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December 20, 2018

ISDA published a report summarizing the final results of a consultation on technical issues related to the new benchmark fallbacks for derivatives contracts that reference certain interbank offered rates (IBORs). The consultation, which was launched in July 2018 and closed in October 2018, covered the proposed methodologies for certain adjustments that would apply to the fallback rate in the event an IBOR is permanently discontinued.

The ISDA consultation had solicited market participants’ responses with respect to the proposed fallbacks for derivatives referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR, and BBSW (the “covered benchmarks”). The consultation also solicited preliminary feedback from market participants with respect to fallbacks for derivatives referencing USD LIBOR, EUR LIBOR, and EURIBOR. The consultation provided information on alternative options for calculating adjusted risk free rates (RFRs) and spread adjustments, and asked market participants to rank nine combinations of these options in order of preference and specify whether their preferences applied universally across the covered benchmarks. The report on the final results of the consultation highlights that the overwhelming majority of respondents preferred the "compounded setting in arrears rate" for the adjusted risk-free rate (RFR) and a significant majority across different types of market participants preferred the "historical mean/median approach" for the spread adjustment. The majority of respondents preferred to use the same adjusted RFR and spread adjustment across all benchmarks covered by the consultation—and potentially other benchmarks (such as U.S. dollar LIBOR, euro LIBOR, and EURIBOR). ISDA expects to launch a supplemental consultation in early 2019 to gather feedback on the U.S. dollar LIBOR and potentially other benchmarks not covered by the recent consultation.

In accordance with these results, ISDA will 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 all of the benchmarks covered by the consultation. In the coming months, ISDA and its independent advisers will work to determine the appropriate parameters for the historical mean/median approach to the spread adjustment (including, for example, whether to use a mean or median calculation and the length of the historical lookback period). As part of this work, ISDA will publish the results of sensitivity analyses to provide all market participants with a better understanding of the range of parameters in the historical mean/median approach. ISDA and its independent advisers will also work to address technical issues that need to be resolved to finalize the precise formula for calculating the spread adjustment and the compounded setting in arrears rate. Before implementing fallbacks in its standard definitions, ISDA expects to solicit additional feedback from market participants on the final parameters of the historical mean/median approach to the spread adjustment.


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Keywords: International, Banking, Insurance, Securities, Derivatives Contracts, IBOR, RFR, Interest Rate Benchmarks, ISDA

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