March 15, 2019

Co-chairs of the Official Sector Steering Group (OSSG) of FSB issued a letter encouraging ISDA to continue its work on the contractual robustness of derivatives to risks of interest rate benchmark discontinuation. The letter highlights that the measures that ISDA is taking will play an important role in the transition from LIBOR and will serve to strengthen contract language in derivatives referencing other Interbank Offered Rates (IBORs). The adoption of appropriately revised fallbacks by market participants will help to mitigate a key source of risk to the financial system.

The letter raises three important issues that the OSSG believes ISDA is moving to address:

  • The addition of other trigger events. The letter encourages ISDA to ask for market opinion on the events that would trigger a move to the spread-adjusted fallback rate for derivatives referencing IBORs. Triggers that would only take effect on the date on which LIBOR permanently or indefinitely stopped publication could leave those with LIBOR-referencing contracts still exposed to a number of risks.
  • The timing for an ISDA consultation on USD LIBOR and certain other key IBORs. The OSSG also understands that ISDA intends to consult on USD LIBOR, CDOR, HIBOR, and SOR in early 2019 and the OSSG strongly supports this. The OSSG co-chairs also encourage ISDA to consult on the key technical details that the ISDA Board Benchmark Committee will need to decide on, before implementation can begin.
  • The necessity of governance and transparency as ISDA makes its final decisions. Importance of this work is such that a careful process of assessment and consideration is essential before the publication of outcomes. It is important to ensure transparency about how the ISDA Board and/or Benchmark Committee would arrive at its decision.

FSB and member authorities, through the OSSG, are working to implement and monitor recommendations of the 2014 FSB report on reforming major interest rate benchmarks. Since July 2016, ISDA has undertaken work, at the request of the OSSG, to strengthen the robustness of derivatives markets in context of the discontinuation of widely used interest rate benchmarks. The OSSG engages regularly with ISDA and other stakeholders with the goal of enhancing contractual robustness in derivatives products and cash products such as loans, mortgages, and floating rate notes.

 

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Keywords: International, Banking, Securities, Derivative Contracts, LIBOR, IBOR, Interest Rate Benchmarks, Interest Rate Risk, OTC Derivatives, ISDA, FSB

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