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    ISDA Consults on Final Parameters for Benchmark Fallback Adjustments

    September 18, 2019

    ISDA launched a consultation on the final parameters for the adjustments that will apply to alternative risk-free rates if derivatives fallbacks are triggered. The deadline for responses to the consultation is October 23, 2019. This latest publication follows two earlier consultations, which set out options for the adjustments that will apply to the relevant risk-free rates if fallbacks are triggered for derivatives referencing nine interbank offered rates (IBORs). ISDA has also published a report by The Brattle Group that summarizes the final results of the second of those consultations, which focused on US dollar LIBOR, CDOR from Canada, and HIBOR from Hong Kong.

    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 currently 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. 

    Based on the results of this consultation, ISDA will make the relevant adjustments to the 2006 ISDA Definitions to incorporate fallbacks for new IBOR trades. A protocol will also be published 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.

     

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    Comment Due Date: October 23, 2019

    Keywords: International, Banking, Securities, IBORs, LIBOR, HIBOR, Benchmark Fallbacks, Interest Rate Benchmarks, Risk-Free Rates, ISDA Protocol, ISDA Definitions, ISDA

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