, 12 CFR 
1026.55(b)(2)-6 (replacing index for credit card).
---------------------------------------------------------------------------
    The complexity of selecting a replacement is compounded in other 
ways too. Most importantly, there is no alternative index that will 
perfectly match the cost and movement of the LIBOR. As a result, any 
replacement will entail some compromises and will risk imposing a cost 
on one party to the contract. Nobody can predict future interest rates, 
so--even if the transition is conducted fairly--it is difficult to 
predict who will bear the burden and how big a burden that will be.
    A related problem is that some contracts may require other 
adjustments to incorporate the new index. These adjustments are 
generically called ``conforming changes,'' because they are intended to 
bring the contract into conformity with the replacement index. One of 
the most significant conforming changes will be to the margin. Because 
the new index will almost certainly have a different starting and 
average rate, the margin will need to be changed to result in a 
``comparable'' contract rate. Some contracts allow the noteholder to 
make this change but many do not. \7\ Other adjustments may be 
necessary too. This is another source of risk and controversy because 
there is no consensus on what conforming changes are appropriate or 
whether the fallback language authorizes noteholders to make them.
---------------------------------------------------------------------------
     \7\ Regulation Z specifically allows creditors to change the 
margin for home equity lines of credit. 12 CFR 1026.40(f)(3)(ii). But 
there is no equivalent provision for closed-end mortgages.
---------------------------------------------------------------------------
    The crux of the risk for consumers and industry participants is 
that making the wrong decisions will lead to an unreasonable transfer 
of value. One party to the contract will unfairly profit and the 
counterparty will be harmed.
    As long-time representatives of consumers, we are very familiar 
with the devastating consequences of predatory lending. This underlies 
our concern that some noteholders may abuse or mismanage their broad 
discretion in a way that gouges consumers. There are a number of ways 
this might happen. Unscrupulous, or even just sloppy, lenders or 
mortgage loan servicers could--

    use a replacement index that is too volatile or that trends 
        at a higher rate than the LIBOR;

    employ a different margin that is too high and results in a 
        windfall for the noteholder;

    make other inappropriate and harmful changes to the 
        contract under the guise of ``conforming changes,'' such as by 
        changing the method by which payments are calculated, or even 
        changing the due date for payments;

    fail to replace the LIBOR altogether, leaving the loan 
        stuck at the last LIBOR and locking in a higher-than-market 
        rate; or

    botch the mechanics of replacing the LIBOR, such as by 
        using a different date to measure the applicable index in a way 
        that unfairly benefits the lender.

    Consumers have no control over what happens in this process and 
contracts provide them with no say in which index the noteholder 
selects. Their only recourse will be to complain or initiate 
litigation.
The Credit Industry Should Adopt the ARRC's Recommended Replacement: 
        The SOFR
    For the past several years, a committee of industry participants, 
known as the Alternative Reference Rate Committee (ARRC) \8\ has worked 
to prepare for this transition. NCLC and other consumer groups have 
participated in these deliberations. The ARRC has developed a set of 
well-vetted plans and recommendations that will protect consumers as 
well as industry. Unfortunately, their recommendations are non-binding. 
And, as the situation stands today, too few industry participants have 
committed to follow them. We believe fear of litigation is a major 
reason for the recalcitrance. They are worried that whatever index they 
choose, someone will sue them: either consumers, whose payments may 
increase, or investors, who may believe they are losing money.
---------------------------------------------------------------------------
     \8\ ``The ARRC is a group of private-market participants convened 
to help ensure a successful transition from USD LIBOR to a more robust 
reference rate, its recommended alternative, the Secured Overnight 
Financing Rate (SOFR). It is comprised of a diverse set of private-
sector entities, each with an important presence in markets affected by 
USD LIBOR, and a wide array of official-sector entities, including 
banking and financial sector regulators, as ex officio members.'' Fed. 
Reserve Bank of N.Y. website, https://www.newyorkfed.org/arrc/about.
---------------------------------------------------------------------------
    The refusal of a significant part of the credit industry to agree 
to abide by the recommendations of the ARRC endangers consumers. This 
refusal also endangers the stability of the economy in the United 
States.
    Replacing the index is the primary challenge of the LIBOR 
transition. Fortunately, the ARRC has identified the most suitable 
replacement index: the Secured Overnight Refinancing Rate (SOFR). The 
technical aspects of why the SOFR is appropriate are beyond the scope 
of NCLC's discussion today, but there is no doubt that the ARRC and the 
Federal Reserve Bank of New York have sufficiently vetted the SOFR. As 
a result of their work, it has become clear that the SOFR, when 
implemented as recommended by the ARRC, \9\ will minimize any value 
transfer caused by the end of LIBOR. It is the best option for both 
industry and consumers.
---------------------------------------------------------------------------
     \9\ Including the recommended spread-adjustments.
---------------------------------------------------------------------------
Congress Should Mandate Use of the SOFR or Offer a Safe Harbor for 
        Voluntary Use
    Despite the ARRC's recommendations, too few industry participants 
have announced that they will adopt the SOFR for legacy consumer 
contracts. Delaying this decision to the last minute will increase the 
risk of implementation errors and the potential for broader economic 
instability. NCLC and other consumer advocates have urged Federal 
regulators to adopt strong regulations that will compel industry to 
adopt the ARRC's recommendations, but they have not done so. States 
have limited ability to adequately address the problem because of 
Federal bank law preemption. However, leaving the transition entirely 
to the market poses too great a risk to the financial markets, to bank 
safety and soundness, and to millions of individual homeowners, student 
loan borrowers, and their families.
    The best solution is for Congress to require noteholders to replace 
the LIBOR with the SOFR in all consumer contracts. But this proposal 
has been rejected by the credit industry, so we have agreed with 
industry trade groups on a suitable compromise. As an alternative to a 
mandate, Congress should create a safe harbor from litigation for 
noteholders that voluntarily adopt the ARRC's recommended benchmark 
replacement index.
    The House of Representatives is already considering such a bill, 
H.R. 4616, the Adjustable Interest Rate (LIBOR) Act of 2021. We support 
the ideas behind H.R. 4616 but only with changes to the safe harbor 
that will prevent abuse.
    While consumer advocates generally oppose safe harbors from 
litigation, we believe a narrowly tailored one is appropriate for this 
unique situation. A safe harbor provides a company with immunity from 
lawsuits by anyone claiming to have been harmed by conduct within the 
scope of the safe harbor. Safe harbor laws are often too broad, poorly 
drafted, and more likely to protect wrongdoers than to accomplish 
anything positive for society. But in this case, we have negotiated a 
narrowly focused safe harbor law that--while not our first choice--will 
avoid the greater harm we expect if noteholders adopt indices other 
than the SOFR.
    Specifically, we recommend that Congress adopt a safe harbor for 
consumer contracts that is limited to liability for:

    the selection or use of the SOFR recommended by the ARRC 
        and Federal Reserve Board; and

    the implementation of necessary conforming changes.

    While we support the concept of a safe harbor embodied in H.R. 
4616, the language of the bill is currently too broad. In its current 
form, the safe harbor would also include consumer claims arising out of 
the determination and performance of conforming changes. We are 
concerned that disreputable actors could harm consumers by taking an 
overly broad interpretation of what conforming changes are necessary to 
implement a new index. If that happens, the current version of H.R. 
4616 could immunize some of the misconduct I describe in section II, 
supra, of my testimony.
    Based on our experience with consumer contracts, we believe that 
very few--if any--conforming changes will be needed. And those that may 
be needed will be so basic and ministerial that there is no reason to 
incentivize them with the offer of a safe harbor. Therefore, we have 
agreed with industry representatives that the safe harbor for consumer 
contracts will not include the determination of what conforming changes 
are necessary or the performance of conforming changes. Instead, the 
definition of ``conforming changes'' will be determined by the Federal 
Reserve Board (FRB). Only those changes will be within the scope of the 
safe harbor. Appendix A [Ed.: Not included] to my testimony is a 
document showing the changes that we and industry representatives 
recommend making to H.R. 4616. This document has already been shared 
with House and Senate staff.
    In the statutory language that we have proposed, the selection of 
the replacement index refers only to the question of whether to use one 
index or another. If a noteholder selects the appropriate SOFR, that 
decision will be protected by the safe harbor. Selecting any other 
index will be outside the safe harbor. This will encourage noteholders 
to follow the ARRC and FRB's recommendation, but will not require them 
to do so.
    Use of the replacement index refers only to routine performance of 
the contract once the new index has been substituted for the LIBOR. 
This primarily refers to the regular rate and payment changes called 
for by the loan contract. So, for example, if a borrower has an ARM 
that calls for annual rate changes, the safe harbor would cover 
calculation of the new interest rate and loan payment each year based 
on the SOFR. Neither a consumer nor an investor could claim that they 
were harmed because the new payment was based on the SOFR. But if the 
servicer makes a mistake in doing so, for example by using the SOFR 
from the wrong date, making a typo when entering the value into the 
computer, or miscalculating the new payment, those mistakes would not 
be protected by the safe harbor and the consumer would retain the right 
to seek appropriate relief.
Conclusion
    NCLC represents the interests of millions of low-income consumers 
who will be directly affected by the end of the LIBOR. If industry 
participants replace the LIBOR with an inappropriate index; if they 
mismanage the transition; or if they take advantage of the opportunity 
to make other changes that cost consumers, many people will be harmed.
    That risk can only be avoided if Congress acts by passing 
legislation to ensure that industry participants adopt the most 
appropriate replacement for the LIBOR--the Secured Overnight 
Refinancing Rate (SOFR). After extensive discussions, we have agreed 
with some of the most important industry trade groups that H.R. 4616 is 
the best vehicle for doing so--but only if it is amended to narrowly 
tailor the safe harbor in a way that will protect consumers.
    Recommendation: The Senate should pass a bill modeled on H.R. 4616 
but with a more limited safe harbor connected to a narrow definition of 
``conforming changes'' to be provided by the Federal Reserve Board.
    I want to conclude by praising industry, the Members of this 
Committee, and the House committee for working together to find a 
solution that is good for everyone. Thank you for considering the views 
of consumers. I am happy to answer any questions.
                                 ______
                                 
             PREPARED STATEMENT OF J. CHRISTOPHER GIANCARLO
Senior Counsel, Willkie Farr & Gallagher LLP, and Former Chairman, U.S. 
                  Commodity Futures Trading Commission
                            November 2, 2021
Introduction
    Thank you, Chairman Brown, Ranking Member Toomey, and Committee 
Members. It is an honor to appear before this Committee once again.
    I am Chris Giancarlo, Senior Counsel at the law firm of Willkie 
Farr & Gallagher.
    I had the honor to serve our country as the thirteenth Chairman of 
the U.S. Commodity Futures Trading Commission (CFTC), a Federal agency 
that has led and continues to lead the transition away from the LIBOR 
interest rate benchmark, the subject of today's hearing. I am also an 
independent director of the American Financial Exchange.
    I commend Chairman Brown and Ranking Member Toomey for holding this 
hearing. Congressional leadership on this issue is important to ensure 
banks and all financial institutions of every size, shape and location 
understand that LIBOR will be replaced and will be replaced soon.
    Over 4 years ago, on the very day that the U.S. Senate unanimously 
confirmed my nomination as CFTC Chairman, Federal Reserve Chairman 
Jerome Powell and I published an opinion piece in the Wall Street 
Journal, entitled ``How to Fix Libor Pains''. In it, we wrote:

         . . . the time has come for market participants and regulators 
        to work together on a plan for dealing with existing Libor-
        based contracts maturing after 2021. This plan must also 
        address how to expand adoption of the broad Treasury repo rate 
        into a wider array of products that rely on a benchmark . . . 
        There is time for this transition to be done thoughtfully. Our 
        agencies are prepared to help ensure that it is done 
        cooperatively and smoothly.

    I was committed then and remain committed today to do everything 
possible to assist the transition away from LIBOR. The transition is 
here and now. Beginning in January 2022, no new capital markets or 
lending contracts can be based on LIBOR.
    Beginning in June 2023, all existing LIBOR contracts must be 
replaced with a LIBOR replacement. This hearing is an important step in 
getting it done.
The Shortcomings of LIBOR
    As you well know, the London Interbank Offered Rate, or LIBOR, 
plays an important role in American finance. The credit cards, 
floating-rate mortgages and car loans of many of our fellow American 
citizens and even the day-to-day funding for the companies where they 
work are all influenced by LIBOR. This arcane interest rate is meant to 
reflect the rate that large banks must pay to borrow short term. It is 
used to calculate the rate of interest on more than half of American 
home mortgages. LIBOR is cited in financial contracts setting trillions 
of dollar-denominated loans, securitizations, and derivatives.
    I have extensive experience, both as a market regulator and 
business executive, with financial benchmarks and, most particularly, 
with LIBOR. Before entering public service, I served as the Executive 
Vice President of GFI Group, a leading trading platform and technology 
vendor to global markets for OTC swaps and other financial derivatives, 
many of which refer to LIBOR. As former Chairman of the CFTC, I am 
familiar with the critical importance of reference benchmarks for the 
sound functioning of U.S. markets for risk mitigation and reliable 
price discovery.
    The shortcomings of LIBOR first came to light during the 2008 
financial crisis with reports of manipulation of the rates used to 
calculate it. My former agency, the Commodity Futures Trading 
Commission, was a leader in investigating and sanctioning a number of 
major banks for benchmark manipulation. Prosecution of many of those 
cases proceeded determinedly under my administration.
    LIBOR is calculated daily from the quoted rates that a panel of a 
few large banks provide to ICE Benchmark Administration, an independent 
subsidiary of the Atlantabased firm Intercontinental Exchange. The 
quotes represent the rates at which the banks estimate they would be 
able to borrow in short-term money markets. Yet, apart from overnight 
transactions, the large banks providing those submissions no longer 
borrow much in those markets. There are very few actual loan 
transactions on which these quoted rates are based. In essence, a few 
large banks are contributing a daily judgment about something they no 
longer do.
    As a result, LIBOR suffers from two fatal flaws: shallowness of 
liquidity because of thin trading volume and narrowness of liquidity 
because of its reliance on only a handful of rate setters. When it 
comes to the potential for manipulation, the second shortcoming may be 
worse than the first.
    Back in 2017 during my CFTC service, the U.K.'s Financial Conduct 
Authority, the agency primarily responsible for regulating LIBOR, 
called for a worldwide transition away from LIBOR because of these very 
shortcomings and the risk they present. Here in the United States, we 
welcomed this move. The CFTC's Market Risk Advisory Committee under the 
keen leadership of Commissioner Russ Benham, now Acting Chair and the 
President's nominee for CFTC Chairman, led agency efforts during my 
Administration and continues to lead efforts to spur the transition 
away from LIBOR.
LIBOR Alternatives: SOFR
    At the same time in 2017 as the CFTC was prosecuting LIBOR 
manipulators and considering its risk to financial markets, the Federal 
Reserve Board convened a group of institutional participants that 
broker and clear LIBOR transactions to form the Alternative Reference 
Rates Committee, known as ARRC. It is a pleasure to appear today 
alongside Tom Wipf of Morgan Stanley, who chairs ARRC. Tom has worked 
tirelessly on these issues and has ably led the ARRC Committee. Under 
his leadership, the ARRC is focused on ensuring a smooth transition 
away from LIBOR for existing and new contracts.
    Following an extensive consultation, the ARRC committee recommended 
replacing LIBOR with a rate derived from short-term loans that are 
backed by a range of Treasury securities as collateral (known as 
Treasury repurchase agreements or ``Repo''). The Treasury Repo market 
is a fully collateralized financing market that enables the largest 
institutions to lend and borrow amongst each other, typically on a very 
short term basis. This interest rate derived from this market is a 
measure of practically risk-free borrowing because U.S. Treasury 
securities serve as collateral. With such risk-free collateral, the 
interest rate does not reflect the credit quality of the market 
participants, but rather the status of U.S. Treasury securities as the 
world's safest investment.
    Unlike LIBOR, SOFR is built upon actual market transactions of 
roughly $800 billion in daily activity. That provides much greater 
depth of trading liquidity than LIBOR. This feature directly addresses 
a key weakness of LIBOR: shallowness of trading liquidity.
    The Treasury Repo market is not only critical to the world's 
largest financial institutions, but it is also critical for ensuring 
liquidity in the U.S. Treasury debt market.
    The Federal Reserve Bank of New York is deeply involved in the Repo 
market in its role of managing Fed Open Market Operations in 
implementing Federal Reserve monetary policy. Widespread adoption of 
the SOFR benchmark is supportive of the U.S. Treasury debt market.
    SOFR is complementary to the cost of funding for many of America's 
largest banks that are primary dealers of Treasury securities and can 
use them as collateral for funding. Combined, these institutions have 
over eleven trillion dollars in assets. SOFR is therefore a highly 
appropriate LIBOR replacement for a broad range of financial 
institutions, especially primary dealers of U.S. Treasuries and other 
large firms that participate in that essential marketplace. I am very 
supportive of widespread adoption of SOFR as a well-constructed and 
durable, risk free interest rate benchmark.
LIBOR Alternatives: AMERIBOR
    Away from Wall Street, America has almost 5,000 community and 
regional banks and lending institutions with another $11 trillion in 
assets. These institutions lend to the real economy of America's small 
to medium-sized businesses, including manufacturers, equipment dealers, 
service providers, agriculture producers, and home builders that are 
America's job creators. These community lenders generally do not hold 
U.S. Treasury securities and other risk free collateral. Rather, they 
lend against relatively illiquid collateral of plant and equipment 
liens, property mortgages, auto leases, and personal guarantees. In 
effect, these lenders take real risk. They are highly credit sensitive.
    Over my 5 years at the CFTC, I traveled over half the country to 
meet with thousands of Americans who depend on CFTC-regulated markets 
to hedge the prices of agriculture, mineral, or energy commodities they 
produce. In the course of those travels, I descended 900 feet 
underground in a Kentucky coal mine, climbed 90 feet in the air on a 
North Dakota natural gas rig and flew 900 feet in the air in a Arkansas 
crop duster. I walked factory floors in Illinois, pecan farms in 
Georgia, grain elevators in Montana, feed lots in Kansas, and power 
plants in Ohio. Almost all of the small and medium-sized businesses I 
met were supported by America's community, State, and regional banks. I 
know how much those community banks, in turn, need support from 
Washington.
    Among other roles I have assumed since completing my service at the 
CFTC, I serve as an independent member of the Board of Directors of the 
American Financial Exchange (AFX). AFX was founded in 2015 by Dr. 
Richard Sandor, American economist and entrepreneur, who pioneered 
interest rate futures and created the world's first trading exchange 
for the reduction and trading of greenhouse gas emissions, for which he 
is known as, ``The Father of Carbon Trading.'' My professional 
relationship with Dr. Sandor began almost two decades ago in the 
private sector. Upon completion of my Government service, I was 
delighted when Dr. Sandor invited me to serve as an independent board 
member of AFX.
    AFX is an electronic marketplace where banks in the U.S. can 
directly lend and borrow short term funds to one another on an 
unsecured, credit sensitive basis. AFX has over 225 members as well as 
over 1,000 correspondent American banks. The assets of AFX members 
exceeds $5.3 trillion dollars. Measured by both the number of U.S. 
banks and aggregate bank assets, AFX members constitute about 25 
percent of America's banks and community lenders, including the 5th, 
6th, and 7th largest banks in the United States.
    AFX member banks are in all 50 U.S. States, including States 
represented by every Member of this Committee. AFX members include some 
of America's most respected local and regional banks as U.S. Bank, 
Keybank, Zions, First Financial, Citizens Trust, Brookline, East-West, 
Abacus Federal Savings, Cambridge Savings, Cape Cod Five Cents Savings, 
Cathay Bank, Customers Bank, Dime Community, Fulton Bank, Glacier Bank, 
Hope Bank, Asian Bank, Dollar Bank and Signature, ServisFirst, Unity, 
and Truist Banks.
    AFX members are highly representative of America's community, 
minority-owned and regional banks. That includes a significant share of 
America's critical minority-owned depository institutions that play a 
vital role in serving traditionally underserved communities, often 
lending to businesses and entrepreneurs with minimal collateral. By 
asset size, AFX members today represent about forty (40 percent) 
percent of U.S. Minority Depository Institutions (MDIs), including some 
of America's most innovative African-American, Asian-American, Hispanic 
and Native-American banks. The National Bankers Association, the 
leading minority-owned bank trade association in America, has endorsed 
AFX's interest benchmark as an approved rate to be used for loan 
documentation for its members.
    AFX was conceived and founded well before the decision to 
transition away from LIBOR. AFX was not created to benefit from LIBOR's 
demise. Like all good ideas, AFX was created to address a commercial 
need: to provide America's community and regional banks with a way to 
lend to and borrow from each another in a regulated, transparent market 
on a peer-to-peer basis. AFX offers America's community and regional 
banks a complementary alternative to their traditional source of 
funding from large money center banks on Wall Street.
    Every business day, tens of billions of dollars of loans are lent 
and borrowed by hundreds of participants in the AFX institutional 
marketplace. The marketplace is electronic, transparent and self-
regulated under the scope of the CFTC's comprehensive regulatory 
framework. It is compliant with standards developed by the 
International Organization of Securities Commissions (IOSCO) for 
appropriate LIBOR benchmark replacements. The interest rate at which 
AFX members independently agree to borrow and lend are tracked and 
compiled into a series of benchmarks that include the 
AMERIBOR' Term-30 index. The index is published nightly and 
displayed on almost all financial data feeds like Reuters and Bloomberg 
and financial broadcast media.
    These AMERIBOR benchmarks are complementary to the cost of funding 
for thousands of AFX members and correspondent firms whose lending 
activities to the real economy is highly credit sensitive and supported 
by relatively illiquid, physical collateral, and personal guarantees. 
For these institutions, AMERIBOR best represents their cost and risk of 
funding. As a result, AMERIBOR benchmarks are favored by the thousands 
of AFX members and correspondent firms as an interest rate benchmark 
for commercial lending contracts. For this reason, I support adoption 
of AMERIBOR by institutional lenders who require a well-constructed and 
durable, credit sensitive interest rate benchmark.
Market Diversity and Durability
    It will not surprise the Committee to hear that at my core I 
believe in open and competitive U.S. markets. But my comments today are 
frankly less about the need for competition in the LIBOR replacement 
market and more about choice. SOFR and AMERIBOR should not be viewed as 
competitive but as complementary. They are different. SOFR is a risk-
free rate and AMERIBOR is a credit sensitive rate. They are 
alternatives for different needs and different sectors of the 
marketplace.
    From my service at the CFTC, I know that most of America's 
important trading markets feature a diverse set of pricing benchmarks 
serving different needs. In our grain futures markets there are 
multiple pricing benchmarks, including Chicago soft red winter wheat, 
Kansas City hard red winter wheat, and Minneapolis hard red spring 
wheat. The different benchmarks serve to establish the cost of 
different varieties of wheat used in different bread products. (Pizza 
dough is made from different wheat than breakfast cereal). In oil 
markets there is West Texas Intermediate and Brent crude oil, again 
setting distinct prices for different fuel products, like domestic auto 
gas or industrial diesel. Of course, in our equity markets, there are 
multiple benchmarks like the Dow Jones Industrials, the S&P 500, and 
the Russell 2000 to measure the different performance of large cap and 
small cap companies. Such existence of a variety of specifically 
designed benchmarks allows market participants to engage in investment 
activities that are specifically crafted to their investment needs 
rather than a ``one-size-fits-all'' approach. Choice of benchmark is 
one reason why U.S. futures and equity markets are the world's deepest, 
most liquid, and most attractive to global capital.
    Strangely, one U.S. market that has not traditionally enjoyed a 
similar choice of benchmark is bank lending, where LIBOR has been 
dominant for decades. In fact, the ubiquity of LIBOR and long absence 
of competing, commercially derived interest rate benchmarks is one of 
the reasons why the demise of LIBOR presents a potential crisis today. 
Lack of choice of interest rate benchmark is itself a systemic risk.
    Nassim Nicholas Taleb, the well-known market observer who coined 
the phrase ``Black Swan'' has written about the increased fragility of 
today's top-down designed, overly complicated economic systems. \1\ He 
warns that concentration in complex systems such as financial markets 
makes them more vulnerable, not less to cascading runaway chains of 
reactions and ultimately fragile in the face of outsized crisis events.
---------------------------------------------------------------------------
     \1\ See, generally, Nassim Nicholas Taleb, ``Antifragile: Things 
That Gain From Disorder'', (Random House) 2012.
---------------------------------------------------------------------------
    He posits that the opposite of such fragility is ``antifragile,'' 
meaning systems that become stronger when subject to stress, the way a 
human body becomes immune to a disease through exposure or inoculation. 
He explains that financial markets that are allowed to grow organically 
through gain and loss with plenty of redundancy and choice best 
resemble biological organisms that adapt and, indeed, thrive.
    The United States banking industry is quite unique and 
extraordinary. On the one hand, its large money center and Wall Street 
investment banks lead the world in sophisticated global trading, 
investment banking, and large project finance. On the other hand, 
America's community and regional banks spread out across the urban, 
suburban, and rural landscape finance the everyday needs of America's 
consumers, small and medium-sized businesses, and domestic job 
creators.
    A banking industry that is so varied, so complex and so essential 
to the American economy needs the diversity and durability that comes 
from choice in interest rate benchmark. A one-size-fits-all response to 
the demise of LIBOR would be a source of systemic risk to the U.S. 
economy. As we rightfully move away from LIBOR, we should make clear 
that lending institutions--be they money center banks or local, 
regional or MDI banks--should have the flexibility to choose among 
IOSCO compliant benchmark alternatives that best meet both their 
lending activity and their customers' needs.
Federal Legislation
    There is a clear consensus, that I share, that Federal legislation 
is necessary to ensure smooth and efficient transition away from LIBOR. 
As Treasury Secretary Janet Yellen stated in her testimony before the 
House Financial Services Committee earlier this year, legislation is 
necessary for tough legacy contracts that do not specify a workable 
fallback rate making it not feasible for private-sector actors to 
modify on their own. \2\ Legal certainty is absolutely critical to 
ensuring that institutions with existing tough legacy contracts can 
replace their LIBOR benchmark before the end of June 2023, the 
termination date for all existing LIBOR contracts.
---------------------------------------------------------------------------
     \2\ Oversight of the Treasury Department's and Federal Reserve's 
Pandemic Response. U.S. House Financial Services Committee (March 23, 
2021), https://www.youtube.com/watch?v=AQsLydo6mJI&t=3488s at 58:44.
---------------------------------------------------------------------------
    There is legislation moving through the House of Representatives, 
H.R. 4616, the Adjustable Interest Rate (Libor) Act of 2021, that would 
provide much needed legal certainty. The legislation makes clear that 
all LIBOR contracts must be converted to an alternative benchmark 
before June 30, 2023. Furthermore, if the contract does not provide 
clarity how an alternative benchmark can be reassigned, the institution 
would have legal certainty if LIBOR is replaced with SOFR. Also, as it 
relates to ``new'' contracts, the legislation, in the ``Findings'' 
section, provides helpful language that institutions entering into new 
contracts will have choice of which benchmark they can utilize. AFX 
supported this legislation when it was before the House Financial 
Services Committee where it was ordered to be reported to the full 
House.
    Enactment of legislation providing legal certainty for the 
conversion of those tough legacy contracts is absolutely critical. I 
would also urge the Committee to consider providing stronger language 
ensuring that, as institutions are entering into new contracts, they 
have the clear ability to choose among properly qualified benchmark 
replacements. Qualifying factors could include, for example, benchmarks 
meeting the IOSCO standards and benchmarks that are built around 
market-based trading and fully transparent price discovery.
Conclusion
    LIBOR has been the world's most used interest rate benchmark. A 
such, the transition away from LIBOR has been, and continues to be, a 
long journey. In less than 2 months LIBOR will cease as the benchmark 
for new contracts and in less than 20 months all legacy LIBOR contracts 
must be replaced with an alternative benchmark. SOFR and Ameribor and, 
no doubt others, will help us put LIBOR in the rear view mirror. But 
this Committee and this Congress can help facilitate that smooth 
transition by providing legal certainty as it relates to tough legacy 
contracts and responsible choice for new contracts.
    If I can leave you with one thought, it is that there is simply no 
one-size-fits-all lending benchmark for an economy as unique and 
diverse as the United States. Having choice among multiple, properly 
qualified benchmarks not only facilitates the transition away from 
LIBOR, but it also enhances efficiency, reduces systemic risk and 
encourages economic growth as we progress through the transition 
process. Both SOFR and AMERIBOR represent the kind of home grown 
American ingenuity and innovation, along with a sound regulatory 
infrastructure, that has helped make U.S. markets the deepest, most 
liquid and most efficient markets in the world.
    Thank you and I look forward to your questions on this important 
matter.
                                 ______
                                 
                  PREPARED STATEMENT OF MICHAEL BRIGHT
        Chief Executive Officer, Structured Finance Association
                            November 2, 2021
Introduction and Background
    Chairman Brown, Ranking Member Toomey, and other Members of the 
Committee, my name is Michael Bright, CEO of the Structured Finance 
Association, or ``SFA.'' On behalf of the member companies of SFA, I 
thank you for inviting me to testify. I also thank you for your focus 
on finalizing the transition away from LIBOR for millions of consumers 
and investors with loans or savings tethered to these rates.
    The Structured Finance Association is a consensus-driven trade 
association with over 370 institutional members representing the entire 
value chain of the securitization market. By facilitating the issuance 
and investing of loans and securities, this market provides trillions 
of dollars of capital to consumers and businesses in communities across 
the country. Our members facilitate credit and capital formation across 
a wide breadth of asset types and industries, including auto loans, 
mortgage loans, student loans, commercial real estate, business loans, 
among others.
    SFA members include issuers and investors, data and analytic firms, 
law firms, servicers, accounting firms, and trustees. Importantly, many 
of our investor members are fiduciaries to their customers. Unlike some 
trade associations, before we take any advocacy position our governance 
requires us to achieve consensus by agreement rather than majority 
vote, ensuring the perspectives of all our diverse membership are 
included. This diversity is our strength, as it builds healthy tension 
in arriving at our consensus positions. Because of this, we are 
methodical and thoughtful as we analyze the pros and cons of 
legislative and regulatory proposals, as well as market dynamics, 
before we reach a mutually acceptable position that represents the 
entirety of the capital markets.
    Formed in 2013, the Structured Finance Association's stated mission 
is: ``To help its members and public policy makers grow credit 
availability and the real economy in a responsible manner.'' \1\ There 
are very few issues that touch on this core mission as much as the work 
we are doing to help responsibly transition away from U.S. dollar (USD) 
LIBOR. Further, this issue is one that has unified all participants in 
our membership--from issuer to investor, and everyone in between--on 
the need for Federal legislation to help ensure a final transition 
takes place smoothly and efficiently.
---------------------------------------------------------------------------
     \1\ https://structuredfinance.org/about-us/
---------------------------------------------------------------------------
    Absent Federal legislation to provide a consistent and fair 
solution as well as a safe harbor for certain so called ``tough 
legacy'' contracts--that is, USD LIBOR contracts lacking clear fallback 
language--retirees and savers will be forced to foot the bill for 
billions if not tens of billions of dollars in legal costs. This will 
occur as trustees would need to seek court guidance on which 
replacement rates to select and how to incorporate that rate into the 
existing contract. The absence of Federal legislation for these 
contracts also opens the possibility that consumers could be left in an 
uncertain position under contracts that fail to provide a fallback 
directive upon LIBOR's cessation. With legislation, however, there are 
critical incentives for lenders to provide consistent treatment to all 
consumers. I will outline in detail in my written testimony below how 
this dynamic has come about, and why, as to this remaining pool of 
legacy contracts, the market is unable to resolve this issue without 
enormous litigation expense.
    Securitization and structured finance are critical elements of 
today's economy. The pooling of loans into a security, coupled with the 
separation of highest credit and prepayment risks from lower prepayment 
and credit risks, allow for efficient matching of borrower and investor 
preferences. This segmentation of risks lowers the cost of credit to 
the consumers and businesses that the capital markets fund while 
providing more tailored investment options to investors with varying 
risk preferences. Our members know that, when done properly, this work 
facilitates economic growth and capital formation across all 
communities.
Background on LIBOR Transition to Date
    Let me first make abundantly clear that many of SFA's member 
companies were impacted by the LIBOR scandal. In particular, SFA 
investor members need to assured that this never happens again. All of 
our members must know that, going forward, contracts based on a 
floating rate index can rely on the integrity of that index. For these 
reasons, SFA has been an active member in the Federal Reserve's 
Alternative References Rate Committee, or ``ARRC'', a group whose 
purpose includes ensuring an orderly transition away from LIBOR.
    Extensive progress has been made on this gigantic financial 
undertaking. Out of over $200 trillion of U.S. dollar-based contracts 
that are tied to LIBOR, nearly all have managed to put in place a plan 
for transition to a new rate. This was achieved across banking and 
financial sector regulators, market participants and consumer groups. 
As there wasn't a natural replacement rate for U.S. dollar LIBOR in 
existence, the transition started with the critical task of identifying 
and developing trusted and widely adopted alternative reference rates 
and ensuring those rates won't present the same flaws as LIBOR or other 
systemic deficiencies. As the alternative replacement rates were not 
previously published, groundbreaking work was launched to build market 
understanding, acceptance, and liquidity in these alternative rates 
required by borrowers, lenders, and investors.
    With alternative rates available and the liquidity and market 
acceptance of those rates steadily building, attention quickly turned 
to ensuring that all new contracts that still referenced LIBOR 
incorporated so called ``fallback'' language. This fallback language is 
agreed to by all contract parties and clearly specifies what interest 
rate would be used in the event that LIBOR is unavailable or ceases to 
exist. In parallel to incorporating fallback language in new contracts, 
work began in large scale by lenders, borrowers and investors to amend 
millions of existing LIBOR contracts that mature after the expected 
cessation date of LIBOR. All this effort, significantly supported and 
helped by a widespread number of market participants, consumer groups, 
and regulators within product-specific working groups of the ARRC, has 
reduced the USD LIBOR exposure that will remain after the June 2023 
LIBOR cessation date from over $200 trillion to an estimated $16 
trillion. \2\
---------------------------------------------------------------------------
     \2\ This is a best guess estimate taken by surveying our member 
firms. This number includes many types of contracts, ranging from 
floating rate mortgage to student loans, loans to businesses, and 
embedded interest rate swaps in contracts.
---------------------------------------------------------------------------
    Meanwhile, market participants have continued to work to build 
liquidity and transparency in the alternative reference rates, which 
allow for the hedging of interest rate risk in a liquid capital market. 
That hedging allows borrowers to access products like the fully 
prepayable fixed rate mortgage, or to issue corporate debt that matches 
a company's assets and cash flows.
    Finally, new security issuance continues to increase in all product 
types. Building off the liquidity of a secondary market for hedging, 
the amount non-LIBOR floating rate contracts continues to increase each 
month.
``Tough Legacy'' Contracts, and Other Remaining Challenges
    Even with this well-organized multiyear effort, these estimated $16 
trillion contracts have no realistic means to be renegotiated and 
amended. While small compared to the overall size of outstanding LIBOR 
contracts, this is still a large sum, posing an enormous risk to the 
financial system and the underlying borrowers, investors and banks if 
not dealt with properly. These so-called ``tough legacy'' contracts 
include mortgages, student loans, business loans, and capital market 
transactions that finance and hedge these legacy LIBOR-based contracts, 
and therefore impact a broad range of American households and 
businesses.
    The simplest explanation for these contracts is that, after more 
than 30 years of publication and use in over 98 percent of U.S. dollar 
floating rate contracts, most contracts that were entered into prior to 
the announcement of LIBOR's end simply did not contemplate the 
permanent cessation of such a ubiquitous rate. While in hindsight today 
it may seem obvious that LIBOR could come and go, for many decades this 
simply and unfortunately was not the case.
    These tough legacy contracts often have very high legal and 
operational hurdles to amending their terms, not the least of which is 
identifying, contacting, and negotiating with the large number of 
contractual parties who must consent to any such amendment. For 
instance, in all widely distributed bonds there are upwards of hundreds 
of bondholders who must be involved in the negotiation--and most often 
unanimous consent--that is required to change the interest rate of the 
bond. Moreover, even in normal market circumstances, due to investor 
privacy constraints and operational hurdles, identifying and 
communicating with bondholders in certain products is very challenging, 
if not impossible. On the massive scale required by the LIBOR 
transition, it is viewed as fruitless.
    Finally, in the likely absence of meeting these impractical 
hurdles, the third-party trustees, who administer certain contractual 
provisions in the structured finance market, would need to seek 
direction through judicial proceedings to navigate the transition to a 
replacement rate. This is what will happen in the absence of safe 
harbor legislation, and--as per the contracts--most of the legal costs 
for structured finance bonds will be borne by the underlying investors 
and savers.
    Recognizing the significant economic, operational and legal risks 
of these $16 trillion contracts, for the past few years SFA investors, 
bond issuers, lenders, trustees, paying agents and servicers members 
have worked extensively with each other, and with consumer groups, 
regulators and other sector participants, to evaluate potential 
solutions. Early in the process of managing away from LIBOR, many of 
these stakeholders expressed concern about the use of legislative 
action that would affect previously agreed contractual matters. 
However, after lengthy deliberation and debate, a consensus position 
across the entire market emerged that the cessation of this critically 
important benchmark rate presents such a unique challenge that other 
alternatives examined were inoperable, could lead to inequitable 
outcomes for investors or consumers, presented extensive and costly 
litigation risk, or all the above. As such, firms that would under 
normal circumstances find legislation to amend contracts anathema, are 
now strong advocates for Federal legislation to ensure a smooth and 
fair transition.
Principles of a Legislative Solution
    Again, after much discussion amongst our members and stakeholders, 
SFA members found that legislation is not only the best option, but the 
only viable option to safely, fairly, and equitably transition tough 
legacy contracts. Moreover, it became clear that, absent congressional 
action, the remaining challenges of the LIBOR transition will create a 
great deal of confusion for borrowers and investors while further 
degrading the value of these fixed-income investments for savers, 
pensioners, and retirees.
    With that as background, SFA market participants identified five 
key principles of a legislative approach:

    Minimize any value transfer among the contractual parties

    Use a single, consistent replacement benchmark for all 
        similar LIBOR contracts based upon a liquid, robust replacement 
        benchmark

    Minimize litigation risk through a comprehensive but narrow 
        safe harbor that provides adequate operational flexibility for 
        billing and paying agents to implement the use of the new 
        replacement benchmark

    Narrowly scope legislation to facilitate the transition 
        away from LIBOR without impacting investor, consumer, or other 
        counterparty rights and protections

    Do not impact contracts that already have a sufficient 
        replacement mechanism unless contract parties opt-in on their 
        own

    To be clear, SFA believes that legislation should in no way 
prohibit parties from agreeing together on a different replacement 
rate, if they so choose. Legislation should pay careful attention to 
all Constitutional rights embedded in contracts, and for this reason 
SFA has spent considerable time working with experts in this area of 
the law. And legislation should in no way contribute to wealth transfer 
between parties. These all represent important boundary conditions on 
how any law would work, and therefore discussions over every provision 
of proposed legislation have taken thousands of hours of work.
    With these principles in mind, SFA is strongly supportive of the 
prospective Federal legislation that recently passed out of the House 
Financial Services Committee. We also know that legislation may undergo 
additional technical edits, and we know that the Senate is working on 
similar legislation with similar goals. With the principles enumerated 
above, we continue to be appreciative of all this legislative work. On 
behalf of the entire membership of SFA, I specifically want to thank 
Senators Tester and Tillis for the leadership they are providing on 
this issue.
    As you likely know, recently, both Chairman Powell and Secretary 
Yellen also expressed their support for Federal legislation. On 
February 24, 2021, Jay Powell, Chair of the Federal Reserve, called 
Federal legislation the ``best solution'' to address outstanding legacy 
contracts that will have not run off by June 2023. On March 23, 2021, 
Treasury Secretary Janet Yellen agreed with Chairman Powell's assertion 
and stated that the transition of certain legacy contracts would be 
difficult without legislation, specifically noting, ``Congress does 
need to provide legislation for the LIBOR transition.'' We understand 
that these statements of support are the result of meaningful 
examination of the issues and challenges involved.
State-by-State Patchwork Approach Is Not Viable
    Recognizing the importance of legislative assistance to transition 
away from LIBOR, on April 6, New York State passed AB164B \3\ into law. 
The legislation provides businesses and consumers paying or receiving 
LIBOR-based payments crucial clarity, minimizing adverse economic 
impact and legal uncertainty in New York-based tough legacy contracts. 
The bill passed by the New York State legislature was also consistent 
with our five key principles.
---------------------------------------------------------------------------
     \3\ https://legislation.nysenate.gov/pdf/bills/2021/A164B
---------------------------------------------------------------------------
    This was a big, positive step forward in the orderly transition of 
LIBOR as we estimate almost half of tough legacy contracts are governed 
by the law of New York State. But a uniform Federal framework would 
expand the protections to also include all other tough legacy contracts 
remaining across the United States, allowing for all tough legacy LIBOR 
contracts to transition on time and in an equitable and fair manner. 
Timely and consistent treatment is crucial for the acceptance of the 
replacement rate by the investing and borrowing public. The success of 
the transition ultimately depends not only on the coordination across 
easily amendable contracts, but also on the fair and timely resolution 
of tough legacy contracts.
    The most important reason for a Federal legislative approach is to 
avoid the foreseeable downside risk to a State level approach. Simply 
put, a State-by-State approach would provide fewer comprehensive 
protections than what could be achievable at the Federal level given 
the very limited time remaining until LIBOR's end in just over 2 years. 
Additionally, we risk a patchwork of varying State laws, which would 
compromise the very intent to provide a smooth transition.
    State-by-State solutions cannot ensure all borrowers, lenders, 
investors, and financial intermediaries of tough legacy contracts have 
the same fair, equitable and consistent treatment across the country 
which is paramount to ensuring the public and market confidence in the 
fairness, viability and liquidity of the replacement rate they receive 
for the remaining term of their contract. Ultimately, any States that 
take no legislative actions will fail to articulate a path forward at 
all, leaving Americans and their businesses with potentially negative 
economic consequences and legal costs needed to protect their 
interests. By providing the certainty of an equitable, liquid, and 
transparent replacement rate and eliminating the potential for costly 
litigation, the legislation recently passed in New York State will 
serve to protect New York consumers, investors and other market 
participants if their contracts are governed by New York law. Similar 
legislation--adopted at the Federal level--would provide the same 
protections to help ensure all consumers, investors, and borrowers 
receive equitable and fair treatment regardless of where their contract 
is governed.
Conclusion
    In conclusion, let me thank you all again for your focus on helping 
to transition our markets and economy away from LIBOR once and for all. 
The work that some Members of this Committee are currently undertaking 
is critical to ensuring that all investors, consumers, and business 
borrowers and lenders are treated equally and fairly. It also will help 
to prevent billions of dollars of potential litigation, where no one 
wins but savers and retirees foot the bill.
    Please know that the membership of the Structured Finance 
Association has been committed to being part of the healthy evolution 
and productive improvements in our markets as they continue their final 
transition away from reliance on LIBOR, and we thank you for your work 
in helping to facilitate this important market evolution.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                        FROM THOMAS WIPF

Q.1. In a recent speech, Federal Reserve Governor Randal 
Quarles noted ``a handful of firms have said that they may want 
more time to evaluate potential alternative rates'' to SOFR. 
Please describe the consequences of these firms not following 
the recommendations of the Alternative Reference Rates 
Committee (ARRC) to transition to SOFR.

A.1. The ARRC believes that SOFR is the strongest alternative 
to USD LIBOR. However, the ARRC's recommendations have always 
been voluntary, and it recognizes that market participants may 
choose other rates. With that in mind, it is important to note 
that the ARRC has expressed its support for a vibrant and 
innovative market with reference rates that are robust, IOSCO 
compliant, and were available for use before the end of 2021 in 
order to promote a timely transition. (Source: Freguently Asked 
Questions Version: August 27, 2021)

Q.2. Please describe the consequences of some market 
participants potentially continuing to use LIBOR after 2021, 
including any potential risks to financial stability that could 
arise.

A.2. The Financial Stability Oversight Council, the Financial 
Stability Board and other domestic and global authorities have 
emphasized the clear risk to financial stability posed by the 
continued reliance on LIBOR. As such, the transition off of 
LIBOR, and toward robust alternative rates that do not 
reintroduce the vulnerabilities of LIBOR, is an important 
foundation for financial stability going forward.
    In the U.S., banking regulators have stated that they 
believe there are safety and soundness concerns for supervised 
entities that continue new use of U.S. dollar LIBOR this year. 
The ARRC has supported this supervisory guidance and has 
encouraged all market participants to end new use of U.S. 
dollar LIBOR. Because LIBOR has been used in such a large 
volume and broad range of financial products and contracts, 
failing to take advantage of the next 15 months to wind down 
legacy positions and instead continuing to create new LIBOR 
contracts would pose a potential threat to individual financial 
institutions and to financial stability.
    It is estimated that current outstanding contracts 
referencing USD LIBOR, including corporate loans, adjustable-
rate mortgages, floating rate notes (FRNs), securitized 
products and a wide range of derivatives products, total more 
than $200 trillion, roughly equivalent to 10 times U.S. Gross 
Domestic Product. The ARRC has estimated that roughly \2/3\ of 
these exposures will mature by June 2023; however, if new LIBOR 
contracts continued to be written then there would be a much 
larger set of contracts that would be forced to suddenly 
transition when LIBOR ends. Without advanced preparation, a 
sudden cessation of such a heavily used reference rate would 
cause considerable disruptions to, and uncertainties around the 
large gross flows of LIBOR related payments and receipts 
between many firms. It would also impair the normal functioning 
of a variety of markets, including markets for business and 
consumer lending. Continuing to use LIBOR would seem to ignore 
both its impending end and that its liquidity and usefulness 
will likely continue to diminish; it will also impede the 
ability of corporate borrowers and consumers to transition.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                       FROM ANDREW PIZOR

Q.1. Do existing student loan contracts that use LIBOR 
generally specify the required replacement rate if LIBOR is 
terminated?

A.1. No. Most existing LIBOR contracts grant note holders sole 
discretion to choose a new rate to replace LIBOR without 
specifying any particular replacement and also to make 
adjustments at the note holder's sole discretion. For example, 
a recent student loan contract from Discover states:

        If the 3-month LIBOR Index is no longer available, we 
        will substitute an index that is comparable, in our 
        sole opinion, and we may adjust the Margin so that the 
        resulting variable interest rate is consistent with the 
        variable interest rate described in this paragraph. If 
        at any time the fixed or variable interest rate as 
        provided in this paragraph is not permitted by 
        applicable law, interest will accrue at the highest 
        rate allowed by applicable law.

    It is also not clear that market participants have adjusted 
their contracts to reflect the upcoming cessation of LIBOR.

Q.2. Please describe the implications of student loan servicers 
having the discretion to choose an alternative rate to the 
Secured Overnight Financing Rate (SOFR), including the impact 
on student loan borrowers.

A.2. Allowing servicers the discretion to choose the 
replacement rate creates significant risk for consumers. The 
primary risk is that servicers will choose a rate that 
generates more profit for them and the note holder by being 
consistantly higher than LIBOR, such as the prime rate. Or they 
may choose a rate that is unsuitable for other reasons, such as 
a rate that is more volatile, one that is less representative 
of market rates, one that is not based on actual transaction 
data, or one that is easily manipulated--as the LIBOR was. For 
example, as consumer advocates have noted, industry 
representatives had advocated for the use of Ameribor and the 
Constant Maturity Treasury (CMT) rate to replace LIBOR, even 
though Ameribor is based on an extremely thin market relative 
to the market SOFR references and CMT is based on 
``indicative'' rate quotations instead of actual transaction 
data.

Q.3. Are existing rules sufficient to protect against companies 
putting any costs of the LIBOR transition onto consumers 
through an increase in interest rates? If not, what new 
protections are needed to mitigate any harms to student 
borrowers?

A.3. No, they are not. Right now, companies can readily replace 
LIBOR with rates that are more favorable to them at borrowers' 
expense, and many contracts allow note holders to make 
additional changes to the terms of consumer contracts (such as 
adjusting the margin on the loan) in the context of the 
adoption of a new reference rate that could put borrowers at 
risk.
    As we previously recommended to the Consumer Financial 
Protection Bureau, several measures are necessary to protect 
student borrowers:

    The CFPB should signal its expectation that 
        industry participants will select SOFR as a replacement 
        index and that failure to do so will invite increased 
        scrutiny of compliance with Regulation Z.

    Consumers should be informed at each critical stage 
        of the transition.

     The CFPB should require that lenders and servicers 
        make information about the transition, including the 
        new replacement rate, readily available to existing and 
        prospective customers, even when their debts transition 
        to spread-adjusted SOFR.

     It should be expected that institutions that 
        continue making loans that use the LIBOR as an index 
        ahead of the rate's cessation will add unambiguous 
        language to their loan contracts clearly articulating 
        the index that any LIBOR-based loan will fall back to 
        upon LIBOR's cessation and any associated changes that 
        will be made to the loan's margin at that time. Lenders 
        that do not adopt the ARRC's recommendations for 
        fallback language should be subjected to heightened 
        scrutiny from the Bureau.

    The CFPB should use all available authorities to 
        ensure the timely transition away from LIBOR.

    The Bureau's recently announced final rule is a strong step 
in the right direction, but more is still necessary.
              Additional Material Supplied for the Record
                              ICBA LETTER

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                              LIBOR LETTER

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                              CAMAC LETTER

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                              NAFCU LETTER

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                         BROOKLINE BANK LETTER

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                      STATEMENT SUBMITTED BY SIFMA

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