ISDA Publishes Preliminary Results of Benchmark Fallback Consultation

The International Swaps and Derivatives Association (ISDA) has published a statement summarising the preliminary results of its supplemental consultation on adjustments that would apply to fallback rates in the event certain interbank offered rates (Ibors) are permanently discontinued.

The consultation was launched in May, and set out options for spread and term adjustments if fallbacks are triggered for derivatives referencing US dollar Libor, Hong Kong’s Hibor and Canada’s Cdor. Feedback was also sought on a proposed fallback for Singapore’s Sor following a permanent cessation of US dollar Libor, given that benchmark is currently used as an input to calculate the Singapore rate.

The supplemental consultation follows a similar exercise last year that covered sterling, Swiss franc, and yen Libors, as well as yen and euroyen Tibor and the Australian Bank Bill Swap Rate.

In the statement, ISDA says it received 85 responses from a variety of market participants including banks, asset managers, pension funds, insurance companies, clearinghouses and government entities from a variety of jurisdictions. Consistent with last year’s consultation the overwhelming majority of respondents preferred the “compounded setting in arrears rate”for the adjusted risk-free rate (RFR) and the “historical mean/median approach”for the spread adjustment.

Respondents cited both support for the substance of these approaches and a strong desire to use the same adjusted RFR and spread adjustment across all benchmarks covered by the supplemental consultation and last year’s consultation (as well as potentially other benchmarks such as EUR Libor and Euribor, for which ISDA expects to launch a supplemental consultation at the end of 2019 or in early 2020).

The association says that based on the foregoing and subject to the ongoing work and ultimate decision of the ISDA Board Benchmark Committee, it expects to proceed with developing fallbacks for inclusion in its standard definitions based on the compounded setting in arrears rate and the historical mean/median approach to the spread adjustment for USD Libor, Cdor and Hibor.

It adds that it continues to analyse preliminary feedback to both the supplemental consultation and last year’s consultation regarding the parameters for the historical mean/median approach to the spread adjustment (for example., the appropriate length of the look-back period, whether the calculation should be based on a mean or median and implications for various types of transactions) and suggestions from respondents about potential variations of that approach, in order to assess what additional feedback may be necessary.

In August 2019, ISDA says it hopes to publish an anonymised and aggregated summary of the feedback received in response to the latest consultation, together with the its Benchmark Committee’s final decision on the approach to the adjusted RFR and spread adjustment to use for developing fallbacks for the covered benchmarks. At the same time, it hopes to publish a consultation on the final parameters for the historical mean/median approach to the spread adjustment in order to solicit market-wide feedback on the open issues. That consultation will remain outstanding for at least a month.

The association says it continues to review and analyse responses to the question in the supplemental consultation regarding fallbacks for derivatives referencing Sor, and hopes to publish the results of that review and analysis in August 2019. It is also continuing to review and analyse responses to the recent Consultation on Pre-Cessation Issues for LIBOR and Certain Other Interbank Offered Rates and says it will continue to seek advice from its independent advisors and feedback from government and regulatory agencies. “Any decision or action by ISDA remains subject to the advice and feedback it receives from its advisors and government and regulatory agencies,” it states.

“Once finalised, the results of this consultation will enable us to further progress in our work to develop and implement robust fallbacks for derivatives,” says Scott O’Malia, chief executive of ISDA. “As a next step, ISDA will publish a further consultation on the final parameters of the adjustments, with the aim of publishing amendments to the ISDA definitions by the end of this year. This will go a long way to reducing the systemic threat posed by a permanent discontinuation of an IBOR.”

Colin Lambert

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