ISDA Publishes Final Consultation on Benchmark Fallbacks

The International Swaps and Derivatives Association (ISDA) has launched a new consultation to finalise the methodologies for the adjustments that will be made to derivatives fallbacks in the event certain interbank offered rates (Ibors) are permanently discontinued.

The latest publication follows two earlier consultations, which set out options for the adjustments that will apply to the relevant risk-free rates (RFRs) if fallbacks are triggered for derivatives referencing nine Ibors. ISDA has also published a report by The Brattle Group that summarises the final results of the second of those consultations, which focused on US dollar Libor, Canada’s CDOR and Hong Kong’s Hibor.

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, while RFRs do not.

The Brattle Group report confirms preliminary findings that the overwhelming majority of respondents preferred the ‘compounded setting in arrears rate’ to address the difference in tenors and the ‘historical mean/median approach’ to address the difference in risk premia.

The new consultation on the final parameters will close on October 23. Based on the results, ISDA says it will then make the relevant adjustments to the 2006 ISDA Definitions to incorporate fallbacks for new Ibor trades. A protocol will also be published to enable market participants to include fallbacks within legacy Ibor contracts if they choose to. Both the amended Definitions and the protocol are expected to be finalized by the end of this year, with implementation in 2020.

 

Colin Lambert

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