ISDA published a report that summarizes responses to the consultation on pre-cessation issues for London Interbank Offered Rate (LIBOR) and certain other interbank offered rates (IBORs). The consultation sought comments on how derivatives contracts should address a regulatory announcement that LIBOR or certain other IBORs categorized as critical benchmarks under the EU Benchmarks Regulation are no longer representative of an underlying market. The responses to the consultation indicate that a majority of market participants would not be content to continue referencing a covered IBOR in either existing or future derivative contracts, post a public statement from the supervisor of that covered IBOR that it was no longer representative.
The consultation responses suggested that market participants have serious reservations about the continued use of IBORs that are are no longer representative of an underlying market. Respondents to the consultation broadly desired a uniform transition to fallback rates across products and currencies. However, the respondents expressed a wide variety of views on whether and how to implement a pre-cessation trigger for covered IBORs, related to non-representativeness for derivatives. In general, the respondents fell into four general categories with respect to how to implement a pre-cessation trigger, without a clear majority in any one category:
- Those who supported adding a pre-cessation trigger to the permanent cessation triggers in the hard wired amendment to the 2006 ISDA Definitions but did not specifically address a preference regarding optionality or flexibility (14.6% of respondents)
- Those who supported adding a pre-cessation trigger to the permanent cessation triggers in the hard wired amendment to the 2006 ISDA Definitions and opposed the publication of a protocol with optionality or flexibility (26.97% of respondents)
- Those who supported the use of a pre-cessation trigger and supported implementation with optionality and flexibility (22.5% of respondents)
- Those who opposed the use of a pre-cessation trigger (28.1% of respondents)
Overall, the consultation did not yield a consensus among market participants regarding how to address pre-cessation issues related to representativeness. Although a majority of respondents (64.0%) supported the inclusion of a pre-cessation trigger in the amended 2006 ISDA Definitions, the responses revealed significant disagreement about how to implement such a trigger.
The consultation took place between May and July. ISDA received 89 responses to the consultation from entities in sixteen countries across the Americas, Europe, Asia-Pacific, and Africa. Respondents included asset managers, banks, pension funds, insurance companies, government entities, financial services firms, exchanges and clearinghouses, and industry and trade associations. The consultation followed a request by the FSB Official Sector Steering Group; the request was for ISDA to obtain market feedback on the events that should trigger a move to a spread-adjusted fallback rate for LIBOR.
Keywords: International, Banking, Insurance, Securities, Pensions, LIBOR, IBOR, Fallback Provisions, Derivative Contracts, Pre-Cessation Triggers, Benchmarks Regulation, ISDA
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