IRS Proposed Rule Would Help Ease Transition Away from Libor

The IRS has proposed regulations intended to help market participants transition from the London Interbank Offered Rate to an alternative reference rate.

With Libor’s fate beyond 2021 uncertain, many questions arose as to whether modifying contracts referencing Libor with an alternative rate would be considered a taxable event. At the urging of the Alternative Reference Rates Committee, the IRS and Treasury Department issued the proposed guidance, which would generally allow market participants to make those contract modifications without tax consequences.

“This clears the path forward, and I strongly encourage all market participants to take this opportunity to transition away from Libor and begin adopting the Secured Overnight Financing Rate,” the ARRC’s recommended reference rate.

The proposal also includes certain safe harbors and guidance on a variety of tax-related issues.

“The Treasury action today provides much more clarity around the tax issues related to converting legacy trades,” said ARRC Chairman Tom Wipf, who is also vice chairman at Morgan Stanley.
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Comments on the proposal will be due 45 days after publication in the Federal Register. ABA is reviewing the proposal and invites bankers to share their feedback to inform the association’s comment letter.

Read the proposal.