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ISDA Publishes Benchmark Fallback Paper

The International Swaps and Derivatives Association (ISDA) has published a report that summarises responses to a consultation on pre-cessation issues for Libor and certain other interbank offered rates (Ibors).

The consultation took place between May and July, and sought comment on how derivatives contracts should address a regulatory announcement that Libor or certain other Ibors categorised as critical benchmarks under the EU Benchmarks Regulation are no longer representative of an underlying market. It follows a request by the Financial Stability Board’s Official Sector Steering Group for ISDA to obtain market feedback on the events that should trigger a move to a spread-adjusted fallback rate for Libor.

ISDA says the responses to the consultation indicate that a majority of market participants would generally not want to continue referencing a covered Ibor in existing or new derivatives contracts following a statement from a supervisor that it is no longer representative of the underlying market, however, there was no consensus on how to respond to such a statement in the context of fallbacks for derivatives contracts.

Respondents were split between those who supported the inclusion of a pre-cessation trigger based on representativeness within fallbacks for derivatives contracts but with the flexibility to include or exclude certain trades and/or counterparties (22.5%), those who supported a trigger but without flexibility or optionality (27.0%), those who supported a trigger but didn’t express a preference on flexibility (14.6%), and those who opposed any implementation of a pre-cessation trigger (28.1%).

“ISDA will continue to work towards finding a solution for how to address a non-representative covered Ibor in derivatives documentation and how to implement a pre-cessation trigger for fallbacks in this scenario,” says Scott O’Malia, ISDA’s chief executive. “Based on the feedback to the consultation, it would be helpful to have more clarity from regulators on the specific circumstances under which they may determine a covered Ibor to be non-representative, and the length of time during which a non-representative Ibor may be published.”

Colin Lambert

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