21 In the consultations, it says: “… it is important to keep in mind that the current libor-based credit model is a cost-plus financing model and that sofr may or may not reflect a bank`s internal financing costs. There are a number of usual credit contract provisions that have developed around the historic construction of LIBOR, and such provisions. B that the financing of the rupture, the increase in costs and the illegality, may have to be reconsidered if LIBOR is not the reference rate. ARRC Consultation Regarding More Robust LIBOR Casback Contract Language for New Originations of LIBOR Syndicated Loans, September 24, 2018, at 6 a.m. Faced with this lack of clarity and the enormous potential impact on a bank`s operations, many U.S. lenders strive to protect their position and retain the right to pass these potential costs on to their borrowers through the cost-raising clause, at least until the details of Dodd-Frank`s implementation can be properly evaluated. Although existing legislation is not normally considered a change in the law, an exception has been made in the case of Dodd-Frank and many U.S. credit contracts now explicitly consider Dodd-Frank to be a “change in the law.” Indeed, the current draft of standard credit contract clauses of the LSTA, which is expected to be finalized during this quarter, reflects this position. The model will also help facilitate liquidity in the secondary market, as buyers entering the credit should only check aspects of the credit contract that are exceptions to the standard.
The divestment and equity agreements included in the model are the agreements concluded by the LSTA in 2002. The LSTA assumes that these agreements will be reviewed in 2004 to assess whether or not to update. Summers pointed out that other provisions, such as the allocation of payment methods, could be updated in the future due to developments in financial markets. The existing Basel II requirement has received more attention with regard to Basel III, as it has been found that the usual language used for the carve-out will unintentionally expand in order to exclude basel III costs as well. This is because Basel III was implemented by a change to the current Basel II regime. The LMA recently issued a note expressing concern. If Basel II costs are excluded from the cost-raising clause of a loan contract, a lender`s prudent approach must be expressly stated that this does not apply to Basel III costs. Given that Basel II is legislation in force in most jurisdictions, we propose that the exception should no longer be necessary in many cost-raising clauses and that it may eventually be abolished, which in turn raises concerns about the linguistic removal of Basel III costs. Given the unknown magnitude and cost of these rules and regulations (and the inability of lenders to properly use credit facilities to account for these costs) and the certainty that the profit protection provisions apply to these costs, some lenders have attempted to design higher cost clauses , so that they explicitly provide for these costs to be covered.
However, some lenders felt that the explicit reference to the Dodd-Frank Act and Basel III was not necessary, as they felt that any new regulations would be covered by more general language, usually already included in their credit contracts. The credit banks and trade association decided to speak expressly in its draft exposure of model credit provisions distributed on February 7, 2011, because such provisions define “the change of law” all requests, rules, directives and directives relating to the Dodd-Frank or Basel III Act, regardless of the date adopted or issued.