After nearly four years of work, the International Swaps and Derivatives Association (ISDA) is now on the cusp of publishing a supplement to the 2006 ISDA Definitions plus a related protocol that will make those fallbacks a reality, and expects the effective date for the supplement and protocol to be in mid- to late-January 2021.
The timetable hinges upon ISDA receiving a positive business review letter from the US Department of Justice (DoJ) and then finalizing work with competition authorities in other jurisdictions. Upon hearing from competition authorities, ISDA will give market participants approximately two weeks’ notice of the official launch date.
During this short period, firms will be able to adhere to the protocol ‘in escrow’. In other words, parties will be able to sign up on a binding but non-public basis so their adherence takes effect as soon as the protocol launches. As there is no regulation requiring institutions to incorporate new fallbacks into legacy trades, having backing for the protocol from day one will hopefully establish strong support for use of the fallbacks, even without a regulatory edict.
The timetable for benchmark reform over the coming months will busy – along with fallbacks, market participants will also need to prepare for the October switch by CCPs to SOFR discounting and price alignment interest for cleared US dollar interest rate derivatives. Many firms are also working to make the necessary changes to systems and processes to support alternative rates to IBORs. Benchmark fallbacks are an integral part of that overall reform effort. Introducing robust fallbacks for derivatives contracts is a vitally important step in mitigating the systemic risk that could arise from the cessation of a key interbank offered rate (IBOR).