Updated: ISDA® Releases Consultation on Technical Issues Related to Benchmark Fallbacks | Practical Law

Updated: ISDA® Releases Consultation on Technical Issues Related to Benchmark Fallbacks | Practical Law

ISDA has published a market-wide consultation related to benchmark fallback rates for certain derivatives agreements.

Updated: ISDA® Releases Consultation on Technical Issues Related to Benchmark Fallbacks

by Practical Law Finance
Published on 11 Oct 2018 • USA (National/Federal)
ISDA has published a market-wide consultation related to benchmark fallback rates for certain derivatives agreements.
Update: On October 11, 2018, ISDA® extended the consultation deadline from October 12, 2018 to October 22, 2018.
On July 12, 2018, as part of ongoing benchmark reform, ISDA® announced publication of a market-wide consultation, seeking comments on technical issues in conjunction with proposed amendments to its standard documentation to implement fallback provisions for derivatives that would apply if certain interbank offered rates (IBOR) referenced in derivatives agreements are permanently discontinued.
ISDA has been leading the work on the implementation of new benchmark fallbacks following a call by the Financial Stability Board (FSB) in July 2014 to reform interest rate benchmarks in the event the main IBORs, such as LIBOR, are permanently discontinued, in order to avoid market disruption (see Legal Update, FSB report on reforming major interest rate benchmarks).
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). The consultation covers GDP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR, and BBSW, each of which will have a specified fallback under the definitions. ISDA will cover other IBORs in supplemental consultations.
ISDA is seeking comment from all market participants to determine an optimal approach to calculate the applicable adjusted risk-free rates (RFRs) if fallbacks are triggered. The consultation sets out four options to facilitate the transition from IBORs to risk-free rates:
  • A spot overnight rate.
  • A convexity adjusted overnight rate.
  • A compounded setting in arrears rate.
  • A compound setting in advance rate.
ISDA also proposed three options to calculate a spread adjustment:
  • A forward approach.
  • A historical mean/media approach.
  • A spot-spread approach.
Once an approach is determined, ISDA will select a vendor through a request-for-proposal process to perform the calculations and will publish the adjusted RFRs and spread adjustments for review and comment.
Once the fallback rates are determined, they would apply to new IBOR trades. ISDA also plans to publish a protocol for market participants to include the fallbacks in legacy derivatives agreements.
The fallback RFRs would be triggered upon either of the following:
  • A public announcement by the administrator of a relevant IBOR that it has or will permanently cease to provide the IBOR, and at the time there is no successor administrator that would continue to provide that IBOR.
  • A public statement that the administrator of a relevant IBOR has or will permanently cease to provide the IBOR, and at the time there is no successor administrator that would continue to provide that IBOR, made by either:
    • the regulatory supervisor for the administrator.
    • the central bank for the currency of the relevant IBOR.
    • an insolvency official with jurisdiction over the administrator.
    • a court or entity with similar insolvency or resolution authority over the administrator.
Market participants may submit comments on the proposed approaches to calculating RFRs through October 13, 2018, online or by email. A webinar covering the approaches can be found here, and a second webinar is planned the week of September 10, 2018. ISDA also maintains a list of FAQs on its website.
"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 resource.
This Update is based, in part, on material provided by the Accelus service Compliance Complete (http://accelus.thomsonreuters.com/products/accelus-compliance-complete), which provides regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges.