ISDA Consults Again on Implementing Pre-Cessation Derivative Fallbacks
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
FED Revises Capital Planning and Stress Testing Requirements for Banks
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB Releases Results of Bank Lending Survey for Fourth Quarter of 2020
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
MAS Revises Guidelines on Technology Risk Management
MAS revised the guidelines that address technology and cyber risks of financial institutions, in an environment of growing use of cloud technologies, application programming interfaces, and rapid software development.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.