ISDA Publishes Factsheet on Benchmark Fallbacks for IBOR
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.
Related Links
Keywords: International, Banking, Securities, IBOR, Benchmark Fallbacks, Interest Rate Benchmarks, LIBOR, Risk-Free Rates, ISDA Definitions, Benchmark Reforms, FCA, ISDA
Previous Article
EBA to Release Data for 2020 Spring Transparency Exercise Next WeekRelated Articles
ESAs Issue Multiple Regulatory Updates for Financial Sector Entities
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
EBA Finalizes Methodology for Stress Tests, Issues Other Updates
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
OSFI Sets Out Work Priorities and Reporting Updates for Banks
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
APRA Finalizes Changes to Capital Framework, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
BIS Hub and Central Banks Conduct CBDC and DeFI Pilots
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations
The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.
ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector
Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)
EC Adopts Final Rules Under CRR, BRRD, and Crowdfunding Regulation
The European Commission (EC) recently adopted regulations with respect to the calculation of own funds requirements for market risk, the prudential treatment of global systemically important institutions (G-SIIs)
