On October 21, 2019, ISDA® published a report summarizing the responses of its consultation on pre-cessation issues for derivatives contracts that reference certain interbank offered rates (IBORs), including USD LIBOR (see Legal Update, ISDA Publishes Two Consultations on IBOR Benchmark Fallbacks).

Pre-cessation refers to a situation where the IBOR has not ceased to exist – for example, it may still be published – however, it has been determined or agreed that it is no longer a representative benchmark.

The report summarizes the responses by breaking them down into five sections:

The report builds on ISDA's previous statement on the preliminary results of the consultation (see Legal Update, ISDA Publishes Statement on IBOR Pre-Cessation Consultation for Derivatives Contracts).

The report concludes by stating that ISDA will continue to engage with market participants, as well as the Financial Stability Board's Official Sector Steering Group, regarding how to address a non-representative covered IBOR in the derivatives market.

According to the report, most market participants (71.9%) would not want to continue referencing a covered IBOR in new derivatives contracts following a public statement from the supervisor of that covered IBOR that it was no longer representative, stating instead that they would transition to the relevant risk-free rate (RFR). Likewise, a smaller majority (64%) stated that they would not want to continue referencing a covered IBOR in existing contracts following such a statement, however, 29.2% of said majority noted that under certain circumstances it could be reasonable or necessary to do so.

Market participants were generally in favor of a uniform transition to fallback rates. However, there were a wide variety of responses to the question of whether and how to implement a pre-cessation trigger for a covered IBOR replacement, where the benchmark is found to no longer be representative of the underlying market.

Responses generally fell into the following four categories:

Many market participants supported the publication by ISDA of a protocol that includes pre-cessation triggers and related fallbacks that allow for inclusion or exclusion of certain transactions or a protocol that allows counterparties to include or exclude a pre-cessation trigger with certain counterparties via a matching function, citing additional flexibility and efficiency as definite advantages. Market participants who did not support publication believed that it would be overly complex and could result in market fragmentation.

Market participants were asked, if a pre-cessation trigger were implemented, would it be appropriate to use the adjusted RFR plus a spread if the covered IBOR continues after counterparties convert to the adjusted RFR plus a spread and these counterparties could therefore determine whether they are receiving or paying more or less in comparison to the unrepresentative covered IBOR?

Some market participants indicated that they would have no issue with this if the covered IBOR continues to be published because it would not be representative. Others, however, noted the potential litigation risks associated with such a scenario and suggested possible regulatory intervention to mitigate such risks.

Nearly all market participants were not in favor of multiple spread adjustment transitions per transaction, citing potential operational challenges and legal risks.

"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.