Benchmark with Checkered Past Shelved After Four Decades
By Christopher R. Vaccaro
Special to Banker & Tradesman

The London Interbank Offered Rate (LIBOR) was a widely accepted benchmark interest rate among financial institutions for over 40 years. Trillions of dollars in loans and other financial products were tied to LIBOR pricing. But LIBOR became tainted by scandal, and its time in the U.S. is coming to an end.

LIBOR is not a single interest rate, but 35 different interest rates determined by the Intercontinental Exchange (ICE) on a daily basis for the U.S. dollar, the British pound, the euro, the Japanese yen and the Swiss franc, on loans with maturities of one day, one week, one month, two months, three months, six months and one year.

On a daily basis, ICE asks a panel of major global banks, such as Bank of America, Barclays, Citibank, JPMorgan Chase, Citibank, UBS and Deutsche Bank, to quote what interest rates they are willing to pay on loans at the stated maturities. ICE then discards the highest and lowest quotes, producing trimmed averages as LIBOR for each currency and maturity. This method of determining LIBOR is based on what major banks say they are willing to pay for short-term loans, not on what they are actually paying for such loans.

Although interest rates tied to LIBOR can be competitively priced, LIBOR is subject to constant change, making some borrowers and investors uncomfortable. Many borrowers and investors prefer fixed interest rates, which allow predictable debt services costs for borrowers, and predictable returns for investors.

In contrast, some borrowers and investors prefer floating rates, such as LIBOR, which allow borrowers to benefit from rate decreases, and investors to benefit from rate increases. In response, banks market profitable interest rate swaps as financial products. Swaps enable borrowers and investors to trade fixed rates for floating rates, and vice versa, to mitigate undesired risks.

An Invitation for Mischief

The method of determining LIBOR, and LIBOR’s popularity in interest rate swaps, gave rise to considerable mischief that surfaced in the wake of the 2008 recession. An analysis by The Wall Street Journal indicated that some banks on the LIBOR panel quoted lowball rates that did not reflect increased loan defaults during the recession, and were out of line with rates quoted by other banks on the panel.

Also, financial institutions on the panel were parties to interest rate contracts tied to LIBOR, giving them incentives to make daily LIBOR quotes that manipulated LIBOR to increase the value of their contracts. A complicated scheme involving these activities was revealed in 2012. Subsequent investigations discovered collusion among multiple banks to manipulate LIBOR over many years. The investigations resulted in over $9 billion in fines against banks, and criminal charges against traders and brokers.

Responding to this misconduct, in 2014 the Federal Reserve convened the Alternative Reference Rates Committee (ARRC), a group of private-market participants, to manage a transition from U.S. Dollar (USD) LIBOR to a more reliable benchmark rate. In 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as a desirable replacement benchmark rate. Since then, use of LIBOR has declined.

The Federal Reserve Bank of New York’s website publishes SOFR on a daily basis. Unlike LIBOR, SOFR is based on an average of interest rates that banks actually pay for overnight loans secured by Treasury securities. The methodology for determining SOFR is complicated and requires challenging data collection and mathematical formulas, but regulators and financial institutions seem confident that SOFR will not be prone to the same manipulation as LIBOR.

The Inevitable Ending

LIBOR’s phase-out became inevitable on Nov. 30, 2020, when the Federal Reserve’s Board of Governors, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued an interagency statement encouraging banks to move away from USD LIBOR as soon as practicable.

ICE will cease publishing the one-week and two-month USD LIBOR rates on Dec. 31, 2021, and the remaining USD LIBOR rates on June 30, 2023. USD LIBOR will remain in limited use until June 30, 2023, so existing USD LIBOR contracts can mature before LIBOR experiences disruptions. The interagency statement warns that financial institutions that fail to prepare for the end of USD LIBOR could undermine their financial stability. The statement strongly discourages financial institutions from entering into contracts based on USD LIBOR after Dec. 31, 2021.

Given LIBOR’s checkered past, few people will grieve as it disappears over the next several months. It remains to be seen whether SOFR will gain acceptance as a replacement to LIBOR, and whether it will prove to be safe from manipulation.

Download the article as seen in Banker & Tradesman on December 27, 2021. Learn more about Christopher R. Vaccaro.

Check out this article written by Partner Shannon Slaughter and featured in the New England Real Estate Journal.

The minimum standard detail requirements for ALTA/NSPS Land Title Surveys was revised in 2021, effective February 23, 2021. Among the numerous revisions made to specific sections of the minimum standard detail requirements, the joint ALTA/NSPS Committee reviewed the case of Gutierrez de Martinez v. Lamagno, 515 U.S. 417 (1995), which held that in certain circumstances, such as those in Gutierrez de Martinez, the term “shall” could mean “may.” Gutierrez de Martinez involved a United States DEA agent that was in an automobile accident in Colombia. The plaintiff claimed that the DEA agent’s negligence and caused physical injuries and property damage and thus named DEA agent as party defendant. Under the Westfall Act, 28 U.S.C. § 2679(d)(1), the United States Attorney General is empowered to certify that an employee was acting within the scope of his or her office of employment and such certification “shall” conclusively establish the scope of office or employment according to the statute. Upon the Attorney General’s certification, the action shall be deemed an action against the United States, and the United States shall be substituted as the defendant. The SCOTUS held that the statutory language (i.e., whether the certification by the Attorney General is subject to judicial review despite the use of the word “shall”) is open to divergent interpretations. The SCOTUS included a footnote explaining that although “shall” generally means “must,” legal writers sometimes use, or misuse, “shall” to mean “should,” “will,” or even “may.”

To illustrate examples, the SCOTUS cited certain Federal Rules of Civil Procedure using the word “shall” to authorize, but not to require, judicial action. In light of the holding in this case, the joint ALTA/NSPS Committee reviewed each use of the word “shall” in the Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys and made determinations in each instance as to whether the word “shall” was intended to be directive or permissive and made revisions accordingly.

Section 5E of the minimum standard detail requirements for ALTA/NSPS Land Title Surveys was revised to require that surveyors disclose, among other things, evidence of easements, servitudes, or other uses by other than the apparent occupants of the surveyed property not disclosed in the documents provided to the surveyor. This includes but is not limited to utility locate markings as evidence of easements and utilities including a note as to the source of the markings (with a note if unknown), pipeline markers, manholes, valves, meters, transformers, pedestals, clean-outs, overhead lines, guy wires, utility poles on or within ten feet of the surveyed property, roads, drives, sidewalks, paths and other ways of access, utility service lines, or any other surface indications of underground easements or servitudes on or across the surveyed property.

In Table A, Sections 6(a) and 6(b) were revised to clarify that zoning research by the surveyor is not required. If this Table A item is requested, clients must provide a zoning report to the surveyor. However, a surveyor may conduct zoning research if so qualified and inclined. Former Item 10(b) of Table A addressed identification of whether certain walls were plumb on the survey–an item that has no bearing on title. This item was eliminated. It should be noted that the items in Table A may be negotiated between surveyors and clients. However, there are certain items in Table A that the surveyor must include to comply with state regulations that cannot be negotiated. Clients and their counsel are encouraged to clarify with lenders and title insurers which Table A items they require from the outset of the transaction to avoid delays and cost increases mid-transaction.

A number of other revisions were made to the 2021 Minimum Standard Detail Requirements for ALTA/NSPS Land Title Surveys that should be carefully reviewed.

Shannon Slaughter is a member of the New England Land Title Association and a partner at Dalton & Finegold LLP, Boston, Mass.

Dalton & Finegold is proud of our Summer Intern Class of 2021!  Joining us from a variety of universities and majors, this bright group of interns filled much needed roles in our Residential and Commercial Real Estate Department, Litigation Department and Marketing Department.  We wish them the very best as they head back to school.

Pictured here from top to bottom:
Max Chabin, Junior at Tufts University, Major: Economics; Minor: Finance & Latin
Olivia Cafarelli, Freshman at University of Connecticut, Major: Political Science & Human Rights
Sachin Sharma, Senior at University of Massachusetts Boston, Major: Political Science; Minor: Law
Catherine Weiner, Senior at Trinity College, Major: English, Minor: Legal Studies
Chloe Graham, Sophomore at University of New England, Major: Applied Exercise Science & Physical Therapy Program
Gretchen Goyette, 3L at University of Southern California Gould School of Law
Tim Walsh, 3L at Brooklyn Law School
Ben Holman, 2L at Suffolk Law
Max Alibrandi, Junior at Marist College, Major: Communications with concentration in Advertising/Marketing; Minor: Business

Also pictured here is Anne Webster, Chief of Operations (left) and Barry Finegold, Managing Partner (center)

Check out the latest article written by Partner Christopher Vaccaro.