ISDA a Step Closer to Benchmark Fallbacks Definition

The International Swaps and Derivatives Association (ISDA) has published a statement summarising responses to a supplemental consultation on the spread and term adjustments that would apply to fallbacks for derivatives referencing euro Libor and Euribor. The statement follows a fourth consultation exercise over the issue that has vexed markets as regulators push for an end to the use of Ibors.

The supplemental consultation, which was launched in December 2019, also covered technical issues related to the adjustment methodology, and sought feedback on whether the adjustments would be appropriate for lesser-used Ibors if ISDA implements fallbacks for those benchmarks in the future. It followed three earlier consultations – two setting out options for the adjustments that will apply to the relevant risk-free rates if fallbacks are triggered for derivatives referencing nine Ibors, and one on the final parameters for the adjustment methodology.

ISDA says it received feedback from 57 entities to the Supplemental Consultation from a variety of market participants with industry affiliations in a variety of jurisdictions and that consistent with its prior consultations, the overwhelming majority of respondents agreed with an implementation based on the ‘compounded setting in arrears rate approach with a backward-shift adjustment’ and a spread adjustment based on a ‘historical median over a five-year lookback period’ for fallbacks in derivatives referencing EUR Libor and Euribor as well as other less widely used Ibors.

Respondents cited both support for the substance of these approaches and a strong desire to apply a consistent approach across all benchmarks covered by this supplemental consultation and the prior consultations, ISDA says, adding that based on the feedback it expects to proceed with developing fallbacks for inclusion in its standard definitions based on the compounded setting in arrears rate with a backward shift and the five-year historical median approach to the spread adjustment for EUR Libor and Euribor.

ISDA says it expects to publish additional information – including anonymised and aggregated responses to the supplemental consultation – in the coming weeks.

Colin Lambert

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