The International Swaps and Derivatives Association (ISDA) has launched a supplemental consultation on the spread and term adjustments that would apply to fallbacks for derivatives referencing euro Libor and Euribor in the event those benchmarks are permanently discontinued. This represents the fourth consultation on the issue by ISDA in recent years and will also cover technical issues related to the adjustment methodology. The consultation will also seek feedback on whether the adjustments would be appropriate for lesser-used interbank offered rates (Ibors) if ISDA implements fallbacks for those benchmarks in the future.
Two of the earlier consultations consulted on options for the adjustments that will apply to the relevant risk-free rates (RFRs) if fallbacks are triggered for derivatives referencing nine Ibors, the third on the final parameters for the adjustment methodology.
ISDA says the adjustments reflect the fact that the Ibors are currently available in multiple tenors, 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 consultation is open until January 21, 2020 and ISDA says it will subsequently publish amendments to its 2006 Definitions to incorporate fallbacks for new trades referenced to the nine Ibors covered so far – sterling Libor, Swiss franc Libor, yen Libor, yen Tibor, euroyen Tibor, the Australian Bank Bill Swap Rate, US dollar Libor, Canada’s CDOR and Hong Kong’s Hibor. A protocol will also be published to enable market participants to include fallbacks within legacy Ibor contracts if they choose to.
Both will be published in the first quarter of 2020, and will take effect three months later – ISDA says it the feedback for euro Libor and Euribor is consistent with prior consultations, it expects to implement these fallbacks at the same time.