CFTC Approves Plain English LIBOR Disclosures for Derivatives | Practical Law

CFTC Approves Plain English LIBOR Disclosures for Derivatives | Practical Law

The CFTC approved a set of standard plain English LIBOR-risk disclosures for parties to provide to clients and counterparties in connection with derivatives contracts that reference LIBOR and other IBORs.

CFTC Approves Plain English LIBOR Disclosures for Derivatives

Practical Law Legal Update w-022-2908 (Approx. 3 pages)

CFTC Approves Plain English LIBOR Disclosures for Derivatives

by Practical Law Finance
Published on 03 Oct 2019 • USA (National/Federal)
The CFTC approved a set of standard plain English LIBOR-risk disclosures for parties to provide to clients and counterparties in connection with derivatives contracts that reference LIBOR and other IBORs.
On September 9, 2019, the CFTC's Market Risk Advisory Committee (MRAC) approved a set of standard plain English disclosures that market participants such as swap dealers and other market-makers may provide, when appropriate, to clients and counterparties with whom they transact derivatives that reference interest rate benchmarks such as LIBOR and other IBORs.
The disclosures are meant to serve as examples, and market participants can select the disclosures that are applicable to their transaction. The disclosures are divided into categories based on whether the market participants have:
The disclosures outline several risks associated with the continued use of LIBOR and other IBORs. These risks include:
  • Uncertainty surrounding the reference rate that would be used and the economic disadvantages this could cause if LIBOR is discontinued.
  • Differences in timing for LIBOR discontinuation in multiple financial documents.
  • Discrepancy between the rate referenced in multiple financial documents.
The disclosures note that ISDA is planning to update the 2006 ISDA Definitions to include fallbacks to certain rates (fallbacks) that would take effect if LIBOR or another IBOR is discontinued (see Legal Update, ISDA Publishes Consultation Seeking Feedback on Final Methodologies for Derivatives Benchmark Fallback Adjustments).
Market participants are advised to either follow the forthcoming protocol that ISDA will publish to incorporate the fallbacks into their existing legacy documentation or bilaterally amend their contracts to include the fallbacks. Adherence to the ISDA protocol will:
  • Amend contracts only with adhering entities so that these contracts include the fallbacks; the fallbacks will not be included in contracts with counterparties that do not adhere.
  • Provide standard amendments to include fallbacks, although bilateral amendments will be allowed to amend contracts with all counterparties that agree to the bilateral amendments on mutually agreeable terms.
The disclosures are the MRAC’s Interest Rate Benchmark Reform Subcommittee’s first recommendation regarding the transition of US dollar derivatives away from LIBOR.
"ISDA" is a registered trademark of the International Swaps and Derivatives Association, Inc. (ISDA). ISDA is not a sponsor of Practical Law and had no part in the development of this Update.