Updated: ISDA® Announces Launch Date and Effective Date of IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol | Practical Law

Updated: ISDA® Announces Launch Date and Effective Date of IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol | Practical Law

ISDA announced that it will launch its upcoming IBOR Fallbacks Supplement to the 2006 ISDA Definitions (supplement) covering interbank offered rate (IBOR) fallbacks, as well as the related ISDA 2020 IBOR Fallbacks Protocol (protocol) that will allow parties to amend their derivatives agreements to incorporate the supplement, on October 23, 2020. ISDA also clarified that the supplement and the amendments made by the protocol will take effect on January 25, 2021.

Updated: ISDA® Announces Launch Date and Effective Date of IBOR Fallbacks Supplement to 2006 ISDA Definitions and Related Protocol

by Practical Law Finance
Published on 14 Oct 2020 • USA (National/Federal)
ISDA announced that it will launch its upcoming IBOR Fallbacks Supplement to the 2006 ISDA Definitions (supplement) covering interbank offered rate (IBOR) fallbacks, as well as the related ISDA 2020 IBOR Fallbacks Protocol (protocol) that will allow parties to amend their derivatives agreements to incorporate the supplement, on October 23, 2020. ISDA also clarified that the supplement and the amendments made by the protocol will take effect on January 25, 2021.
On October 9, 2020, ISDA® issued a statement clarifying that it will launch its upcoming IBOR Fallbacks Supplement to the 2006 ISDA Definitions (supplement), covering interbank offered rate (IBOR) fallbacks, as well as the related ISDA 2020 IBOR Fallbacks Protocol (protocol) that will allow parties to amend their derivatives agreements to incorporate the supplement, on October 23, 2020. Additionally, ISDA clarified that the supplement and the amendments made by the protocol will take effect on January 25, 2021 (IBOR fallbacks effective date). The 2006 ISDA Definitions (2006 Definitions) govern interest rate swaps, cross-currency swaps, and certain other types of swap transactions.
As anticipated, ISDA has provided market participants with two weeks' notice of the official launch date. During this period, market participants can adhere to the protocol "in escrow" before the launch date. Information about the adherence-in-escrow process was set out in a letter from ISDA on July 22, 2020 to the chairs of various risk-free rate (RFR) working groups (see Legal Update, ISDA proposes adherence in escrow process for IBOR Fallback Protocol).
To facilitate the adherence-in-escrow process, ISDA also published pre-publication versions of the supplement and protocol. These were accompanied by various other documents, including a set of FAQs and bilateral forms for IBOR fallbacks. For access to these, and other documents published alongside the ISDA statement, see the ISDA website.
The timetable results from input from market participants expressing:
  • Near-unanimous preference that the IBOR fallbacks effective date does not occur during December 2020 or the first week of January 2021.
  • At least three months between launch and effectiveness of the IBOR fallbacks protocol and IBOR fallbacks definitions supplement is necessary.
In a September 21, 2020, letter to the Federal Reserve Bank of New York (FRBNY) and the Bank of England (BOE), ISDA advised FRBNY and BOE that:
  • Though it may be in position to launch the supplement and protocol, this launch can only occur if and after ISDA:
  • ISDA will provide market participants with approximately two weeks' notice of the official launch date and the IBOR fallbacks effective date that will follow shortly thereafter. During this two-week period, ISDA expects to facilitate a process by which regulated entities and other key market participants can adhere to the protocol "in escrow" before the launch date. Information about the process and objectives of the adherence in escrow process was set out in a July 22, 2020 letter from ISDA to the chairs of various risk-free rate working groups (see, Legal Update, ISDA Proposes Adherence in Escrow Process for IBOR Fallback Protocol).
  • The IBOR fallbacks supplement and protocol will take effect approximately three months after the launch date to allow the bulk of the market to agree to include the new fallbacks in existing non-cleared derivatives transactions before the IBOR fallbacks effective date. Market participants have indicated that less than a three-month period between launch and effectiveness of the supplement and protocol would not allow enough time for counterparty outreach and adherence.
  • ISDA is not aware of anything else that would delay the launch.
The September 21, 2020 letter also advised that:
  • Once the IBOR fallbacks definitions supplement becomes effective (IBOR fallbacks effective date), all cleared over-the-counter (OTC) and non-cleared derivatives transactions entered into after the IBOR fallbacks effective date that incorporate the 2006 Definitions and reference a covered IBOR will automatically incorporate the fallbacks without further counterparty action.
  • ISDA understands that the IBOR fallbacks effective date is when major central counterparties (CCPs) plan to apply the new IBOR fallbacks to all new and existing cleared OTC derivatives transactions.
  • Any announcement made before the IBOR fallbacks effective date of post-2021 dates for the cessation or non-representativeness of LIBOR would result in:
    • a "freezing" of spread adjustments for the new fallbacks under the terms of the current Bloomberg Rule Book; and
    • application of the "frozen" spread adjustments to fallbacks that take effect in contracts incorporating the supplement and the amendments made by the protocol in the same way that they would apply if the amendments were made after the IBOR fallbacks effective date.
In a separate statement, the CEO of ISDA also noted that:
  • Adhering to the protocol in escrow would allow parties to sign up on a binding but non-public basis so their adherence takes effect once the protocol launches.
  • For legacy derivatives transactions:
    • the IBOR fallback changes will be voluntary, meaning that firms can choose to make changes to legacy contracts on a bilateral basis or keep outstanding trades unchanged; and
    • these changes will apply if both counterparties have either adhered to the protocol or agreed to bilateral amendments similar to the protocol.
"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.