Featured Product

    ISDA Consults Again on Implementing Pre-Cessation Derivative Fallbacks

    February 25, 2020

    ISDA launched a new consultation on the implementation of pre-cessation fallbacks for derivatives. The new consultation asks whether the 2006 ISDA Definitions should be amended to include fallbacks that would 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. The new consultation is open until March 25, 2020. ISDA aims to publish the results of this consultation, along with the information on next steps, in late April or early May.

    ISDA intends to amend the 2006 ISDA Definitions by publishing a supplement to the 2006 ISDA Definitions. The supplement will implement the fallbacks by amending and restating the relevant rate options for London Interbank Offered Rate (LIBOR) in each currency in which it is published (such as USD, GBP, CHF, JPY, and EUR) and for the other IBORs for which ISDA is implementing fallbacks. On publication of the supplement, all transactions incorporating the 2006 ISDA Definitions that are entered into on or after the effective date of the supplement will include the amended terms. Transactions entered into prior to the effective date of the supplement (so called legacy derivative contracts) will continue to be based on the 2006 ISDA Definitions as the 2006 ISDA Definitions existed at the time of trading and, therefore, will not include the updated fallback provisions.

    However, ISDA also intends to publish a protocol to facilitate multilateral amendments to incorporate the amended terms, and therefore the fallback provisions, in legacy derivative contracts. By adhering to the protocol, market participants would agree that all of their legacy derivative contracts, with all other adherents, will include the amended terms. Therefore, these contracts will include the same fallback provisions that will be included in transactions entered into after the effective date of the supplement and will incorporate the amended 2006 ISDA Definitions, except to the extent that two adherents separately bilaterally negotiate different terms. Also, adherence to any such protocol will be voluntary and will only amend contracts between two adhering parties.

    LIBOR and the other IBORs for which ISDA is implementing fallbacks are published in various tenors and incorporate bank credit risk premia and a variety of other factors. To account for these differences in the event that the fallback provisions apply (whether as the result of a non-representativeness determination or permanent cessation), each overnight rate will be subject to two adjustments. First, the overnight rate will be compounded in arrears over the tenor of the relevant IBOR (for example, one month, three months). Then, a spread adjustment will be added to the compounded rate. For LIBOR, the spread adjustment will be calculated based on the median of the historical differences between LIBOR in the relevant currency for the relevant tenor and the corresponding fallback rate compounded over a time period with the same length as the tenor, over a five-year period prior to the announcement triggering the fallbacks.

    ISDA announced its decision to consult on the pre-cessation issues on February 05, following the statements from FCA, ICE Benchmark Administration (IBA), and LCH that provided additional information to the market on this topic. The statements and this new consultation follow a 2019 consultation that was unable to find market consensus on how to implement pre-cessation fallbacks in derivatives contracts.

     

    Related Links

    Comment Due Date: March 25, 2020

    Keywords: International, Banking, Securities, Insurance, Pre-Cessation Triggers, Fallback Provisions, ISDA Definitions, IBORs, Benchmark Reforms, ISDA

    Related Articles
    News

    EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    News

    HM Treasury Announces G7 Agreement on Green Agenda Ahead of COP26

    HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6821