[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                    THE END OF LIBOR: TRANSITIONING
                    TO AN ALTERNATIVE INTEREST RATE
                   CALCULATION FOR MORTGAGES, STUDENT
                     LOANS, BUSINESS BORROWING, AND
                        OTHER FINANCIAL PRODUCTS

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

                            VIRTUAL HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON INVESTOR PROTECTION,

                 ENTREPRENEURSHIP, AND CAPITAL MARKETS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 15, 2021

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 117-17
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
44-665 PDF                  WASHINGTON : 2021                     
          
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado              ANN WAGNER, Missouri
JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa                     TED BUDD, North Carolina
SEAN CASTEN, Illinois                DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts       TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York             ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts      JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina           BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania         WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York   VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
        Subcommittee on Investor Protection, Entrepreneurship, 
                          and Capital Markets

                   BRAD SHERMAN, California, Chairman

CAROLYN B. MALONEY, New York         BILL HUIZENGA, Michigan, Ranking 
DAVID SCOTT, Georgia                     Member
JIM A. HIMES, Connecticut            STEVE STIVERS, Ohio
BILL FOSTER, Illinois                ANN WAGNER, Missouri
GREGORY W. MEEKS, New York           FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER. New Jersey          ALEXANDER X. MOONEY, West Virginia
VICENTE GONZALEZ, Texas              WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam            TREY HOLLINGSWORTH, Indiana, Vice 
CINDY AXNE, Iowa                         Ranking Member
SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
EMANUEL CLEAVER, Missouri            BRYAN STEIL, Wisconsin
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 15, 2021...............................................     1
Appendix:
    April 15, 2021...............................................    35

                               WITNESSES
                        Thursday, April 15, 2021

Coates, Daniel E., Senior Associate Director, Office of Risk 
  Analysis and Modeling, Federal Housing Finance Agency (FHFA)...     5
Coates, John, Acting Director, Division of Corporation Finance, 
  U.S. Securities and Exchange Commission (SEC)..................     7
Smith, Brian, Deputy Assistant Secretary for Federal Finance, 
  U.S. Department of the Treasury................................     8
Van Der Weide, Mark, General Counsel, Board of Governors of the 
  Federal Reserve System.........................................     9
Walsh, Kevin P., Deputy Comptroller, Market Risk Policy, Office 
  of the Comptroller of the Currency (OCC).......................    11

                                APPENDIX

Prepared statements:
    Coates, Daniel E.............................................    36
    Coates, John.................................................    43
    Smith, Brian.................................................    47
    Van Der Weide, Mark..........................................    49
    Walsh, Kevin P...............................................    56

              Additional Material Submitted for the Record

Sherman, Hon. Brad:
    Written statement of the Alternative Reference Rates 
      Committee (ARRC)...........................................    68
    Written statement of the Association for Financial 
      Professionals et al........................................    70
    Written statement of the Structured Finance Association......    76
    Written statement of the Securities Industry and Financial 
      Markets Association (SIFMA)................................    83
    Letter from various undersigned organizations................    95

 
                    THE END OF LIBOR: TRANSITIONING
                    TO AN ALTERNATIVE INTEREST RATE
                   CALCULATION FOR MORTGAGES, STUDENT
                     LOANS, BUSINESS BORROWING, AND
                        OTHER FINANCIAL PRODUCTS

                              ----------                              


                        Thursday, April 15, 2021

             U.S. House of Representatives,
               Subcommittee on Investor Protection,
             Entrepreneurship, and Capital Markets,
                           Committee on Financial Services,
                                                     Washington, DC
    The subcommittee met, pursuant to notice, at 2 p.m., via 
Webex, Hon. Brad Sherman [chairman of the subcommittee] 
presiding.
    Members present: Representatives Sherman, Scott, Himes, 
Foster, Meeks, Vargas, Gottheimer, Gonzalez of Texas, San 
Nicolas, Axne, Casten, Cleaver; Huizenga, Stivers, Wagner, 
Hill, Emmer, Mooney, Davidson, Hollingsworth, Gonzalez of Ohio, 
and Steil.
    Ex officio present: Representative Waters.
    Chairman Sherman. The Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets will come to order.
    And live, from Washington, D.C., the Financial Services 
Committee's Subcommittee on Investor Protection, 
Entrepreneurship, and Capital Markets hearing entitled, ``The 
End of LIBOR: Transitioning to an Alternative Interest Rate 
Calculation for Mortgages, Student Loans, Business Borrowing, 
and Other Financial Products.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of this subcommittee are authorized to 
participate in today's hearing.
    As a reminder, I ask all Members to keep themselves muted 
when they are not being recognized by the Chair. The staff has 
been instructed not to mute Members except when the Member is 
not being recognized by the Chair and there is inadvertent 
background noise.
    Members are reminded that they may only participate in one 
remote proceeding at a time. If you are participating today, 
please keep your camera on. If you choose to attend another 
remote proceeding, please turn your camera off.
    I will now recognize myself for a 4-minute opening 
statement, after which we will hear from Ranking Member 
Huizenga.
    In a way, this is a test to see whether Congress can pass 
necessary legislation that is not Democratic, and is not 
Republican. There are $200 trillion of business loans, of home 
mortgages, and of other instruments that have adjustable 
interest rates that are keyed to the London Interbank Offered 
Rate (LIBOR). As of January of next year, two of the minor 
London Interbank Rates will no longer be published. And as of 
June of next year, none of the London Interbank Rates will be 
published.
    You start with $200 trillion of instruments. Ninety-nine 
percent of the problem we do not have to deal with because many 
of these instruments are short term and they will expire before 
next year. And a lot of these instruments were drafted with the 
foresight to recognize that there is a possibility that the 
London Interbank Rate would not be published, and the parties 
have agreed what to do under those circumstances.
    So, we are dealing with a mere 1 percent. But that mere 1 
percent is $2 trillion of instruments. These instruments were 
drafted and the parties agreed without anticipating that LIBOR 
would no longer be published during the term.
    Now, I do not want to minimize this. This is still $2 
trillion. Chair Powell of the Federal Reserve has told us that 
this is a systemic risk to our entire economy. And in the last 
2 months, both the Chair of the Fed and the Secretary of the 
Treasury have testified before our committee, saying that 
Federal legislation is necessary.
    What Federal legislation? There is a bill in Albany, New 
York. I have circulated draft number 1, and just this week, I 
circulated to members of the committee discussion draft number 
2. These bills are substantively identical, and we are still 
fine-tuning the drafting, and I look forward--I am glad that 
Mr. Huizenga has agreed to work with me on that final drafting, 
and I look forward to working with him to get this bill 
adopted.
    Some 30 organizations have written to our committee saying 
that we need legislation along the lines of these discussion 
drafts. Now, these are groups that do not always agree. 
Supporting this approach are the Americans for Financial 
Reform, the National Consumer Law Center, the U.S. Chamber of 
Commerce, the Structured Finance Association, and SIFMA.
    Finally, you might ask, well, why not just have the States 
do it? There are five reasons: first, some States will not do 
it.
    Second, you get into choice-of-law litigation where you may 
have the borrower in one State, the lender in a second State, 
and the security for the loan is in a third State. If they have 
different rules, different amounts to be paid, we can litigate 
instrument by instrument, which is not an efficient approach.
    Third, we would leave our lenders with 51 different systems 
to deal with, which is expensive and unnecessary.
    Fourth, no State has jurisdiction where the Trust Indenture 
Act of 1939 is applicable. So, even if we got all 51 States to 
act, and even if they were consistent, we would still be 
leaving hundreds of billions of dollars outside the solution.
    And finally, some instruments are, in effect, in two 
levels. You may have a mortgage-backed security subject to New 
York law, which is an investment in a pool of mortgages which 
are subject to 50 different State laws depending upon where the 
home is located.
    We need Federal legislation, and I look forward to working 
with the members of this committee to achieve it. And we need 
to act soon because the legislation drafts have regulators 
having to adopt regulations, and that will take some time as 
well, and we have to get it all done this year.
    With that, I recognize the ranking member of the 
subcommittee, Mr. Huizenga, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. I do appreciate you 
having this hearing. As you have pointed out, as of late, we 
have heard from some of those regulators who have acknowledged 
the need for a Federal approach. They had not been so 
enthusiastic about that until more recently. And as you 
indicated, this is not necessarily a Democrat or a Republican 
issue, but I will note that it does need to be open to input. 
So, there is no party attached to this, but there is a need for 
input on it.
    I am going to skip over some of my remarks because I know 
that time is going to be short here. But as you pointed out, 
when we have over $223 trillion, with a ``T''--which, by the 
way, is even more than what we have been spending lately--that 
is a huge amount of money. And when we have that, these 
exposures that are in derivatives, corporate bonds, business 
loans, secured products, commercial and residential mortgage 
loans, credit cards, student loans, auto loans--a lot of things 
are tied to LIBOR, and obviously, to date, we saw with the 
London Whale that there has now been $9 billion in fines that 
have been levied here and in the U.K., in the European Union.
    There is a lot of agreement that this was a benchmark that 
could not continue. And there have been comprehensive reforms 
which include designating a new lead regulator for LIBOR, in 
addition to new governance and oversight technology for the 
benchmark. However, despite these reform efforts in both the 
U.S. and the U.K., ``LIBOR has increasingly relied on market 
and transaction database expert judgment.''
    So in response to the recommendations and objectives set 
forth by the Financial Stability Board (FSB) and the Financial 
Stability Oversight Council (FSOC), and to address continued 
risks related to the U.S. Dollar LIBOR, the Federal Reserve 
Board and the Federal Reserve Bank in New York jointly convened 
the Alternative Reference Rates Committee (ARRC) in 2014. ARRC 
was tasked to identify, ``risk-free alternative reference rates 
for U.S. Dollar LIBOR, identify best practices for contract 
robustness, and to create an implementation plan with metrics 
of success and a timeline to support an orderly adoption.''
    That is, I think, all good. In 2017, ARRC announced the 
Secured Overnight Financing Rate, or SOFR, its recommended 
alternative to the LIBOR. SOFR is an overnight interest rate 
based on Treasury repurchase transactions or overnight 
corporate loans secured by U.S. Treasury securities. Unlike 
LIBOR, SOFR is calculated based on interest rates charged in 
real transactions in the U.S. Treasury repo market.
    One of the biggest challenges that we have with 
transitioning away from LIBOR is the thousands of existing 
legacy contracts that extend beyond 2023 that reference LIBOR 
but do not contain contractual, ``fallback language,'' that 
allows for the contract to be amended, and continue to function 
should LIBOR be discontinued. That is as of the fourth quarter 
of 2020.
    There are $223 trillion of outstanding exposures to U.S. 
Dollar LIBOR--$74 trillion in contractual notional value will 
remain outstanding after LIBOR's discontinuation in June of 
2023, and this includes approximately $69 trillion in 
derivatives and approximately $5 trillion in cash products.
    Some of these parties have begun incorporating fallback 
provisions, but it looks like, as we transition away, slowly 
transition away, both Treasury and Federal Reserve officials 
have called now for Federal legislation to assist in the smooth 
transition.
    I am looking forward to hearing from the witnesses today. 
Mr. Chairman, we do need to work on this together, with the 
input not only of industry and those who are affected, but 
those of us who have been elected to act as that speed bump at 
times to make sure that we are heading in the right direction, 
and I for one want to make sure that the Federal Reserve, not 
just the New York Fed but the Federal Reserve, it seems to me, 
may need to have a piece of this rather than just being the New 
York Federal Reserve, and we need to make sure that any Federal 
legislation provides market stability and preserves market 
liquidity.
    I think my time is expiring, but I do look forward to 
working with you in a cooperative manner, and I yield back.
    Chairman Sherman. I could not agree with you more--a 
trillion dollars here, and a trillion dollars there, can add up 
to real money.
    I now recognize the Chair of the full Financial Services 
Committee, the gentlewoman from California, Chairwoman Waters, 
for 1 minute.
    Chairwoman Waters. Thank you so very much, Chair Sherman. 
You have been talking about LIBOR to anybody who would listen 
to you for over a year or so now, maybe longer than that, and I 
am so pleased that you are holding this hearing.
    Trillions of dollars of consumer contracts, ranging from 
mortgages and student loans to securities contracts, are 
currently tied to the LIBOR, which will cease as a reference 
rate in 2023. As a result, these contracts will have to use 
another rate.
    LIBOR proved to be easily manipulated when banking 
authorities around the globe found extensive collusion by 
megabanks like JPMorgan, Citigroup, Barclays, Deutsche Bank, 
UBS, and the Royal Bank of Scotland, to fix the LIBOR to their 
own advantage. These institutions paid billions of dollars in 
fines to settle their fraud, but now we need to protect 
consumers, investors, and the U.S. financial system as the 
markets transition away from the LIBOR.
    Thank you, and I yield back the remainder of my time.
    Chairman Sherman. Thank you, Madam Chairwoman.
    Today, we welcome the testimony of our distinguished 
witnesses.
    First, we have Dan Coates, who is the Senior Associate 
Director for the Office of Risk Analysis and Modeling at the 
Federal Housing Finance Agency (FHFA).
    Our second witness will prove that our subcommittee can 
attract more Coates than any other subcommittee this week. We 
have John Coates, no relation, who is the Acting Director of 
the Division of Corporation Finance at the U.S. Securities and 
Exchange Commission (SEC).
    Our third witness will be Brian Smith, who is the Deputy 
Assistant Secretary for Federal Finance at the U.S. Department 
of the Treasury.
    Our fourth witness will be Mark Van Der Weide, who is the 
General Counsel at the Board of Governors of the Federal 
Reserve System. And I want to thank Mr. Van Der Weide for his 
help in drafting what is now discussion draft 2, which I have 
circulated this week.
    And finally, we will have Kevin Walsh, who is the Deputy 
Comptroller for Market Risk Policy at the Office of the 
Comptroller of the Currency.
    The witnesses are reminded that your oral testimony will be 
limited to 5 minutes. You will be able to see a timer on your 
screen that will indicate how much time you have left, and a 
chime will go off at the end of your time. I would ask that you 
be mindful of the timer and quickly wrap up your testimony if 
you hear the chime so that we can be respectful of both the 
witnesses' and the committee members' time. And without 
objection, your full written statements will be made a part of 
the record.
    I now recognize Mr. Dan Coates for 5 minutes.

   STATEMENT OF DANIEL E. COATES, SENIOR ASSOCIATE DIRECTOR, 
 OFFICE OF RISK ANALYSIS AND MODELING, FEDERAL HOUSING FINANCE 
                         AGENCY (FHFA)

    Mr. Dan Coates. Good afternoon, Chairwoman Waters, Chairman 
Sherman, Ranking Member Huizenga, and members of the 
subcommittee. I appreciate the opportunity to testify before 
you today.
    I serve as the Senior Associate Director of Risk Analysis 
and Modeling in the Federal Housing Finance Agency's Division 
of Federal Home Loan Bank Regulation.
    FHFA regulates and oversees Fannie Mae, Freddie Mac, and 
the Federal Home Loan Bank System. Since 2008, FHFA has also 
served as conservator of Fannie Mae and Freddie Mac--together, 
the Enterprises.
    Since completing my Ph.D. in economics, I have served in 
the Federal Government for over 30 years. Today marks the first 
time I am testifying before Congress.
    At FHFA, I lead an office of economists and financial 
analysts supporting our examination, supervision, and 
regulation of the Federal Home Loan Banks. Since the 2017 
announcement of LIBOR's future discontinuation, I have lead 
FHFA's LIBOR transition efforts as it oversees the transition 
of its regulated entities.
    LIBOR has been the world's most widely used interest rate 
benchmark. Preparing for this transition has been and will 
continue to be an enormous undertaking, with a variety of 
implications for all participants in the global financial 
system.
    FHFA and its regulated entities have been leaders in this 
effort, and I am proud of what we have accomplished to date. As 
Director Calabria has made clear, FHFA's efforts to transition 
away from LIBOR are guided by the same core principles that 
direct all of the agency's work: ensuring the safety and 
soundness of our regulated entities; supporting liquidity and 
resilience in our nation's housing finance markets; and 
protecting homeowners and renters.
    While important work remains, I am confident that we will 
meet our goal of fully transitioning the Enterprises and the 
Federal Home Loan Banks away from LIBOR before the end of 2021. 
When this effort began, LIBOR was the reference rate for the 
vast majority of financial products central to the operations 
of FHFA's regulated entities. Such products included Enterprise 
and Federal Home Loan Bank System debt, Federal Home Loan Bank 
advances, derivatives transactions, mortgage-backed securities, 
collateralized mortgage obligations, credit risk transfer 
transactions, and adjustable rate mortgages, known as ARMs.
    Our challenge was to ensure our regulated entities 
transitioned to robust reference rates for all of these 
products, and for the related internal systems of the regulated 
entities. FHFA supports, and its regulated entities have 
adopted, the ARRC's recommended replacement rate as being the 
best suited for this transition away from LIBOR.
    There are a number of contracts that did not contemplate 
the permanent cessation of LIBOR. Disputes over the 
interpretation of these contracts will likely be lessened with 
the passage of Federal legislation to provide clarity about the 
transition.
    While FHFA is open to any robust reference rate that meets 
the principles of the International Organization of Securities 
Commissions and its fit for purpose, the time remaining to 
prepare for this transition is getting short, and FHFA does not 
support a wait-and-see approach to this transition.
    While the date of the LIBOR cessation has recently been 
extended for most U.S. Dollar LIBOR maturities until June 30th, 
2023, FHFA has continued to ensure that our regulated entities 
are ready for the LIBOR cessation by the end of this year. The 
actions FHFA has taken since 2018 to prepare for this 
transition are consistent with the guidance issued on November 
30, 2020, by the Federal Reserve, the OCC, and the FDIC, who 
stated their concerns that continued LIBOR use after the end of 
2021 would create safety and soundness risks.
    Thanks to FHFA's leadership, the Federal Home Loan Banks 
and the Enterprises are moving prudently away from LIBOR. As of 
July 2020, the Federal Home Loan Banks have ceased entering 
into LIBOR transactions with maturities beyond 2021. As of 
December 31, 2020, the Enterprises are no longer purchasing 
LIBOR-indexed ARMs or issuing any LIBOR-based mortgage 
products. They are now purchasing SOFR-based ARMs and issuing 
SOFR-indexed mortgage-backed securities and other market 
products.
    FHFA's regulated entities have led the LIBOR transition as 
the first and most significant issuers of SOFR-indexed debt and 
as developers of SOFR-based alternatives to their existing 
LIBOR products. At FHFA, we continue to look for ways we can 
enhance awareness of the importance of this transition.
    I will be glad to answer your questions.
    [The prepared statement of Senior Associate Director Daniel 
Coates can be found on page 36 of the appendix.]
    Chairman Sherman. Thank you, Mr. Coates.
    We now recognize Mr. John Coates for 5 minutes.

    STATEMENT OF JOHN COATES, ACTING DIRECTOR, DIVISION OF 
 CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE COMMISSION 
                             (SEC)

    Mr. John Coates. Thank you, Chairwoman Waters, Chairman 
Sherman, Ranking Member Huizenga, and members of the 
subcommittee. I appreciate the opportunity to testify today 
about the transition away from LIBOR and the efforts of the 
staff of the Securities and Exchange Commission to monitor that 
transition in furtherance of the Commission's missions, which 
are to protect investors, maintain fair and orderly markets, 
and facilitate capital formation.
    The announced discontinuation of LIBOR and the transition 
to one or more alternatives will have significant impacts on 
the financial markets and on market participants, and it may 
present material risks for both public companies and their 
investors, as well as SEC-supervised entities. Those risks will 
be greater if an orderly transition is not completed in a 
timely manner, including important work to be done this year 
and beyond.
    A cross-agency team of staff at the Commission has been 
collaborating regularly on transition matters, and the staff is 
actively monitoring the extent to which market participants are 
identifying and addressing risks in preparing for the 
transition.
    In the division that I currently help lead, the Division of 
Corporation Finance, we have been encouraging public companies 
to plan for the transition and consider their disclosure 
obligations and the risks that the transition may present to 
their businesses. We specifically encourage companies to inform 
investors about risk identification and mitigation, as well as 
any anticipated material impacts of the transition which may 
particularly affect companies who face financing constraints.
    Companies may also need to reflect the transition in their 
information technology systems, their internal controls, and 
their policies and procedures. The back office, which sometimes 
gets neglected, is going to be very important in this 
transition.
    A second division at the SEC, our Trading and Markets 
Division, has been monitoring the impacts of the transition on 
brokers, counterparties, and exchanges. These impacts may arise 
due to being a party to transactions referencing LIBOR, making 
a market in those instruments, underwriting, placing, or 
advising on them. And the impact can have several different 
channels for how they affect these firms, on their businesses 
and systems. Valuation models are going to have to be changed, 
business processes used, and risk management frameworks. 
Ultimately, these firms serve clients who also are going to be 
affected.
    A third division at the SEC, our Examinations Division, has 
been assessing the impact on entities that we oversee. Last 
year, we performed roughly 75 exams on a wide range of 
registrants, with a focus on identifying challenges from the 
transition. They have also provided guidance for how to plan 
for and carry out a successful transition. And as with our 
other efforts, that exam work is ongoing.
    Preparation in risk management by investment advisors and 
funds is performed by our Division of Investment Management. 
That division has been encouraging advisors to consider the 
effect of the transition on LIBOR-based instruments which are 
held by mutual funds, which are in turn held by millions of 
retail investors. Investment Management has been providing 
guidance to encourage funds to provide tailored disclosures 
about the transition and how it interacts with their investment 
objectives, holdings, strategies, and structure.
    Finally, two of our offices have been also involved in 
LIBOR-related work, our Office of the Chief Accountant and our 
Office of Municipal Securities. Let me just say it is nice to 
be testifying before a Chair who has an accounting background, 
which is a central focus of my division. Our Chief Accountant 
continues to monitor the activities of preparers and auditors, 
standard setters and other regulators to address the financial 
reporting issues related to the transition. The staff of the 
Chief Accountant has been having ongoing discussions with 
various stakeholders and has supported efforts to raise 
awareness of the accounting side of the transition, and we note 
that the Financial Accounting Standards Board (FASB) and the 
International Accounting Standards Board (IASB) have continued 
to update their standards to reflect ongoing changes throughout 
the transition.
    Last but not least, our Office of Municipal Securities has 
been encouraging municipal issuers and advisors to focus on 
those issues directly relevant to the municipal market, which 
is also important to retail.
    Thank you for the opportunity to testify here today.
    [The prepared statement of Acting Director John Coates can 
be found on page 43 of the appendix.]
    Chairman Sherman. I thank our witnesses for limiting their 
comments to 5 minutes.
    We now recognize Mr. Smith for 5 minutes.

   STATEMENT OF BRIAN SMITH, DEPUTY ASSISTANT SECRETARY FOR 
        FEDERAL FINANCE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Smith. Thank you to Chairwoman Waters, Chairman 
Sherman, and Ranking Member Huizenga. I appreciate the 
opportunity to testify at this hearing on this important issue.
    As Treasury's Deputy Assistant Secretary for Federal 
Finance, I oversee the Department's work on the LIBOR 
transition.
    Though LIBOR is used in more than $200 trillion of 
outstanding financial contracts today, 2 tenors of USD LIBOR 
will cease being published at the end of 2021, and the 
remainder will cease by June 2023. LIBOR's widespread use in 
the financial system, but short remaining lifespan, underscores 
the urgency of a timely and effective transition.
    In recent years, Treasury has played an active role in 
highlighting the risks associated with the continued use of 
LIBOR and encouraging a market participant-led transition. 
Since 2013, annual reports of the Financial Stability Oversight 
Council (FSOC), which the Treasury Secretary chairs, have 
called attention to LIBOR-related financial stability risks, 
encouraged market participants to formulate and execute their 
transition plans, and recommended that member agencies use 
their authorities to facilitate transition.
    Treasury has served as an ex-officio member of the 
Alternative Reference Rates Committee, or ARRC, since that 
group was convened in 2014 by the Board of Governors of the 
Federal Reserve System and the Federal Reserve Bank of New 
York. The ARRC is composed of a diverse set of private market 
participants working towards successful transition away from 
LIBOR. As an alternative to LIBOR, the ARRC has recommended the 
Secured Overnight Financing Rate, or SOFR, which is a robust 
rate based on nearly $1 trillion in daily transactions. The 
ARRC has also recommended robust contract fallback language for 
various financial products and has worked closely with 
regulators to identify and tackle potential roadblocks to 
transition.
    Treasury applauds the passage of LIBOR transition 
legislation in New York State, which will provide meaningful 
relief for the transition of legacy contracts written under New 
York law. In addition, Treasury has also taken initial steps to 
address the potential tax consequences of modifying contracts 
that reference LIBOR, although some of the relevant tax 
statutes lack a grant of regulatory authority, which limits the 
tax relief that Treasury can provide.
    Despite this important progress, challenges for the 
transition remain, and Federal legislation is needed. As 
Secretary Yellen described in recent testimony before the House 
Financial Services Committee, legislation is necessary for so-
called, ``tough legacy'' contracts that do not specify a 
workable fallback rate and are not feasible for private-sector 
actors to modify on their own. Federal legislation could also 
ensure that Treasury has sufficient authority to address the 
tax consequences of the LIBOR transition and amend the Higher 
Education Act of 1965's reference to LIBOR for special 
allowance payments under the legacy guaranteed Federal student 
loan program.
    With LIBOR's cessation dates approaching quickly, market 
participants must make progress on transitioning contracts, 
where feasible, and new contracts should begin referencing 
alternative rates like SOFR. In addition, in the case of 
consumer loans, it is imperative that lenders engage with 
consumers about how this transition will affect them and 
provide them with timely notice of any changes. Lenders need to 
act responsibly so that consumers are not caught by surprise.
    With that, I will conclude my remarks. Chairman Sherman and 
Ranking Member Huizenga, thank you again for your interest and 
your engagement on this important issue, and I look forward to 
your questions.
    [The prepared statement of Deputy Assistant Secretary Smith 
can be found on page 47 of the appendix.]
    Chairman Sherman. Thank you for your brevity.
    I now recognize Mr. Van Der Weide, and I want to thank Mr. 
Van Der Weide for his help in drafting the session draft number 
2. You are recognized for 5 minutes.

  STATEMENT OF MARK VAN DER WEIDE, GENERAL COUNSEL, BOARD OF 
            GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Van Der Weide. Chairman Sherman, Ranking Member 
Huizenga, and members of the subcommittee, thank you for the 
opportunity to appear today. My testimony will discuss the 
importance of ensuring a smooth, transparent, and fair 
transition away from LIBOR to more durable replacement rates, 
as well as some of the challenges posed by this transition. 
Before I delve into these issues, however, it may be helpful to 
review how LIBOR is used and why it will be discontinued.
    LIBOR measures the average interest rate at which large 
banks can borrow in unsecured wholesale funding markets. Over 
the past few decades, LIBOR became a benchmark used to set 
interest rates for commercial loans, mortgages, derivatives, 
and many other financial products. In total, U.S. Dollar LIBOR 
is used in more than $200 trillion of financial contracts 
worldwide.
    By now, the flaws of LIBOR are well documented. A 
fundamental deficiency is that LIBOR has been based on thinly 
traded markets, which has made the rate vulnerable to collusion 
and manipulation. Following the exposure of these weaknesses 
and the imposition of material large legal penalties on a 
number of firms and individuals that engaged in LIBOR 
misconduct, most of the LIBOR banks determined that they would 
not continue making LIBOR submissions.
    Last month, LIBOR's U.K. regulator announced that the one-
week and two-month U.S. Dollar LIBOR rates will cease to be 
published at the end of 2021, while the remaining LIBOR rates 
will cease to be published on a representative basis in mid-
2023. This definitive announcement about the end of LIBOR 
underscores the importance of moving away from this moribund 
benchmark rate.
    Market participants, regulatory agencies, consumer groups, 
and other stakeholders have put in a great deal of work to 
prepare for life after LIBOR. To promote a smooth transition 
away from the rate, the Central Reserve convened the 
Alternative Reference Rate Committee, or ARRC, in 2014. 
Recognizing that the private sector must drive the transition, 
the ARRC's voting members are private-sector firms.
    In 2017, the ARRC identified Secured Overnight Financing 
Rate, or SOFR, as its recommended alternative to U.S. Dollar 
LIBOR. SOFR is a broad measure of the cost of borrowing cash 
overnight, collateralized by Treasury securities. Unlike LIBOR, 
SOFR is based on a market of high-volume underlying 
transactions, regularly around $1 trillion daily.
    Market participants are not required to replace LIBOR with 
SOFR for financial contracts. Importantly, the Federal Reserve 
and the other regulatory agencies issued a statement last year 
to emphasize that a bank may use any reference rate for its 
loans that the bank determines to be appropriate for its 
funding model and customer needs. They also noted, however, 
that a bench loan contract should include robust callback 
language.
    The Fed's supervision of LIBOR is strengthening. In 
November of 2020 the Federal Reserve, the OCC, and the FDIC 
sent a letter to banking firms noting that the continued use of 
U.S. Dollar LIBOR in new transactions after 2021 will create 
safety and soundness risks. Accordingly, we have encouraged our 
supervised entities to stop using LIBOR in new contracts as 
soon as practicable, or in any event, by the end of this year.
    Vice Chair Quarles emphasized in a recent speech that 
banking firms should be aware of the intense supervisory focus 
the Fed is placing on the LIBOR transition.
    A key question for policymakers is whether legacy LIBOR 
contracts can seamlessly switch over to alternative reference 
rates when LIBOR ends. The ARRC recently estimated that roughly 
one-third of legacy contracts will not mature before mid-2023. 
Some of these legacy contracts have workable fallback language 
to address the end of LIBOR, but others do not, which may 
result in significant litigation.
    Chair Powell and Vice Chair Quarles have publicly stated 
their support for Federal legislation to mitigate risks related 
to legacy contracts. Federal legislation would establish a 
clear and uniform framework on a nationwide basis for replacing 
LIBOR in legacy contracts that do not provide for an 
appropriate fallback rate.
    Federal legislation should be targeted narrowly to address 
legacy contracts that have no fallback language, that have 
fallback language referring to LIBOR or to a poll of banks, or 
that effectively convert to fixed-rate instruments.
    Federal legislation should not affect legacy contracts with 
fallbacks to another floating rate, nor should Federal 
legislation dictate that market participants must use any 
particular benchmark rate in future contracts.
    Finally, to avoid conflict-of-laws problems, Federal 
legislation should preempt any outstanding State laws on legacy 
LIBOR contracts.
    Thank you. I look forward to your questions on this 
important matter.
    [The prepared statement of Mr. Van Der Weide can be found 
on page 49 of the appendix.]
    Chairman Sherman. Thank you.
    Mr. Walsh is now recognized for 5 minutes.

 STATEMENT OF KEVIN P. WALSH, DEPUTY COMPTROLLER, MARKET RISK 
    POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Walsh. Chairwoman Waters, Chairman Sherman, Ranking 
Member Huizenga, and members of the subcommittee, thank you for 
the opportunity to discuss the OCC's work to ensure the large, 
mid-sized, and community banks we supervise are prepared for 
the cessation and replacement of the London Interbank Offered 
Rate, or LIBOR.
    I am Kevin Walsh, Deputy Comptroller for Market Risk 
Policy. I am the OCC's ex-officio member of the Alternative 
Reference Rate Committee, I oversee the agency's representation 
on other committees associated with LIBOR cessation, and I 
oversee the development and interpretation of policy and 
guidance related to market risk facing the Federal banking 
system.
    The OCC has worked closely with the institutions we 
supervise to ensure their preparedness since 2018. To avoid the 
risk of market disruptions, prolonged litigation, and adverse 
financial impacts, the OCC has stressed to banks we supervise 
the importance of adequate transition planning and successfully 
executing those plans before LIBOR ceases to be reported.
    The OCC's mission is to ensure that the institutions we 
charter and supervise operate in a safe and sound manner and 
treat all customers fairly. Rather than endorse any specific 
replacement rate, including the Secured Overnight Financing 
Rate (SOFR), we want to ensure that banks have the flexibility 
to determine LIBOR's successor rate or rates as may be most 
appropriate for the continued operation of their business model 
and risk appetite and the function that rate supports in a safe 
and sound manner.
    Starting in 2018, as part of our ongoing outreach sessions 
with bank CEOs, CFOs, chief risk officers, and bank directors, 
we included discussions of LIBOR cessation and encouraged them 
to consider their exposures, risk tolerances, and mitigation 
plans. We first mentioned the need for LIBOR transition plans 
in our semi-annual risk perspective that year. Since then we 
have published several bulletins and guidance documents that 
set forth our expectations for bank transition activities.
    In November 2020, the OCC published a joint letter with the 
Federal Reserve and the FDIC which reiterated that a bank may 
use any reference rate it determines to be appropriate for its 
business model and customer needs. That month, the OCC and 
other banking regulators clarified expectations that banks must 
stop creating new LIBOR exposures by the end of 2021, with few 
exceptions. Recently, the OCC published a self-assessment tool 
that includes a series of questions related to bank exposure 
assessment and planning, consideration of replacement rates, 
fallback language, and the bank's overall LIBOR cessation 
preparedness. The tool helped bank management evaluate, 
identify, and alleviate transition risks. To date, more than 95 
percent of the institutions we supervise have gone through the 
process to quantify their exposures.
    For smaller community banks that engage in LIBOR-based 
lending, such as commercial or residential real estate lending 
or small business loans, the transition process may present 
operational challenges that banks will need to address based on 
their resources, the scope of their exposure, and the relative 
financial sophistication of their borrowers. The OCC is working 
closely with these banks to assist them in mitigating these 
challenges.
    OCC examiners are also supporting the regional and largest 
banks to address their LIBOR-based exposures and are actively 
monitoring the adequacy of their planning and implementation of 
their mitigation strategies. My testimony describes how new 
International Swaps and Derivatives Association (ISDA) 
protocols in a recently enacted New York State law have 
significantly reduced the risk of market disruption in the 
derivatives market.
    Mitigating risks within consumer loan products and 
securities portfolios will be more complex, given the nature of 
those instruments. Loans are typically negotiated between 
parties, and the applicability of a variety of State laws can 
make negotiations more complicated. Securities, notably 
securitized exposures, are complicated by the diverse investor 
bases that need to provide agreement to make changes to the 
rates. Banks continue to work on preparing these portfolios for 
the transition, and the OCC is closely monitoring their 
efforts.
    To further assist with the transition, the OCC appreciates 
Congress' efforts to clarify contracts that do not have a 
fallback provision or new rate as is designated in the draft 
Adjustable Interest Rate LIBOR Act of 2021. Legislation could 
be helpful in addressing systemic risks associated with the 
LIBOR cessation by incentivizing financial counterparties to 
agree to an appropriate reference rate or otherwise designating 
SOFR as the replacement rate. The OCC has provided comments to 
staff and looks forward to working with the subcommittee to 
perfect the legislation.
    Thank you again for inviting me to appear today. I will be 
happy to answer your questions.
    [The prepared statement of Deputy Comptroller Walsh can be 
found on page 56 of the appendix.]
    Chairman Sherman. Thank you.
    We will be conducting this hearing while there is voting 
going on, on the Floor. I have been told that Mr. Casten will 
be back within 10 minutes, which will give me a chance to rush 
to the Floor to vote.
    Mr. Huizenga. Mr. Chairman, this is Bill Huizenga. Just a 
point of clarification, you do not intend to halt the hearing, 
correct? You are just expecting this to go on, on an ongoing 
rolling basis, correct?
    Chairman Sherman. Exactly. Out of respect for our 
witnesses' time, I am hoping that members can vote and come 
back and that they will be available when they are called on, 
and if they are not, we will go on to the next member from the 
respective party.
    Mr. Huizenga. And is there any indication--I know that 
recently votes were changed to a 30-minute window, and I know 
we have 14 votes today. Are we anticipating that those will 
continue to be 30-minute votes for each one of those, or are 
you aware of leadership taking up that time, which may make 
this a little more challenging to do this on an ongoing rolling 
basis?
    Chairman Sherman. The rules are 30 minutes. In the past, 
they have been 40 minutes. My guess is that 30 today will mean 
30, but there is no change in the official policy.
    Mr. Huizenga. Okay. Thank you.
    Chairman Sherman. And I will remind members that the tape 
of this hearing will be available. So if you miss part of it, 
you can go back and watch it late tonight, or you can watch it 
while we are waiting for the 13th and 14th vote later in the 
evening.
    I will now yield myself 5 minutes.
    I want to thank Mr. Van Der Weide for pointing out that the 
discussion drafts honor the sanctity of contracts with the 90 
percent-plus contracts that were written in anticipation of the 
possibility that LIBOR would no longer be published, and that 
these discussion drafts involve inserting government only where 
the parties did not make an agreement that can be carried out.
    I want to thank Mr. Walsh for pointing out the operational 
challenges that will face, particularly small and medium-sized 
institutions. If we end up with 51 different rules, small banks 
that may not do business in the District of Columbia and all 50 
States, but may have loans on their books for one reason or 
another in 5 or 10 different places, could easily find 
themselves facing real operational difficulties.
    I now have a question for each one of our witnesses that I 
am hoping to get a simple yes or no answer to, and I will go 
down the list. The question is, is it important that we 
promptly adopt Federal legislation to provide a statutory fix 
for LIBOR-based contracts that lack sufficient background 
language?
    Mr. Dan Coates, is it important?
    Mr. Dan Coates. Yes. Yes, we believe it is important.
    Chairman Sherman. Mr. John Coates?
    Mr. John Coates. The Commission has not taken a position 
formally on legislation, but we are supportive of efforts to 
increase the stability of the market, so we stand ready to 
support your efforts in this legislation.
    Chairman Sherman. That is as close to a yes as you can get 
until the new Chair takes over.
    Mr. Smith?
    Mr. Smith. Yes. Secretary Yellen has indicated support for 
the Federal legislation.
    Chairman Sherman. Mr. Van Der Weide?
    Mr. Van Der Weide. Yes, thumbs up.
    Chairman Sherman. And Mr. Walsh?
    Mr. Walsh. We think it is constructive.
    Chairman Sherman. Thank you.
    Mr. John Coates, in the absence of a clear solution for 
LIBOR-based contracts as we get closer to June 2023, I imagine 
we are going to see increased price volatility or a discounting 
of those instruments that lack clear fallback language. Is that 
something that we would expect, where two contracts that look 
identical will be trading differently because one has 
significant fallback language in it but the other one does not?
    Mr. John Coates. I think that is a fair prediction. I think 
any risks, including litigation risk, can affect pricing and 
could create discrepancies in pricing. I think that is correct.
    Chairman Sherman. Now, Mr. Van Der Weide, I have a question 
for you about timing. Each proposal, whether it is the one from 
Albany or the two that I have circulated, all involve the idea 
of an agency writing a regulation. So first you need the 
legislation, and then, you get the regulatory process. So how 
much time do we have to adopt legislation and have it signed 
into law, so that the Fed can adopt regulations that will solve 
this problem?
    Mr. Van Der Weide. I think it is important that we have a 
regulatory agency with the ability to write regulations to 
implement the legislation. There are going to be a lot of 
complicated operational issues, and it will be useful to have 
an agency that can do the interstitial work to plug those 
holes. That does mean I think it is important for Congress to 
act expeditiously to get the legislation passed. I do not have 
a deadline to give you, but as you know, the important LIBOR 
tenors are going to be going away in mid-2023. We will want to 
give an agency some time to write the rules, so, decently well 
in advance of June 2023, we want Congress to have that 
legislation passed.
    Chairman Sherman. My staff calculated that you need 240 
days to adopt regulations. Is that right, or can you do it more 
quickly? Or optimally, would you have 240 days, or how much 
less could you live with?
    Mr. Van Der Weide. Optimally, yes, I think that having 8 
months would be great, but we can do it a little faster than 
that. I am sure we can do it a little faster than that.
    Chairman Sherman. Okay. Well, my hope is that we have this 
signed into law, hopefully before Halloween. Otherwise, it 
starts to get scary for financial markets.
    My time has expired. I will now recognize Mr. Huizenga for 
questions.
    Mr. Huizenga. Thank you, Mr. Chairman.
    I want to start with my fellow Dutchman. Being Chair of the 
Dutch Caucus, this is an important clarification, whether it is 
``Van Der Weide,'' as we would say in West Michigan, or ``Van 
Der Weide.'' Feel free to clarify.
    But I do have a question for you. Does the New York State 
legislation only fix New York problems, or does it impact some 
of those other contracts across the country? And what happens 
in the absence of any Federal intervention?
    You are on mute. Sorry, we need you to come off mute. We 
still cannot hear you, sir.
    Mr. Chairman, I am hoping we will be able to add a little 
time back onto the clock.
    Chairman Sherman. We will add 20 seconds back.
    Mr. Huizenga. It was about 40 seconds.
    Chairman Sherman. We will add 45 seconds back.
    Mr. Huizenga. Whatever.
    Chairman Sherman. Which means you now have more than 5 
minutes. Go on.
    Mr. Huizenga. Okay. If he is speaking, I am sorry, but I 
cannot hear him.
    Chairman Sherman. Neither can I.
    Mr. Huizenga. Let me move on, and hopefully we will be able 
to get back to you, Mr. Van Der Weide, for that clarification 
on your name pronunciation.
    But to everybody, I guess, the question that the chairman 
asked, I think is a good one. In your support of this, is it 
this specific language that we have before us, or is it the 
concept of Federal legislation needing a response?
    Why don't we start off with the two Mr. Coates?
    Mr. Dan Coates. Congressman, we support any Federal 
legislation to smooth the transition. We stand ready to help 
you and your colleagues.
    Mr. Huizenga. So it is more the concept that we need to 
address it.
    Mr. Dan Coates. Yes, sir.
    Mr. Huizenga. Correct. Okay.
    Mr. John Coates?
    Mr. John Coates. Yes, thank you. The same answer as before, 
which is we are supportive of efforts to increase the stability 
of the markets, and that applies regardless of the particular 
language.
    Mr. Huizenga. Okay. And, Mr. Walsh, I detected a hint of a 
little more reticence on your part. I do not know whether that 
was intentional or me reading into it, but the question I have 
for you is, is the concept for the need for Federal legislation 
or this specific language? And then, do you perceive any 
conflict in using SOFR?
    Mr. Walsh. To answer the first part of your question, 
Congressman, we think that the Federal legislation is very 
constructive and we have offered comments to staff and would be 
very happy to review those comments with staff and work to 
perfect the legislation, moving forward.
    No, we do not see that there is any issue or problem with 
SOFR, but the scope and spectrum of banks that the OCC 
supervises is extraordinarily diverse, from the largest 
globally active, most complex financial institutions down to 
small community banks that operate in a very local way, and 
their needs are different. We want to respect that and give 
them the opportunity to use any replacement rate that they 
think fits their business model, their risk appetite, and is 
appropriately approved through their internal processes for 
risk management.
    Mr. Huizenga. So let me ask you, what happens in the 
absence of Federal intervention?
    Mr. Walsh. I think that in the absence of Federal 
legislation, the contracts that do not have fallback language 
can be very problematic, and there are also a large number of 
contracts that require 100 percent of investor-based agreement 
that we do not think is operationally executable.
    Mr. Huizenga. Is the shorthand to that answer, litigation?
    Mr. Walsh. Yes.
    Mr. Huizenga. Okay. On preemption, we all know that State 
law governs private contracts made in that State. Federal 
legislation providing fallback language for these tough legacy 
contracts is essentially amending these contracts governed by 
State law, retroactively inserting fallback provisions. So what 
it sounds like is we are needing to preempt State law to a 
degree, correct?
    Either Mr. Coates, or if Mr. Van Der Weide is back on?
    Mr. Walsh. Here at the OCC, we think it is very important 
that there be consistency across all of the markets, and that 
Federal legislation can help propel that consistency.
    Mr. Huizenga. Yes. One of the concerns, in my closing 
seconds here, is in an effort to avoid litigation, I am afraid 
that we may be susceptible to litigation challenging the 
constitutionality of interfering with these private contracts 
under the Takings Clause of the 5th Amendment. So does anybody 
else have any concerns about that? Either of the Mr. Coates or 
yourself, Mr. Walsh?
    Mr. Dan Coates. I would defer to those trained in the law 
to answer that question.
    Mr. Huizenga. Mr. Coates or Mr. Walsh, in the closing 
seconds?
    Mr. John Coates. What I would say is I think we can work at 
a technical level to try to minimize that risk, and I think you 
are right that there is risk of litigation no matter what, and 
the question is how best to minimize it to the greatest extent 
we can.
    Mr. Huizenga. Thank you, and I appreciate the extra time, 
Mr. Chairman. While I think both you and I are leaving to go 
vote, I am assuming that we have coverage from some capable 
colleagues of ours, correct?
    Chairman Sherman. Mr. Casten has proven that he can get 
back just in time. I am turning over the gavel to him.
    And as to the constitutional matter, I will point out that 
the contracts clause of the U.S. Constitution limits the power 
of State Governments, not the power of the Federal Government. 
Although the sanctity of contracts is an important principle, 
it is not as constitutional a principle when Federal Government 
takes action.
    With that, I yield to Mr. Casten both for his questions and 
for his service as Acting Chair.
    Mr. Casten. [presiding]. Thank you very much, Mr. Sherman. 
I am not sure how I got bumped up in the queue, but I guess 
with great power comes great responsibility, or something like 
that.
    Chairman Sherman. I believe it is because others are not 
there. If there is a more senior member of the subcommittee--
    Mr. Casten. Perfect, perfect. I will take it, and I will 
watch for staff letting me know who is next in the queue.
    Thank you to all our witnesses, and I want to echo what 
Chairman Sherman said at the start. This is one of these issues 
that is, thankfully, so bloody complicated that it is 
nonpartisan. So I hope you will forgive my lack of education on 
this issue, but I would just like to understand.
    I think I understand what we are doing, or at least what 
the fulcrum of issues are on the day after LIBOR ends. What I 
am curious for your view on is to what degree do we need to be 
concerned about the days before it ends? Specifically, there is 
a robust swaps and futures market and all of those folks who 
are hedging out their LIBOR risk. We know that LIBOR has been 
gameable. Presumably, the liquidity in those swaps and futures 
markets is going to start shrinking as we get close to D-Day.
    Is there sufficient vigilance from a regulatory perspective 
for that period? Is there anything we should be watching for? 
And if the answer is, ``That is a dumb question, Casten,'' that 
is an acceptable answer as well. I am asking out of curiosity. 
And I am happy for any of you who have thoughts on that, to 
direct it to any particular witness.
    Mr. Walsh. Here at the OCC, we have had a very well-
thought-out and aggressive program in our supervision 
activities with respect to LIBOR cessation and transition since 
2018. It was a phased approach in the first period. We focused 
on awareness, communicating that LIBOR was ending and that 
banks that we supervise needed to do an inventory and 
understand their risk exposures. In the next phase, we added 
preparedness, where we worked closely with the banks. I 
mentioned in my opening statement the LIBOR self-assessment 
tool that we first published as guidance to the banks we 
supervise, and more recently have made public for the entire 
financial institution community to use. It is a checklist, a 
series of over 30 questions to identify risks that they might 
have. And finally now, we are moving into a phase where we will 
be very actively examining banks to determine the level of 
preparedness that they have.
    So we think that we are very well along in terms of the 
before-the-end-date tasks that have to be undertaken.
    Mr. Casten. Okay. But you are satisfied that those 
forwards, futures, and swaps, those markets will stay robust as 
long as we need them to stay robust and sufficiently liquid?
    Mr. Walsh. Yes, I am.
    Mr. Casten. Okay. So the second question is, I was in the 
utility industry before I got here, and you have a lot of 
contracts, like a lot of industries, where you have cost pass-
throughs for your customers, and in the context of a borrower 
and a lender, I think I understand where the fulcrum of the 
issues is here. But presumably, there is some quantum of 
borrowers who have downstream contracts where they can pass 
this risk along as it moves.
    I am just curious whether there is any lingering--if we do 
not mandate that everybody switches to a fixed product, to the 
extent that some borrowers have the ability to pass whatever 
the resulting risk is on to their customers, do we need to be 
vigilant about that? Is there even any way to quantify how big 
that risk is? Because you would have to start looking into a 
lot of downstream contracts beyond the pure banking contracts. 
But I presume there is a decent number of those pass-through 
contracts out there.
    Has anybody looked into that or understood it, or am I 
barking up a short tree? Anybody can answer that question.
    Mr. John Coates. In the absence of someone else answering, 
let me just offer that actually litigation is hard to pass 
through. There are ways you can do it, but if you are the 
direct party, even if you have a perfectly matching ability to 
recover on the economics, if you end up in litigation because 
the terms of that security are uncertain, you are going to be 
in litigation. So there is actually a kind of--regardless of 
the economics of the position of that contract in the overall 
market, you do have an incentive to look for clarity in what 
has to be paid.
    Mr. Casten. And I guess I am not thinking that you would 
ever have a right to pass through litigation, but if I am not 
mandated to go to another basis, and I do not have any 
particular economic incentive to pick one basis versus the 
other, is there any risk there that you might just default to? 
I don't know. I am just curious if it is something we should be 
thinking about.
    Mr. John Coates. In effect, the terms of renegotiation 
might not be well considered if the party doing the 
negotiations--yes, I think that is a fair point for anybody 
supervising.
    Mr. Casten. Apologies for my ignorance, but I do appreciate 
your time and your willingness to tolerate me.
    The Chair will now recognize Representative Wagner from 
Missouri.
    Mrs. Wagner. Thank you, Mr. Chairman.
    Mr. Smith, will you describe the steps that the Treasury 
Department has taken and is taking to facilitate the transition 
from LIBOR?
    Mr. Smith. Yes. Thank you for that question and your 
interest in this important issue. The Treasury Department has 
taken several steps regarding the transition away from LIBOR, 
all with the goal of trying to ensure a smooth transition that 
avoids disruptions of financial markets, as well as for 
businesses, consumers, and families who have financial products 
related to these rates.
    The Financial Stability Oversight Council (FSOC) that the 
Treasury Secretary chairs has highlighted the risks surrounding 
LIBOR and the transition for several years now, and encouraged 
market participants to evaluate their exposures, and regulators 
to collaborate on encouraging transition.
    Treasury is an ex-officio member of the Alternative 
Reference Rate Committee and has supported its work to 
establish robust fallback language in contracts, to consider 
alternative reference rates like SOFR, and to engage with 
market participants about their use, encourage them to stop 
using LIBOR where feasible, and begin using alternative rates, 
if possible.
    And lastly, the Treasury Department has published tax 
rules, a proposal, with reliance to help manage the tax 
consequences of the transition away from LIBOR so that 
potential tax consequences don't become an impediment to 
participants who want to transition away.
    Mrs. Wagner. Thank you very much.
    Mr. John Coates, will you describe the SEC's role in this 
process and the steps the Commission and its staff are taking 
to facilitate the transition, please?
    Mr. John Coates. Thank you very much for the interest in 
what we have been doing. Also, my written statement outlines 
this a little bit more than I will do right now. But at a high 
level, what we have been doing is to actively monitor the 
extent to which public companies and other supervised entities 
of ours are identifying, disclosing, and managing the risks 
associated with the transition, particularly risks associated 
with new contracts or tough legacy contracts that extend beyond 
2021.
    We put out some written guidance on how to approach these 
topics, as well as risk alerts to investors to draw attention 
to the issues that regulated entities and public companies 
should all be considering as they engage in the transition.
    Mrs. Wagner. Thank you very much.
    Mr. Van Der Weide, will you describe the differences 
between LIBOR and SOFR?
    I don't think we can hear you.
    Anybody else want to take a stab? I'm sorry, Mark. I don't 
think we can--is it just me?
    Mr. Smith. I can't hear him either, and I will be happy to 
take that, if you would like.
    Mrs. Wagner. Please.
    Mr. Smith. LIBOR is a survey-based rate. It is constructed 
by polling a panel of banks and asking them where they can 
borrow. SOFR is based on transactions in the Treasury repo 
markets, the overnight markets, and it is based on actual 
transactions, not a survey of where people think they can 
borrow. And it is based on collateralized borrowing, that is, 
people pledging Treasury securities as the collateral.
    So key differences are the transaction basis. SOFR has 
almost a trillion dollars of the transactions that occur every 
day, and they are actual, observable transactions that you can 
see. They are actually done. LIBOR is a survey where banks 
determine their submission sometimes based on transactions, but 
often based on judgment, because they have no transactions to 
reference.
    I am sorry, ma'am, I can't hear you.
    Mrs. Wagner. I'm sorry. I am trying to cut down on the 
background noise.
    Given the issues that we had with LIBOR in the past, could 
you discuss a little bit, Mr. Smith, how SOFR addresses that 
risk of manipulation, please? In my limited time.
    Mr. Smith. Yes. The main way is because it is based on that 
robust set of transactions that are so large and deep and done 
by such a diverse set of market participants. That makes it 
very hard to manipulate. The profit was also very transparent 
for taking those transactions, how they are aggregated and 
calculated in a final number, done by the Federal Reserve Bank 
of New York, and done in compliance with International 
Organization of Securities Commissions (IOSCO) principles.
    Mrs. Wagner. Thank you all very much. I appreciate the 
panel. I appreciate the discussion. And I will yield back.
    Mr. Casten. And if I am following the grid properly, I 
believe that in terms of participation, Mr. Foster from 
Illinois is now up next.
    Mr. Foster, you are recognized for 5 minutes.
    Mr. Foster. First, I wanted to thank everyone who has been 
working on this for a decade. I remember during the financial 
crisis, you would wake up every day and check out the LIBOR 
spread to find out if the world was ending or not, and then to 
find out more than a year later that the whole thing was just 
sort of made up made me a little bit queasy. So, it is nice to 
see that we are finally fixing this.
    I would like to ask some questions about whether people 
expect systematic differences in the average rate of the 
alternative rates. Will LIBOR be higher or lower on average? 
Who are the winners and losers if it turns out that there are a 
couple of basis points difference in these?
    Mr. Van Der Weide. Can you hear me now? Can you hear me 
now?
    Mr. Foster. Yes, we can.
    Mr. Van Der Weide. Okay. Sorry for all of the technical 
difficulties.
    There may be some differences in the rate. There are 
different alternative rates that folks use as LIBOR is going 
away. SOFR, the alternative rate that has been recommended by 
the ARRC, is different in nature, as Brian Smith indicated, 
than LIBOR. So, for example, daily averages of SOFR will show 
more volatility than LIBOR, and SOFR will behave a little bit 
differently in times of economic stress and financial crises 
than LIBOR will.
    But in general, the way that SOFR is implemented into 
contracts is it is done through an average, and the average of 
SOFR and LIBOR correlate quite closely together if you look 
over the last 30 years of data. They correlate quite closely 
together. So we think in the long haul, there shouldn't be 
significant categories of winners and losers as people move 
over to SOFR for derivatives and some other transaction types.
    Mr. Foster. Are they based on averages or mediums or--
    Mr. Van Der Weide. The version of SOFR that is used in 
financial contracts is based on an average over multiple days, 
and that averaging mechanism softens some of the volatility and 
gets us to, I think, a more tractable result.
    Mr. Foster. Okay. And are there already players in the 
market betting that we are going to fix this one way or another 
and trying to play the decision that is made in the legislation 
here in the shift in the value of some of the positions that 
are held on this? Is that something that is happening yet? Or 
are people just counting on it being continuous and smooth, 
with no disruption?
    Mr. Van Der Weide. There are certainly investors out there 
who are taking positions on the speed and nature of the way we 
transition away from LIBOR. We are trying to ignore that noise 
and move forward with the LIBOR transition in the way that we 
think is most publicly useful. But there are certainly various 
parties out there entering into different kinds of contracts 
based on the nature and the speed of the LIBOR transition 
process.
    Mr. Foster. And what is the structure of such a bet that 
one might be able to place?
    Mr. Van Der Weide. I don't think I have enough expertise to 
answer that one.
    Mr. Foster. Is there someone else who might have a guess at 
that?
    Mr. Smith. I guess I would offer that the ARRC, in its 
approach to thinking about fallback, tried to develop a process 
that was transparent and fair for all participants, to avoid 
that kind of winners and losers type of situation by developing 
in advance a clearly laid-out approach for what the spread 
adjustment would be when contracts fell back, having external 
parties calculate a clear formula for it, and having that 
trigger at the moment that the administrator of LIBOR announced 
that it would be. So, those fallback amounts have already been 
fixed earlier this year when the announcement was made.
    Mr. Foster. And are there specific institutions that might 
introduce systemic risk that have a special role in creating 
any of these rates?
    Mr. Van Der Weide. The nice thing about SOFR, one of the 
main nice things about SOFR is that it does, as Brian indicated 
earlier--there are a ton of underlying transactions, and they 
come from a pretty diverse and large set of financial 
institutions. So at least the primary alternative to LIBOR, 
SOFR, is going to be one that is based on a large volume and a 
diverse set of market participants.
    Mr. Foster. Okay. And who is it that accumulates the data 
for it? I just looked up something on the Web here at the 
Federal Reserve Bank of New York, and it indicates that Mellon 
had a special role in calculating the rate. I was just 
wondering if we are very dependent on specific institutions 
here, and if there may be systemic risk there?
    Mr. Van Der Weide. I don't think in a problematic way, no.
    Mr. Foster. Okay. Thank you.
    I yield back.
    Mr. Casten. The gentleman from Ohio, Mr. Stivers, is now 
recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    My first question is for Mr. John Coates. The SEC has an 
important role to play in ensuring that Federal and State LIBOR 
transition legislation is effective. As you know, the Trust 
Indenture Act may require unanimous consent of note holders to 
effect a change in the benchmark interest rate on those 
transactions. Unanimous consent in practice is impossible to 
achieve, especially on the scale of tens of thousands of note 
holders, and the requirement in this unique scenario could harm 
investors that the Trust Indenture Act (TIA) is meant to 
protect. Therefore, narrow, targeted guidance and relief 
related to the application of TIA might be necessary to reach 
the end goal of amending contracts in an expedient manner, 
while at the same time staving off uncertainty and potential 
litigation.
    Mr. Coates, do you think that the SEC will be able and 
willing to issue some narrow and targeted guidance related to 
the Trust Indenture Act and the LIBOR transition?
    Mr. John Coates. Thank you for that question. I think it is 
a very good question, and it highlights an important difference 
in the way that State and Federal law can respond or anticipate 
the transition here. It is exactly correct, as you summarized, 
that the Trust Indenture Act can create problems. The SEC does 
have an ability to provide exemptive relief under that Act. I 
would note that it would require a Notice and Comment 
Rulemaking, as we understand the role that we would be likely 
to play, which, as you know, can take some time. And I will 
also note that the bill that I think is being discussed here 
would directly address the question, as well.
    So I think we are ready to both help in the technical sense 
with language in this bill, as well as consider the potential 
need for exemptive relief if that becomes necessary.
    Mr. Stivers. Great. Thank you. That is really the only key 
question I had, and I appreciate everybody's hard work. I 
appreciate all of the witnesses. This is a very important 
transition for our financial markets. It is important that we 
get it right.
    This is not, as the ranking member said in his opening 
statement, a partisan issue at all. Republicans and Democrats 
both want to get this transition right, and we stand ready to 
work with the Administration and the SEC and the FHFA and the 
Federal Reserve in any way we can. I look forward to starting 
to move this legislation forward. I know that the Chair of the 
subcommittee has been working on this a while and cares a lot 
about it.
    With that, I yield back.
    Mr. Casten. It is nice to see the generosity of spirit 
across the aisle, and with the clock, which is freeing up so 
much extra time here.
    The gentleman from California, Mr. Vargas, is now 
recognized for 5 minutes.
    Mr. Vargas. Mr. Chairman, thank you very much. I appreciate 
the opportunity to speak.
    And I also want to thank each and every one of our 
witnesses today.
    I don't know if anyone remembers Y2K, but I was on the San 
Diego City Council, on the Public Safety Committee, and I 
remember that New Year's Eve. I had never been so nervous, 
because we didn't know what was going to happen. I remember 
sitting there in the police department, thinking all of the 
lights were going to go off, because we were told all these 
crazy things were going to happen. The street lights were going 
to go down, all of our signaling for the traffic was going to 
go down potentially, police weren't going to be able to 
communicate with each other. So I remember sitting there with 
the chief of police, the chief of the fire department, the 
mayor, and all of us were, like, we don't know, let's see what 
happens.
    Nothing happened, thank God, and we kept going. And the 
reason for that was we were prepared. We had worked hard on 
this and people were prepared.
    That is the way I see this, to be frank. It sounds like you 
all have been working hard; 99 percent of potential problems 
seem to have been anticipated and corrected. This 1 percent is 
$2 trillion, and that is nothing to sneeze at. But it sounds 
like most of the issues have been solved.
    So my question here is, on this last little bit, how really 
could consumers be hurt? What would be the big difference to a 
consumer if we didn't fix this legislatively? I hope that we 
will, and it sounds like we will. But if we didn't, what would 
be the damage? Can somebody explain that to me?
    Mr. Dan Coates. Congressman, our concern with the need for 
a Federal legislative effort is that, as you know, a lot of 
these mortgages and mortgage contracts are written differently 
in different States. The advantage of a Federal effort is that 
all consumers would be assured of a predictable, fair, and 
equitable solution regardless of in what State they live. So 
our efforts have been designed to try to minimize disruption, 
and that is why we think there is great value in the Federal 
legislative effort.
    Mr. Vargas. I think there is, too, obviously, but what 
happens if we don't have, for some reason--I don't know if you 
guys know why we are walking across the street so crazily today 
is because someone decided that we should vote on everything. 
This is not our normal procedure. Normally, we would sit here 
and talk to each other and we wouldn't be disrupted. I am 
sitting here looking at the clock, knowing I have to run off. 
This is not normal, and sometimes things happen here that are 
abnormal. It is abnormal what is happening today, and I 
apologize for that, for your time. It is inappropriate, and I 
apologize.
    But what would happen if somehow this thing were to fall 
apart?
    Mr. Dan Coates. Our concern is that there are some who may 
not move, or who may be worried about expressing their 
discretionary ability because they don't know how it will be 
interpreted in various States. The advantage of the Federal 
legislation is that not only do consumers understand a fair and 
equitable solution will come across the board but also the 
administrative ability to move these contracts will be able to 
move them with some degree of--
    Mr. Vargas. I understand the benefits of it, but I am 
asking the opposite; what are the risks? Can anyone else answer 
that? What are the risks? What if the thing falls apart? What 
if we do have suspension built in and some crazy person decides 
that we have to vote on each and every one of them, as opposed 
to just taking them en bloc, as we normally do? What happens if 
someone gets a wild idea here and we are not able to fix this? 
What happens? Can someone talk about that? What is the 
downside?
    Is anyone going to take a shot? If not, I will pick on 
somebody here.
    Go ahead, Mr. Smith. I will pick on you.
    Mr. Smith. Sure, I am happy to take that. As you say, it is 
really important that consumers don't have their normal life, 
their normal economic activity disrupted by something that is 
far away and something that no one is really paying attention 
to. So, we wanted to pay very close attention to that issue.
    If this LIBOR transition does not go well, people may not 
know what their mortgage payment is if it is linked to LIBOR. 
They may have their credit card payment disrupted. Financial 
markets may be disrupted. Lending to businesses may be 
disrupted. Litigation will take over, and I think it will be 
disruptive to markets and disruptive to consumers.
    Mr. Vargas. Thank you for your work. I really do appreciate 
what you guys are doing, I really do. Thank you.
    Chairman Sherman. I believe that every member in attendance 
has asked their questions. Am I correct on that?
    Mr. Huizenga. Mr. Chairman, Bill Huizenga here. I talked to 
a number of our members on the Floor that I know were in the 
queue. I know some of them were trying to vote at the end of 
the last bill and the beginning of this one, so I am not sure 
who the last Republican was. I just walked in. Do you mind 
informing me who that was?
    Chairman Sherman. Who was the last Republican to speak?
    Mr. Stivers has asked questions.
    Mr. Huizenga. Okay. I do know that Mr. Steil, Mr. Gonzalez, 
Mr. Hill, and I think Mr. Davidson, were all in our queue. I 
don't know whether or not they have returned.
    Chairman Sherman. I see we do have a member to recognize. 
Mr. Hill is recognized for 5 minutes.
    Mr. Hill. Thanks, Mr. Chairman. I appreciate this good 
hearing on a super-important topic. Thanks for your high-
quality opening of the hearing, and thanks for helping us 
navigate these votes this afternoon.
    Mr. Van Der Weide, I want to start out with just sort of 
the big picture. The staff information I have seen is there is 
about $16 trillion of notional value that will be outstanding 
in legacy contracts after June 2023. Is that the right number 
for us to be thinking about of the legacy transactions?
    Mr. Van Der Weide. I would say that our expectation for 
total legacy contracts by mid-2023 is more in the range of $70 
trillion, but only about $10 trillion of those would be what we 
would consider tough legacy contracts that have inappropriate 
fallback provisions that are very difficult for the contracting 
parties to renegotiate. So $10 trillion, I think, is the number 
that we are focused on.
    Mr. Hill. Good. That is very helpful. Thanks for that 
clarification, because that was one of the items that I wanted 
to clear up.
    Mr. Coates, I have long advocated for this change. The 
whole 6 years I have served in Congress, we have been talking 
about it, and we are superb here in D.C. in talking about 
problems, and you are aware of that. In fact, last January, 
when FHFA testified, I asked then, what is the status of Fannie 
Mae and Freddie Mac being ready to go in their conversion. Can 
you give us an update, please?
    Mr. Dan Coates. Sure. And thank you for the attention to 
FHFA's work. I appreciate that.
    Our regulated entities have really done a lot of work to be 
ready for this transition. They started by writing new contract 
language within the confines of the ARRC to ensure that those 
LIBOR contracts that were written had clearer fallback 
language.
    We then got consumer groups and all interested parties 
together with the ARRC to set up new LIBOR ARMs, and they 
started building those. And after we got those built, we have 
prohibited the Enterprises from issuing LIBOR-based products 
anymore, or purchasing LIBOR-based products.
    They are largely transitioned away from LIBOR, to SOFR, in 
all of their mortgage-based products, so we feel pretty 
comfortable. The one remaining area is some derivatives 
activity, and we expect the LIBOR-related derivative activities 
to drop off as SOFR derivative liquidity increases.
    Mr. Hill. Good. Thanks for that answer.
    So, Mr. Walsh, I was curious, in the Majority staff's memo 
to the committee, they talked about some ambiguity for small 
and medium-sized banks and their discomfort with SOFR. Having 
been a former CEO of a medium-sized community bank, I really 
couldn't tell from their memo what is driving that. We didn't 
use LIBOR in our portfolio lending. We used Wall Street Journal 
prime, plus or minus, competing, obviously, with LIBOR quotes. 
Tell me what is going on with the community banks where they 
have discomfort with this?
    Mr. Walsh. Thank you for that question. It is a very 
important one.
    As my colleague, Brian Smith, mentioned earlier, SOFR is an 
overnight risk-free rate, and it has great benefit in that it 
is transparent. The two issues that community banks, as well as 
some corporate-type borrowers, have expressed with respect to 
SOFR is that it doesn't include a credit component. It is an 
overnight risk-free rate. And there is much work being done at 
present to address that, to try to create a credit spread that 
would be appropriate to apply to SOFR to make it more credit-
sensitive.
    It is also, as I think Mr. Van Der Weide was describing, an 
average rate. LIBOR is a rate that is set in advance and paid 
in arrears, and there has been some concern expressed by 
various parties that they will find it difficult to manage 
their cash flow positions if they do not know at the start of a 
reset period what the final amount of interest due might be. 
There is work being done to address that in trying to find a 
so-called forward-looking term rate for SOFR.
    Mr. Hill. I hope you and your bank supervisors will 
collectively help push that education and collaborate on a 
solution there.
    Mr. Van Der Weide, another question I was curious about. We 
talked about State legislation. The State of New York is curing 
part of this. How do you reference it? Has the General Assembly 
of New York passed any legislation on this, and what percentage 
of the market might that assist?
    Mr. Van Der Weide. We think the New York legislation will 
probably cover a majority of the financial contracts out there 
under LIBOR, but for a variety of reasons we do think that 
Federal legislation is really needed to provide that kind of 
nationwide uniform solution and to cover some of the central 
Trust Indenture Act and tax issues.
    Mr. Hill. Good. Thank you.
    Mr. Chairman, I appreciate the time, and I yield back.
    Chairman Sherman. Thank you.
    Without objection, I will enter into the record letters 
from SIFMA, the Structured Finance Association, the American 
Bankers Association, and the American Council of Life Insurers, 
and others, in support of Federal legislation in this area, and 
a letter from the Structured Finance Association making 
basically the same point, and a statement from the Structured 
Finance Association.
    Withput objection, it is so ordered.
    And I now recognize Mr. Davidson.
    Mr. Davidson. Thank you. I was expecting the rotation to go 
to a Democrat, but it is nice to be in the queue. Thank you, 
Mr. Sherman. Thank you, Mr. Hill. And thanks to our witnesses.
    This is an important topic for our financial markets, and 
it is always good when Congress spends time on things that are 
actually substantive.
    A lot has already been said. I like that it has already 
been highlighted that this is an average. So it is designed to 
smooth out some of the day-to-day volatility, and it is 
designed to mitigate some of the volatility because of that.
    But I am particularly interested in going back to September 
of 2019 and the repo market. We saw that spike. Should we be 
worried about this happening again, Mr. Van Der Weide? If so, 
what would be the implications we would have under a new SOFR-
based system?
    Mr. Van Der Weide. We have seen some dysfunction in the 
Treasury markets over the last couple of years. We saw it in 
September 2019, and we saw it again in March of 2020. We and 
our colleagues at Treasury and some of the other agencies are 
taking a hard look at what we can do to improve the resiliency 
of Treasury markets.
    I will say that the SOFR spike, the Treasury repo spike in 
September of 2019 was very short-lived, in part because of some 
of the actions the Federal Reserve took in response to it. But 
because of the way SOFR is integrated into financial contracts, 
through a longer-term average, spikes in SOFR that only last 
for a day or two, like what occurred in September of 2019, are 
not going to have a bad volatility effect on the usage of that 
rate in the contracts. I think through the averaging mechanism, 
we have a good mechanism to deal with some of the short 
volatility spikes that might occur in Treasury repo rates.
    Mr. Davidson. Okay. So do you anticipate enough stability 
in repo that the Fed will not actively intervene in repo, or 
how do you see that playing out? And what role does SOFR play 
in that?
    Mr. Van Der Weide. We think the averaging mechanism is 
going to be enough to deal with the volatility, the national 
volatility in Treasury repo rates. But I should also mention 
that SOFR is not a mandated rate. We are not mandating that 
banks or financial firms use SOFR in their contracts. So if 
they are concerned about the volatility of SOFR for certain 
transaction types, they are certainly able to migrate to a 
different alternate rate.
    Mr. Davidson. In the crisis, of course, everyone hopes to, 
first and foremost, create some stability. But there was 
concern when this high amount of interest was being paid out in 
the repo market, and it was being paid above what some of the 
offers were from other banks. There were some banks who were 
maybe as high as 10 percent.
    Now, that didn't last in an enduring way, as you have 
already highlighted, but I heard from banks who said that they 
were offering to finance substantially lower, and the market 
could have cleared, provided stability at a lower rate. Did you 
deal with any of those claims?
    Mr. Van Der Weide. I think fundamentally the disruptions in 
the Treasury repo market back in September were quite short 
term, so they are not going to impact the nature of the SOFR 
rate that is going to be used in financial contracts. Those 
kinds of very temporary disruptions are not, I think, a black 
mark against the potential use of SOFR.
    Mr. Davidson. Okay.
    Mr. Coates, what has FHFA done to ensure that its regulated 
entities are prepared to transition away from LIBOR, and what 
kind of exposure is there left for LIBOR?
    Mr. Dan Coates. Thank you for the question and for your 
interest in FHFA's regulated entities.
    As I outlined earlier, the Enterprises--Fannie and 
Freddie--and the Federal Home Loan Banks have been moving 
prudently away from LIBOR and to SOFR since we started this 
effort in 2018. They have worked, in Fannie and Freddie's case, 
with the Consumer Products Working Group to develop new 
fallback language to ensure that those last few LIBOR contracts 
had clear roadmaps for how they would transition.
    Then, they worked with all of the industry groups and 
consumer groups to develop an acceptable adjustable rate 
mortgage based on SOFR, and then they went and built that 
system. They have offered now SOFR-based adjustable rate 
mortgages and other mortgage products, and they are out of 
LIBOR mortgage-based products.
    Mr. Davidson. Won't there be about two-thirds still 
outstanding after 2023?
    Mr. Van Der Weide. As you may know, the exposure 
information is not public, but I would be glad to follow up 
with you and discuss the exposure information, if you are 
interested.
    Mr. Davidson. Okay. Thank you so much.
    My time has expired, and I yield back.
    Chairman Sherman. Thank you.
    Without objection, we will add to the record a letter from 
the United States Chamber of Commerce and related organizations 
supporting Federal legislation along the lines of the 
discussion draft that has been circulated; a letter from the 
Alternative Reference Rate Committee supporting the specific 
draft that has been circulated; and a letter from Americans for 
Financial Reform, the National Consumer Law Center, and the 
Student Borrower Protection Center supporting the New York 
legislation, which is substantively identical to the discussion 
draft that has been circulated.
    With that, I recognize Mr. Emmer for 5 minutes.
    Mr. Emmer, are you there?
    Mr. Emmer. I am. If I could yield my time to Mr. Gonzalez, 
please?
    Chairman Sherman. Mr. Gonzalez, you are now recognized.
    Mr. Gonzalez of Ohio. Sure. You caught me off guard there, 
Tom. But in any event, thank you for yielding.
    Thank you, Chairman Sherman and Ranking Member Huizenga, 
for holding this hearing today. It is certainly an important 
topic.
    I want to also commend the ARRC for the work they have done 
over the years. I feel like if the ARRC didn't exist, we would 
be probably talking about how to create it and make sure it 
exists today. So, I certainly appreciate all of the work and 
all of the thought that has gone into the various proposals.
    I want to start with Mr. Smith. I was pleased to see that 
the State of New York just enacted legislation that does 
provide for a legal safe harbor to address financial contracts 
that have inadequate fallback language, which we know sort of 
comprises that tail risk. However, it doesn't fully address the 
Federal issues.
    From this past year's experience, we know that 
securitization trustees, for example, were taking steps toward 
initiation of litigation, which is more than a year prior to 
the original LIBOR end date of December 2021. So with that as 
the backdrop, how concerned are you that we would see 
additional litigation soon, and maybe paint a timeline for us. 
The longer it takes us to enact something at the Federal level, 
when do you see the litigation coming, and in what kind of 
volume?
    Mr. Smith. Thank you for the question. As you highlighted, 
New York has taken an important step for managing risk for 
contracts based in New York law, but there remains a necessity 
for Federal legislation both to make sure we have a 
comprehensive and uniform approach that covers all of the 
United States, as well as because of the unique Federal issues.
    You identified the trust and bank issue. That is one of 
several issues. We also want to make sure at the Treasury 
Department that we can manage the tax consequences of LIBOR 
transition and make sure that doesn't become an impediment. 
There are certain legacy student loans based on the legacy 
program that have a reference to LIBOR in statute. Those are 
just some of the Federal issues that we want to make sure to 
manage. And as you highlight, litigation is certainly a risk if 
they are not managed appropriately.
    Mr. Gonzalez of Ohio. Thanks. Do you suspect that Treasury 
will provide legislative guidance or suggestions with respect 
to handling the tax consequences and the issue in the student 
loan market?
    Mr. Smith. Yes. Treasury has provided technical assistance 
on the draft legislation related to managing the tax 
consequences, with an aim of ensuring that tax realization 
events are not triggered by the move from LIBOR to SOFR, 
including by this legislation, as well as by making sure that 
Treasury has appropriate authority to do rulemaking to cover 
the broad range of technical issues that might come up.
    Mr. Gonzalez of Ohio. Great.
    And for Mr. Dan Coates, without an appropriate authorized 
alternative solution, many of the parties responsible for 
directing LIBOR-based calculations have already notified the 
contractual parties that they will seek court direction. Can 
you explain the implication of massive litigation on financial 
markets? And then, who ultimately would bear the cost of this 
litigation?
    Mr. Dan Coates. I appreciate your question. There are a lot 
of entities that will bear the cost if folks don't move. As you 
know, Fannie Mae securities are governed by D.C. law, and 
Freddie Mac's by New York State law, and the Federal Home Loan 
Banks all around the country. So the challenge if folks don't 
move, and if the lawsuits happen all over the place--we already 
saw this before the New York State law was started--trustees 
were starting to go to the courts to seek resolution. So, the 
real challenge is that this transition would be stalled in 51 
jurisdictions, and that could end up getting different outcomes 
in the different jurisdictions, which could affect consumers 
differently. So, we are very concerned about that.
    Mr. Gonzalez of Ohio. Thank you.
    And then with my last few seconds, according to market 
participants, whom I hope we hear from publicly at some point, 
implementing the transition will require significant 
operational and systems changes. So based on the current 
timeline, are you concerned about interruptions to the 
marketplace?
    That one is for either Mr. Dan Coates or Mr. Smith.
    Mr. Dan Coates. I will just take a shot at it. We have seen 
good progress. The ARRC has had an Infrastructure Working Group 
to bring vendors in to get them ready, and we have every 
expectation that things will make more progress.
    Mr. Gonzalez of Ohio. Thank you, and I will yield back to 
Mr. Emmer, or just yield back altogether. I don't know if he is 
on.
    Chairman Sherman. I don't see him. I do want to comment 
that the discussion draft that I have circulated does contain, 
as Section 6, a provision that shifting from one index to the 
other index does not constitute a sale exchange or disposition 
of property for tax purposes. The other technical assistance 
that Treasury has sent in was just received yesterday, and I 
know it will be very interesting to myself, Mr. Huizenga, and 
others working to perfect this draft.
    With that, I will recognize Mr. Steil for 5 minutes.
    Mr. Steil. Thank you very much, Mr. Chairman. It has been a 
good hearing today and a good discussion of LIBOR. I want to 
shift gears slightly just for one minute, if I could, while we 
have you, Mr. Coates. I would like to ask you about some recent 
statements from your office regarding SPACs.
    Last week, you put out a statement kind of opining whether 
Special Purpose Acquisition Companies (SPACs) were ideal. A 
popular commentator called the remarks, ``a weird speech,'' his 
words, that was really, ``advice for plaintiffs' lawyers,'' 
also his words, rather than anything related to SEC enforcement 
priorities. And then this week, alongside the SEC's acting 
Chief Accountant, you issued another statement that I think had 
some market implications regarding how warrants are issued and 
SPAC offerings and how they should be treated for accounting 
purposes. One of the major law firms actually noted that it has 
essentially frozen the SPAC marketplace as a result of some of 
those comments. And the firm pointed out, in the public comment 
that I read, that they were not aware of a statement put out 
without notice or comment that had such a chilling effect on 
capital market activities.
    I read your statement and I noticed there was a pretty 
solid, well-written disclaimer in the footnote of your 
statement. But admittedly, despite that, I think many people 
out there are worrying that these comments may have greater 
teeth. Did you determine the significant market-moving 
statements are appropriate?
    Mr. John Coates. Thank you for those questions about SPACs. 
I am happy to give you a quick answer now. I don't want to 
distract from the LIBOR focus of the hearing, and I am happy to 
go at much greater length, if you would like, after this with 
my staff and your staff.
    Very briefly, yes, we believe that the statements were 
appropriate for protection of investors and issuers and capital 
formation. I will note that the accounting statement that came 
out this week is not reflecting anything new. The guidance 
comes from FASB. That guidance has been there for years. And 
the reason that we put it out is because a particular 
registrant came to us with the questions and asked for our 
advice, and we gave it. Once we gave it, we recognized it might 
have implications for other issuers and did not feel 
comfortable not telling the market about the conclusion that we 
had reached about that question.
    But again, as I said, I will be happy to follow up later, 
if you would like, with more information.
    Mr. Steil. Thank you for the background as to the 
orientation of the formation of those comments. Should we 
expect a more formal rulemaking on this issue in the near 
future?
    Mr. John Coates. I guess I would have to say I look forward 
to working with our new Chair, who will come on board very 
shortly, and talk about that issue with him and the rest of the 
staff at the SEC.
    Mr. Steil. Very good. I appreciate you letting me shift 
gears there for a second.
    Let's pivot back to LIBOR, which I have actually been 
pretty interested in since I first arrived on this committee. I 
spoke about this topic in 2019, and while it seldom makes the 
front page of some of the newspapers, I think the LIBOR 
transition is actually one of the more important stories 
affecting our economy. So if I could ask a question for you, 
Mr. Van Der Weide.
    In a speech delivered to the Alternative Reference Rate 
Committee last month, Vice Chairman Quarles sought to address 
rumors that the transition from LIBOR will be delayed further. 
Do you think the message has been fully received that LIBOR is 
really ending? This is one of my concerns.
    And then, in particular, how do New York's recent moves 
impact the pace of this transition?
    Mr. Van Der Weide. I think the statements that we heard 
last month from the U.K.'s Financial Conduct Authority and the 
administrator of LIBOR were pretty definitive that major U.S. 
LIBOR tenors are ending in June 2023. I think that message is 
getting across. We are certainly getting that message across 
during our supervisory process. We have issued, along with our 
sister banking agencies, the OCC and the FDIC, several pieces 
of supervisory guidance over the last few months, and that is 
reinforcing the significance of the imminent demise of LIBOR 
and the cessation of writing new contracts under LIBOR. So, I 
consider the end of LIBOR to be set at this point in the middle 
of 2023.
    Mr. Steil. I appreciate that.
    In observance of the time remaining, I appreciate 
everyone's time today discussing this important topic, and with 
that, I will yield back.
    Chairman Sherman. Thank you. I assure you, Mr. Steil, that 
we will focus on SPACs at the subcommittee level expeditiously.
    And without objection, I will put in the record a letter 
from the National Association of Federally-Insured Credit 
Unions supporting the idea of Congress taking legislation 
promptly on the LIBOR contracts consistent with the discussion 
draft that has been circulated.
    Without objection, it is so ordered.
    And I believe the next person in line is Mr. Hollingsworth, 
so I will recognize him for 5 minutes.
    Mr. Hollingsworth. I appreciate that, Mr. Chairman. And I 
certainly appreciate all of the witnesses that we have here 
today.
    As my good friend, Mr. Steil, said, this is an important 
issue. The numbers that we are dealing with--and certainly the 
chairman introduced this concept--are enormous, and making sure 
that we have an elegant solution to this transition is really 
important to both the real economy and the financial economy. 
Nothing I am going to ask about should minimize my sympathy for 
the problem that we have before us in transitioning a whole 
host of contracts that don't have an appropriate fallback or 
any fallback at all.
    All that being said, and with the additional preamble of me 
not being a lawyer but always being concerned about the rights 
of parties to contracts, I wanted to ask Mr. Van Der Weide, do 
you have any trepidation or concern about the notion that the 
Fed is going to pick a rate, and that rate is going to be 
conclusive and binding upon parties that have agreed to a 
contract, and they, at least as I read the legislation, will 
not be afforded any sort of litigation avenue, cause of action, 
or other redress should they disagree with that? Is that 
concerning to you? I understand the problem that we have ahead 
of us, but are we going too far in saying presumptively that if 
you don't contest it, this is the rate, but instead saying, 
this is the rate, period, your only option is to contest this 
law altogether, not contest with the counterparty whether that 
is the right rate?
    Mr. Van Der Weide. I do agree with the impulse here that it 
should be a rare situation when Congress or legislators are 
overriding private contracts, and you only want to do that in a 
very narrow way for a very important government purpose. I 
think we have a very important government purpose here, to 
prevent financial stability negative effects and the litigation 
that may come by mid-June. We want to do this in the most 
narrowly tailored way possible, because I do think the Federal 
legislation needs to be strictly limited to legacy contracts. 
It should not be relevant looking forward to new contracts. It 
should only apply to legacy contracts that have no fallback 
rate or an inappropriate fallback rate, and people should have 
the ability to opt out of a rate that is set by the 
legislation.
    So, should contracting parties take a look at where the 
government-recommended rate is if they don't like it and they 
want to go a different route? They should be able to amend 
their contract and opt out. I think that is the way to maximize 
the benefits here.
    Mr. Hollingsworth. I really appreciate that very thorough 
answer. I certainly concur that this is a big problem ahead of 
us. I certainly concur with your hesitation or desire to 
narrowly do this. And this is the first time I have actually 
heard someone say there should be an opt out or a means of 
redress should they disagree with that. That is something, a 
bar that I also agree with.
    I have a little bit of concern--I like the idea of 
minimizing the logistical hurdles by saying this is the rate 
unless you contest it otherwise, and maybe even setting 
timeframes around that, that this is going to be your reference 
rate going forward. But I want people to have the ability to 
contest that, because they are ultimately the parties to that 
contract, and if they believe that is inappropriate, they 
should have their day in court to go argue before a judge and 
have that judge determine whether it is appropriate or 
inappropriate, what has been done.
    Is that kind of what you are saying, as well? Not to 
characterize what you are trying to say.
    Mr. Van Der Weide. I think the fundamental issue here is, 
do you want to have a legislature step in and provide clarity 
to the financial markets about what some of these replacement 
rates are going to be for that tranche of contracts that are 
legacy?
    Mr. Hollingsworth. Yes. But as you said, we don't want that 
clarity to come at too high a cost. If we, by principle of 
government, believe you should have access to the Judicial 
Branch to argue in front of a judge and have a judge decide 
what is appropriate or inappropriate, I believe that if you 
abandon your principles at a time when a big problem is afoot, 
then you probably didn't have those principles to start with.
    Mr. Van Der Weide. I think the balance you have to strike 
is between the clarity that we really need when LIBOR goes away 
in 2023 and the judicial right of review. I think the more 
judicial right of review you are going to have, the more 
litigation we are going to have, the more uncertainty we are 
going to have in the financial markets. So, we have to strike 
the right balance between those two.
    Mr. Hollingsworth. I think you are exactly right. 
``Balance'' is the operative term, and certainly I would love 
to work with Chairman Sherman in further fine-tuning. I think 
he is on the right track, but we should strike that balance to 
make sure there is a means for a party who has agreed to a 
contract to take it before a judge. That is really important to 
me.
    Thank you. I yield back my time.
    Chairman Sherman. Thank you.
    One clarification for the record. I think the record was 
already clear. The Americans for Financial Reform, the National 
Consumer Law Center, and the Student Borrower Protection Center 
have not endorsed Federal legislation. They have not endorsed 
the drafts that I have circulated. They have endorsed the New 
York bill, which is substantively identical to the Federal 
legislation that we are discussing here today. That is as far 
as they have gone. I think I have correctly characterized them 
twice in this hearing already, but that will be a 
clarification.
    At this point, I believe we have heard from all members who 
have asked their questions. What I am going to suggest is that 
Mr. Huizenga grace us with a 1-minute closing statement. I will 
then deliver a 1-minute closing statement, and at that point 
our members and witnesses can zoom off to their next meeting.
    Mr. Huizenga?
    Mr. Huizenga. Thank you, Mr. Chairman. We will zoom off to 
our votes, as well.
    I do appreciate your having this hearing. I know this is 
something that has been important. What I am hoping for in the 
next hearing is that we are going to be able to hear from 
market participants, those who are going to be affected by this 
material change in those contracts.
    As I had started to explore a little earlier, it sounds 
like we may have some legal experts in here as well to just 
comment on the constitutionality of this. I know you believe 
that you have addressed this, or you certainly attempted to 
address this, but looking at what the legality of this effort 
is is an important part of this process in my mind.
    As has been noted, June of 2023 is that sort of drop-dead 
time. In classic Washington experience, that would mean May of 
2023 is when we would get to it. But we are well ahead of that 
time, and I commend you for that, and I am glad to be a part of 
it and look forward to working with you on this.
    Chairman Sherman. I look forward to working with you. The 
importance of this issue is at least $2 trillion in instruments 
that will still be outstanding after the middle of next year 
that do not have a fallback position. But if I heard Mr. Van 
Der Weide's testimony correctly, his number is closer to $10 
trillion. I realize we are dealing with $200 trillion in 
evaluating what is so many different instruments, and applying 
it is difficult. So, we may be dealing with a problem that 
involves $10 trillion in instruments.
    As to the sanctity of contracts, I think that we can deal 
with the Office of the Legislative Counsel and maybe the 
experts at the Congressional Research Service (CRS). I don't 
anticipate having another hearing where we bring in legal 
experts, but if we don't get a clear answer from them, then we 
do have to make sure that our bill will be constitutional.
    I will point out that the principle of the sanctity of 
contracts is a principle important to all of us in every 
circumstance, but as a constitutional matter is applicable to 
State legislation.
    I will also point out that New York State has passed 
legislation that would govern many of these instruments unless 
we pass our bill. Adding to the confusion is that the 
constitutionality of their bill is much less certain.
    And finally, let's point out, as far as sanctity of 
contracts, the 95-percent-plus of drafted contracts that are 
clear as to how they would apply in a LIBOR-less world, the 
sanctity of those contracts is being respected. Where the 
parties didn't agree, it is much more efficient to have a bill 
than to have hundreds and hundreds of lawsuits. Although as an 
old-time lawyer, the idea of my colleagues billing thousands 
and thousands and thousands of hours is something that they 
would want me to support.
    With that, we stand adjourned.
    [Whereupon, at 3:51 p.m., the hearing was adjourned.]

                            A P P E N D I X


                             April 15, 2021

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