ISDA® Publishes IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol | Practical Law

ISDA® Publishes IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol | Practical Law

ISDA announced that it launched its IBOR Fallbacks Supplement (supplement) to the 2006 ISDA Definitions, covering interbank offered rate (IBOR) fallbacks, as well as its related IBOR Fallbacks Protocol (protocol) that will allow parties to amend their derivatives agreements to incorporate the supplement.

ISDA® Publishes IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol

by Practical Law Finance
Published on 26 Oct 2020 • USA (National/Federal)
ISDA announced that it launched its IBOR Fallbacks Supplement (supplement) to the 2006 ISDA Definitions, covering interbank offered rate (IBOR) fallbacks, as well as its related IBOR Fallbacks Protocol (protocol) that will allow parties to amend their derivatives agreements to incorporate the supplement.
On October 23, 2020, ISDA® issued a press release announcing that it had launched its IBOR Fallbacks Supplement (supplement) to the 2006 ISDA Definitions (2006 Definitions), covering interbank offered rate (IBOR) fallbacks, as well as its related IBOR Fallbacks Protocol (protocol) that will allow parties to amend their derivatives agreements to incorporate the supplement. ISDA previously announced the launch on October 9, 2020 and released pre-publication versions of the supplement and protocol in order to allow voluntary adherence "in escrow" during the two weeks before the official launch date (see Legal Update, Updated: ISDA Announces Launch Date and Effective Date of IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol).

Supplement

The supplement provides parties to ISDA Master Agreements (and other derivatives agreements) that incorporate the 2006 Definitions a way to amend many floating rate option definitions by incorporating certain risk-free rates (RFRs) as that will apply when a trigger event occurs (referred to as fallback rates). Such trigger events include the permanent or temporary cessation of a specified IBOR, including LIBOR, which is expected to be discontinued after 2021.
The fallback rates are based on adjusted overnight RFRs. The suggested RFR to replace USD LIBOR is the Secured Overnight Financing Rate (SOFR). To determine the adjusted SOFR rate, SOFR is compounded over an accrual period corresponding to the term of the USD LIBOR rate that it is replacing. Spread adjustments based on the five-year median spread between USD LIBOR and the adjusted SOFR rate are then added to the adjusted RFRs to get the final adjusted overnight SOFR rate. RFRs, including SOFR, are calculated and published by Bloomberg Index Services Limited on a daily basis.
Notably, the supplement also introduces definitions of the terms "Index Cessation Event" and an "Index Cessation Effective Date." These provisions are designed to function as pre-cessation triggers.
The Index Cessation Event definition outlines the following events that will activate IBOR-to-RFR fallback provisions:
  • A public statement or publication of information from the relevant IBOR announcing permanent or indefinite cessation, provided that there is no successor administrator that will continue providing the relevant IBOR at the time of the statement or publication.
  • A public statement or publication of information from a relevant body stating that the administrator of the relevant IBOR has ceased to provide the relevant IBOR permanently or indefinitely, again provided that there is no successor continuing to provide the relevant IBOR.
  • A public statement or publication of information from the regulatory supervisor for the administrator of the relevant IBOR announcing that:
    • the regulatory supervisor has determined that the relevant IBOR is no longer representative and that representativeness will not be restored; and
    • the statement or publication is being made in awareness that it will engage certain contractual triggers for fallbacks activated by pre-cessation announcements by such supervisors in contracts.
The Index Cessation Effective Date, with respect to a relevant IBOR and one or more Index Cessation Events, is the first date on which the IBOR is either:
  • Non-representative, in the case of a relevant LIBOR; or
  • No longer provided.
The supplement also addresses the following scenarios:
  • When an IBOR is deemed to no longer be representative. If this occurs, the rate will become the relevant adjusted RFR.
  • The temporary non-publication of an IBOR. If this occurs, the rate will be determined by a calculation agent on the basis of an officially recommended alternative or rates used by central clearing counterparties (CCPs) or futures exchanges.
  • The occurrence of an Index Cessation Effective Date. If this occurs, the rate will become the relevant adjusted RFR.
  • The unavailability of a fallback rate. If this occurs, further fallbacks apply. For example, if SOFR becomes temporarily unavailable, the rate for a given reset day (as defined in the 2006 Definitions) would be the most recently provided or published SOFR rate at that time. If SOFR becomes discontinued, the supplement sets out the following waterfall of fallback rates:
    • calculate the fallback rate based on published overnight SOFR rates for the relevant calculation period;
    • use the rate recommended to replace SOFR by the Federal Reserve Board, the Federal Reserve Bank of New York, or by a committee officially endorsed or convened by either of them;
    • use the Overnight Bank Funding Rate;
    • use the short-term interest rate target set by the Federal Open Market Committee (FOMC) or, if one has not been set, the mid-point of the short-term interest rate target range also set by FOMC.

Protocol

The protocol enables market participants to amend the terms of their swap documents (referred to as protocol covered documents) to include in the terms of such document:
  • Either the terms of, or a particular defined term included in, the supplement; and
  • Fallbacks for the relevant IBOR.
Adherence to the protocol is voluntary. Market participants may adhere to and be bound by the protocol by accessing the protocols section of the ISDA website, entering the required information, and submitting payment of any applicable fee. An adherence letter will then be generated and must be signed and uploaded as a PDF attachment into the protocol system. Once approved and accepted by ISDA, the adhering party will receive an email confirmation of their adherence to the protocol. Once a party has adhered to the protocol, all protocol covered documents entered into between that party and all other adhering parties are subject to the supplement.
The supplement and protocol will take effect on January 25, 2021. All new cleared and non-cleared derivatives that reference the 2006 Definitions will include the supplement, while legacy derivatives will continue to be based on the 2006 Definitions without the supplement, unless the parties agree otherwise.
"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.