On April 15, 2020, ISDA® announced the preliminary results of its second consultation on derivatives pre-cessation LIBOR-replacement fallbacks, indicating that a majority of market participants favor including both pre-cessation and permanent-cessation fallbacks as standard language in an upcoming IBOR supplement to the 2006 ISDA Definitions (upcoming IBOR supplement). The 2006 Definitions govern interest rate swaps, cross-currency swaps, and certain other types of swap transactions.

The consultation, which was entitled 2020 Consultation on How to Implement Pre-Cessation Fallbacks in Derivatives (the 2020 pre-cessation consultation), was published on February 25, 2020, and sought further input on ISDA's approach to addressing pre-cessation issues in derivatives contracts that reference USD LIBOR (see Legal Update, ISDA Publishes Second Consultation on IBOR Pre-Cessation Fallbacks for Derivatives). Though the pre-cessation fallbacks will apply to LIBOR and certain other IBORs, the scope of the consultation was limited to LIBOR. Pre-cessation attempts to address whether fallback to a reference rate is triggered when an IBOR is no longer a representative or reliable benchmark, but has not technically ceased to be published.

The 2020 pre-cessation consultation asked market participants whether the upcoming IBOR supplement should include fallbacks that would apply to all covered derivatives following the first to occur of:

Preliminary results indicate that a majority of market participants favor including both pre-cessation and permanent-cessation fallbacks as standard language in the upcoming IBOR supplement, as well as in a single protocol for incorporating the updated 2006 Definitions into legacy trades.

ISDA expects to move forward with the notion that both pre-cessation fallbacks based on a "non-representativeness" determination and permanent-cessation fallbacks would apply to new and legacy derivatives referencing LIBOR that incorporate the upcoming IBOR supplement. The updated definitions for other covered IBORs in the upcoming IBOR supplement will only include permanent-cessation fallbacks.

A final report on the consultation is expected in the coming weeks.

"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.