On December 20, 2018, ISDA® published the final results of a market-wide consultation related to benchmark fallback rates for certain derivatives agreements. The majority of respondents to the consultation favored a combination of the compounded setting in arrears rate for the adjusted risk-free rate (RFR) with the historical mean/median approach to calculate the spread adjustment.

Launched on July 12, 2018 as part of ongoing benchmark reform, the consultation sought comments on technical issues in conjunction with proposed amendments to ISDA's standard documentation to implement fallback provisions for derivatives that would apply if certain interbank offered rates (IBOR) referenced in derivatives agreements are permanently discontinued (see Legal Update, Updated: ISDA® Releases Consultation on Technical Issues Related to Benchmark Fallbacks).

ISDA sought comment from all market participants to determine an optimal approach to calculating the applicable adjusted RFRs if fallbacks are triggered. The consultation set out four options to facilitate the transition from IBORs to risk-free rates:

ISDA also proposed three options to calculate a spread adjustment:

Respondents favored the compound setting in arrears rate with the historical mean/median approach to the spread adjustment, with that combination receiving 86 of the 142 top respondent votes. The second most favored approach, receiving 41 top respondent votes, was compounded setting in arrears rate with the forward approach to the spread adjustment.

Overall, the compounded setting in arrears rate was selected as the top preference for the adjusted RFR in nearly 90% of rankings, citing its compatibility with the overnight index swap market and ability to reflect daily interest rate movements as advantages. The historical mean/median approach to the spread adjustment was selected as the top preference in almost 70% of rankings, citing multiple advantages, including its robustness and simplicity. ISDA expects to solicit further feedback on the parameters of the historical mean/median approach.

The consultation covered GDP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR, and BBSW (the covered benchmarks), but also solicited preliminary feedback with respect to USD LIBOR, EUR LIBOR, and EURIBOR. The majority of respondents expressed preference to using the same adjusted RFR and spread adjustments across all benchmarks, including those not included in the covered benchmarks umbrella.

ISDA plans to publish a Supplement to the 2006 ISDA Definitions (definitions) that will amend certain floating rate options in Section 7.1 to include fallbacks that would apply if a specified IBOR is permanently discontinued (see Standard Document, ISDA® Market Agreed Coupon (MAC) Interest Rate Swap Transaction Confirmation (Annotated), Drafting Note, Floating Rate Option for an explanation of floating rate options under the definitions). ISDA plans to incorporate the feedback from this consultation and develop fallbacks based on the compound setting in arrears rate and the historical mean/median approach for all covered benchmarks for inclusion in the definitions.