ISDA Paper Outlines Developments on Risk-Free Rate Adoption in 2020
ISDA published a research paper that examines several major upcoming developments on the adoption of risk-free rates in 2020. These developments include the publication of new benchmark fallbacks for derivatives contracts and central counterparty changes in discounting and price alignment interest for certain currencies. The transition from London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) is critical because of the issues associated with the robustness and viability of some IBORs, particularly LIBOR, given the sharp decline in activity in the unsecured interbank funding market.
The paper notes the following key developments:
- Calculation and publication by Bloomberg of IBOR fallback rates based on adjusted risk-free rates for key IBORs in the first half of 2020. Additionally, ISDA will publish amendments to the 2006 ISDA Definitions incorporating the adjusted risk-free rate fallbacks in new contracts referencing the covered IBORs. ISDA will also publish a protocol that will enable market participants to include the amended 2006 ISDA Definitions with fallbacks in legacy IBOR contracts.
- Change of discounting and price alignment interest/price alignment amount by central counterparties for cleared euro-denominated derivatives from the Euro Overnight Index Average (EONIA) to the Euro Short-Term Rate (€STR) in June 2020.
- Change of discounting and price alignment interest/price alignment amount by central counterparties for cleared US dollar-denominated interest rate derivatives from the Effective Federal Funds Rate (EFFR) to the Secured Overnight Financing Rate (SOFR) in October 2020.
- Expected change of the market convention for sterling interest rate swaps from sterling LIBOR to Sterling Overnight Index Average (SONIA) on March 02, 2020.
- Expected continued growth in the issuance of risk-free rate based cash products that will likely propel the need for hedging activity and increase the demand for risk-free rate based derivative products.
Related Links
Keywords: International, Banking, Securities, ISDA Definitions, ISDA Protocol, Risk-Free Rates, LIBOR, IBORs, Interest Rate Benchmark, Benchmark Fallbacks
Related Articles
BCBS Amends Guidelines on Sound Management of AML/CFT Risks
BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).
EBA Guidelines on Treatment of Structural Foreign Exchange Under CRR
EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).
FSB Issues Statement on Impact of COVID-19 Crisis on Benchmark Reform
FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.
IAIS Publishes List of Internationally Active Insurance Groups
IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.
FED Temporarily Revises FR Y-9C With Respect to PPPLF and CARES Act
FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).
EC Launches Consultation on Review of Solvency II Directive
EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.
ECB Consults on Supervisory Approach to Consolidation in Banking
ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.
PRA Letter Sets Expectations on Approach to Managing Climate Risks
PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.
US Agencies Finalize Amendments to Swap Margin Rule
US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.
IAIS on Package for 2020 Data Collection on ICS and Aggregation Method
IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.
