Editor’s Note: Have to hand it to ISDA for an entertaining animated video explaining the fallback language. The video is here. Let us know what your six year old thinks.
The International Swaps and Derivatives Association, Inc. (ISDA) has today launched the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, marking a major step in reducing the systemic impact of a key interbank offered rate (IBOR) becoming unavailable while market participants continue to have exposure to that rate.
The supplement will amend ISDA’s standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes coming into effect on January 25, 2021. From that date, all new cleared and non-cleared derivatives that reference the definitions will include the fallbacks.
The protocol will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the protocol. The protocol is open for adherence from today, and will become effective on the same date as the supplement: January 25, 2021. At launch, 257 derivatives market participants had adhered to the protocol during the two-week pre-launch ‘escrow period’.
The fallbacks for a particular currency will apply following a permanent cessation of the IBOR in that currency. For derivatives that reference LIBOR, the fallbacks in the relevant currency would also apply following a determination by the UK Financial Conduct Authority (FCA) that LIBOR in that currency is no longer representative of its underlying market. In each case, the fallbacks will be adjusted versions of the risk-free rates identified in each currency. Click here for more background on fallbacks and the adjustment methodology.
“The implementation of fallbacks for derivatives will go a long way to mitigating the systemic risk that could occur following the disappearance of LIBOR or another key IBOR. With the fallbacks in place, derivatives market participants will be able get on with transitioning their IBOR exposures with confidence that there is a robust back-up in case of need,” said Scott O’Malia, ISDA’s Chief Executive.
The IBOR Fallbacks Supplement is available here. The IBOR Fallbacks Protocol is available here.