The International Swaps and Derivatives Association (ISDA), has published a statement strongly urging adherence to the association’s Fallback Protocol as part of the financial markets industry’s switch from Ibors to risk-free rates (RFRs).
ISDA is planning to amend certain ‘rate options’ in its 2006 Definitions to include fallbacks that would apply upon the permanent discontinuation of Libor and other key Ibors and upon a ‘non-representative’ determination for Libor. The association says it is also amending certain floating rate options that use US dollar Libor as an input to include fallbacks that would apply if that rate setting is permanently discontinued. As it has done from time to time, ISDA says it will amend the 2006 Definitions by publishing a supplement.
ISDA also expects to publish a protocol to facilitate multilateral amendments to include the amended floating rate options, and therefore the fallbacks, in legacy derivatives contracts. By adhering to the protocol, market participants agree that their legacy derivatives contracts with other adherents will include the amended floating rate option for the relevant Ibor and will therefore include the fallback. “As always,” ISDA states. “Any such protocol will be completely voluntary and will amend contracts only between two adhering parties (ie, it will not amend contracts between an adhering party and a non-adhering party or between two non-adhering parties).”
The association says it will also publish bilateral forms of amendment that market participants could use to amend their legacy derivatives contracts. The fallbacks will take effect in new contracts via the Ibor Fallback Supplement and in legacy contracts that are amended by the Ibor Fallback Protocol (or bilaterally) on a set date approximately three to four months after the upcoming launch.
“Since 2016, ISDA has been working with the Financial Stability Board Official Sector Steering Group on updates to its standard documentation for interest rate derivatives to implement more robust fallbacks for Libor and other Ibors,” ISDA’s board of directors says in a statement. “These fallbacks will be critical to ensure that derivatives contracts continue to reference clear, transparent and consistent rates if the Ibor they currently reference is discontinued or, in the case of Libor, becomes non-representative. The new fallbacks are based on adjusted versions of the risk-free rates identified as alternatives to Libor and other Ibors in the relevant jurisdictions.
“As part of its work, ISDA will soon publish the Ibor Fallback Protocol to facilitate inclusion of the new fallbacks in existing non-cleared Ibor derivatives transactions between counterparties that both adhere to the protocol.,” it continues. “Members of the ISDA Board of Directors strongly support broad adherence to the Ibor Fallback Protocol among all market participants globally that have non-cleared derivatives exposure to Libor and other Ibors.
“The fallbacks and related triggers that will be implemented in legacy non-cleared derivatives contracts via the Ibor Fallback Protocol are based on a series of open consultations over the past two years that resulted in broad market consensus,” the board adds. “The Ibor Fallback Protocol is the most efficient way for participants in the vast majority of non-cleared derivatives markets to mitigate against the risks associated with the discontinuation of a key Ibor, and is a critical part of addressing both individual firm risks and systemic risks associated with the expected discontinuation and/or non-representativeness of Libor in particular. Central counterparties that clear derivatives referencing key Ibors have already stated they will use the powers in their respective rule books to implement the new fallbacks across all new and legacy over-the-counter transactions they clear.”