Following a consultation that failed to come to a consensus last year, The International Swaps and Derivatives Association (ISDA) has announced that it will re-consult on how to implement pre-cessation fallbacks. Based on the results of that consultation, ISDA says it will move quickly to deliver the appropriate, industry endorsed fallback solution later this year.
The decision to re-consult on pre-cessation fallbacks follows the release of new information by the UK Financial Conduct Authority (FCA) and ICE Benchmark Administration (IBA) on the length of time Libor may be published following a regulatory statement that the benchmark is no longer representative of the underlying market. ISDA says the launch of a consultation by LCH on proposed rule book changes to implement pre-cessation fallbacks on January 27 has also provided further clarity to the market on pre-cessation issues.
The new consultation is expected to be published later this month, and will ask whether the 2006 ISDA Definitions should be amended to include fallbacks that would take apply to all covered derivatives following the permanent cessation of an interbank offered rate (Ibor) or a ‘non-representative’ pre-cessation event, whichever occurs first. Under this scenario, a single protocol would also be launched to allow participants to include both pre-cessation and permanent cessation fallbacks within their legacy derivatives trades.
If there is insufficient support for this approach, then ISDA says it will amend the 2006 ISDA Definitions to enable derivatives counterparties to incorporate pre-cessation fallbacks alongside permanent cessation fallbacks if they choose to. A protocol for amending legacy derivatives would also be published with a similar ability to opt-in to pre-cessation fallbacks when implementing permanent cessation fallbacks.
ISDA had intended to publish amendments to the 2006 ISDA Definitions to incorporate permanent cessation fallbacks in the first half of 2020, as well as a protocol to include permanent cessation fallbacks into legacy trades. The timing of publication will now be subject to the results of the new consultation, it says, adding that additional detail on implementation will be available as soon as possible after the results of the consultation are announced.
In the meantime, ISDA says it will continue to work with Bloomberg to publish indicative spread calculations and all-in fallback rates during the first half of 2020 to help facilitate operational readiness for fallback implementation.
“ISDA is committed to delivering the appropriate documentation tools to support implementation of robust fallbacks for new and legacy derivative contracts,” says Scott O’Malia, ISDA’s chief executive. “Given the additional information from the FCA, IBA and LCH, we felt a new market-wide consultation was necessary on whether to link pre-cessation fallbacks with permanent cessation fallbacks for all derivatives.”