ISDA on Responses to Proposal on Benchmark Fallback Adjustments
ISDA published a report summarizing the responses to consultation on final parameters of adjustments that will apply to derivatives fallbacks for certain interbank offered rates (IBORs). The report covers technical issues on specific methodologies for the two proposed adjustments. ISDA also expects to shortly publish a new supplemental consultation on the spread and term adjustments for fallbacks in derivatives referencing euro LIBOR and EURIBOR; this consultation will also cover the final parameters for these adjustments. If the results if the consultation are consistent with the results of the prior consultations, ISDA expects to implement fallbacks for euro LIBOR and EURIBOR in 2020, in line with the fallbacks for nine other IBORs covered by the earlier consultations.
This report, which is published by The Brattle Group, follows two earlier consultations that found the overwhelming majority of respondents preferred the "compounded setting in arrears rate" to address differences in tenor between IBORs and overnight risk-free rates, and the "historical mean/median approach" to deal with differences in credit risk and other factors. This consultation is intended to finalize the methodologies for the adjustments that will be made to derivatives fallbacks in the event certain interbank offered rates (IBORs) are permanently discontinued. These adjustments are necessary because of the differences between the IBORs and the risk-free rates. The adjustments reflect that the IBORs are available in multiple tenors, but the risk-free rates identified as fallbacks are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors, while risk-free rates do not. The Brattle Group report confirms preliminary findings that the overwhelming majority of respondents preferred the "compounded setting in arrears rate" to address the difference in tenors and the "historical mean/median approach" to address the difference in risk premia.
Responses to the final parameters consultation show that a majority of participants preferred a historical median approach over a five-year lookback period. A majority also preferred not to include a transitional period in the spread adjustment calculation, not to exclude outliers, and not to exclude any negative spreads. For the compounded setting in arrears rate, a clear majority favored a two-banking-day backward shift adjustment for operational and payment purposes. Following these results, ISDA will make relevant amendments to the 2006 ISDA Definitions to incorporate fallbacks with these adjustments for new IBOR trades. Bloomberg has been selected to publish the adjustments and "all in" fallback rates. ISDA will also publish a protocol to enable market participants to include fallbacks within legacy IBOR contracts if they choose to. Both the amended Definitions and the protocol are expected to be finalized by the end of this year, with implementation in 2020.
Related Links
Keywords: International, Banking, Securities, IBORs, LIBOR, Benchmark Fallbacks, Interest Rate Benchmarks, Risk-Free Rates, ISDA Protocol, ISDA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
FED Publishes Financial Stability Report in November 2019Related Articles
ECB Allows Temporary Relief in Leverage Ratio Amid COVID-19 Pandemic
ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs Launch Survey on Templates for Product Disclosures Under SFDR
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB Proposes Integrated Reporting Framework to Reduce Burden for Banks
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
ECB Finalizes Methodology to Assess CCR and A-CVA Risk of Banks
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.
EBA Provides Opinion on Definition of Credit Institution in CRR
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
APRA Consults on Alignment of Daily Liquidity Report for Banks
APRA is consulting on updates to ARS 210.0, the reporting standard that sets out requirements for provision of information on liquidity and funding of an authorized deposit-taking institution.
FED Releases Scenarios for Second Round of Stress Tests on Banks
FED released hypothetical scenarios for a second round of stress tests for banks.
FED to Temporarily Revise FR Y-14 Reports to Conduct Stressed Analysis
FED is proposing to temporarily revise the capital assessments and stress testing reports (FR Y-14A/Q/M) to implement the changes necessary to conduct stressed analysis in connection with the re-submission of capital plans, using data as of June 30, 2020.
FED Revises Information Collection Under Market Risk Capital Rule
FED adopted a proposal to extend for three years, with revision, the information collection under the market risk capital rule (FR 4201; OMB No. 7100-0314).
EBA Seeks Input on ESG Disclosure Practices of Banks
EBA published a voluntary online survey seeking input from credit institutions on their practices and future plans for Pillar 3 disclosures on the environmental, social, and governance (ESG) risks.
