ISDA launched a supplemental consultation on the spread and term adjustments that would apply to fallbacks for derivatives referencing euro LIBOR and EURIBOR in the event those benchmarks are permanently discontinued. The consultation also covers technical issues related to the adjustment methodology and seeks feedback on whether the adjustments would be appropriate for lesser-used interbank offered rates (IBORs) if ISDA implements fallbacks for those benchmarks in the future. The consultation is open until January 21, 2020. The Brattle Group has also provided a workbook, along with the instructions for using the workbook, to help market participants understand the implications of the different options and variations for the historical mean or median approach to the spread adjustment.
The consultation seeks input on the approach to address certain issues associated with adjustments that would apply to €STR if fallbacks in EURIBOR or EUR LIBOR take effect, including the final parameters for these adjustments. It also addresses adjustments that could apply if fallbacks take effect in less widely used IBORs. These adjustments are necessary because of the differences between IBORs (such as EURIBOR and EUR LIBOR) and risk-free rates (such as €STR). These adjustments reflect that IBORs are currently available in multiple tenors, but RFRs identified as fallbacks are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors (such as liquidity and fluctuations in supply and demand), while risk-free rates do not.
ISDA will subsequently publish amendments to the 2006 definitions to incorporate fallbacks for new trades referenced to the nine IBORs covered so far, which are sterling LIBOR, Swiss franc LIBOR, yen LIBOR, yen TIBOR, euroyen TIBOR, the Australian Bank Bill Swap Rate, US dollar LIBOR, Canadian CDOR, and Hong Kong’s HIBOR. A protocol will also be published to enable market participants to include fallbacks within legacy IBOR contracts if they choose. Both will be published in the first quarter of 2020, and will take effect three months later. If the feedback for euro LIBOR and EURIBOR is consistent with prior consultations, ISDA expects to implement these fallbacks at the same time. This consultation follows three earlier consultations, of which on consultation is on the final parameters for the adjustment methodology and two consultations set out options for the adjustments that will apply to the relevant risk-free rates if fallbacks are triggered for derivatives referencing nine IBORs.
Comment Due Date: January 21, 2020
Keywords: International, Banking, Securities, IBORs, LIBOR, Risk-Free Rates, Interest Rate Benchmarks, EURIBOR, Fallback Provisions, ISDA Protocol, €STR, ISDA
Previous ArticleHKMA Consults on Policy Module on Capital Adequacy Regime for Banks
BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.
APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.
ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.
MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.
ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.
BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.
EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.
SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.
EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).
ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting