ISDA Publishes Two Consultations on Benchmark Fallbacks

NEW YORK, May 16, 2018 – The International Swaps and Derivatives Association, Inc. (ISDA) has launched two new consultations on benchmark fallbacks – one covering adjustments that would apply to fallback rates in the event certain interbank offered rates (IBORs) are permanently discontinued, and another relating to pre-cessation issues for LIBOR and certain other IBORs.

The first consultation sets out options for adjustments that will apply to the relevant risk-free rates (RFRs) if fallbacks are triggered for derivatives referencing US dollar LIBOR, Hong Kong’s HIBOR and Canada’s CDOR. Feedback is also sought on a proposed fallback for Singapore’s SOR following a permanent cessation of US dollar LIBOR, given US dollar LIBOR is currently used as an input to calculate the Singapore rate.

These adjustments reflect the fact that the IBORs are currently available in multiple tenors – for example, one, three, six and 12 months – but the RFRs identified as fallbacks are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors (such as liquidity and fluctuations in supply and demand), while RFRs do not.

The new publication follows a previous consultation last year that covered sterling LIBOR, Swiss franc LIBOR, yen LIBOR, yen TIBOR, euroyen TIBOR and the Australian Bank Bill Swap Rate (BBSW).

The results of that consultation found that the overwhelming majority of respondents preferred the ‘compounded setting in arrears rate’ to address the difference in tenors, and a significant majority across different types of market participant preferred the ‘historical mean/median approach’ to address the difference in risk premia. ISDA expects to use the results of the two consultations to implement fallbacks for the relevant IBORs by the end of this year.

“It is vital that derivatives contracts have robust fallbacks in place to mitigate the systemic impact of a key IBOR ceasing to exist. Given the differences between the IBORs and the relevant RFRs identified as fallbacks, it is also imperative that the market agrees a common approach to adjusting the RFRs to mitigate potential disruption after a fallback takes effect,” said Scott O’Malia, ISDA’s Chief Executive.

The other consultation relates to pre-cessation issues, and seeks comment on how derivatives contracts should address a regulatory announcement that LIBOR or certain other IBORs categorized as critical benchmarks under the EU Benchmarks Regulation[1]are no longer representative of an underlying market.

Anything implemented as a result of this consultation would be in addition to the fallbacks ISDA expects to implement to address a permanent cessation of a key IBOR. This consultation follows a request by the Financial Stability Board’s Official Sector Steering Group (FSB OSSG) for ISDA to request comment on the events that should trigger a move to a spread-adjusted fallback rate for LIBOR.

“It’s important to get market feedback on issues arising from a determination that LIBOR is no longer representative, in order to inform whether and how ISDA should address such an event in industry standard documentation for derivatives,” said Mr. O’Malia.

Both consultations are open until July 12, 2019.

The supplemental consultation on spread and term adjustments for fallbacks in derivatives referencing US dollar LIBOR, CDOR and HIBOR and certain aspects of fallbacks for derivatives referencing SOR is available here.

The consultation on pre-cessation issues for LIBOR and certain other IBORs is available here.

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