ISDA published a factsheet on the benchmark fallbacks for interbank offered rate (IBOR). The factsheet provides answers to certain questions on benchmark fallbacks, including why changes to fallbacks are necessary and how to adopt the new fallbacks. ISDA plans to publish a supplement to the 2006 ISDA Definitions in July to incorporate new fallbacks for derivatives that reference certain key interbank offered rates. Simultaneously, ISDA will publish a protocol that will allow market participants to choose to incorporate the revisions into their legacy derivatives trades.
Benchmark fallbacks are replacement rates that would apply to derivatives trades referencing a particular benchmark. These would take effect if the relevant benchmark becomes unavailable while market participants continue to have exposure to that rate. Specific fallback rates are set out in the 2006 ISDA Definitions. ISDA is working on new robust fallbacks that would apply in the event of a permanent cessation of a key IBOR. It was determined that the fallbacks will be adjusted versions of the risk-free rates that have been identified by working groups in each jurisdiction as alternatives to the IBORs. The adjusted risk-free rates in the relevant currency would apply as a fallback, following a permanent cessation of the IBOR in that currency.
Current fallbacks under the 2006 ISDA Definitions typically require the counterparty that is the calculation agent to obtain quotes from major dealers in the relevant inter-dealer market. If an IBOR has been permanently discontinued, it is likely that major dealers would be unwilling and/or unable to give such quotes. It is also likely that quotes could vary materially across the market. With respect to LIBOR, the UK FCA has stated that it will not compel or persuade banks to make LIBOR submissions after the end of 2021, raising the likelihood that LIBOR will cease to exist after that date. Fallbacks are not intended to be a primary means of moving from IBORs to risk-free rates. Once the fallbacks are in place, it is recommended that market participants focus on a voluntary transition before the cessation of any key IBOR.
Keywords: International, Banking, Securities, IBOR, Benchmark Fallbacks, Interest Rate Benchmarks, LIBOR, Risk-Free Rates, ISDA Definitions, Benchmark Reforms, FCA, ISDA
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