ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021. After nearly four years of work, ISDA is now on the cusp of publishing a supplement to the 2006 ISDA Definitions and the related protocol. However, the timetable hinges on ISDA receiving a positive business review letter from the U.S. Department of Justice (DoJ) and then finalizing work with competition authorities in other jurisdictions.
Once ISDA hears from the competition authorities, it will give market participants approximately two-week notice of the official launch date. During this short period, firms will be able to adhere to the protocol "in escrow." Parties will be able to sign up on a binding but non-public basis so their adherence takes effect as soon as the protocol launches. As there is no regulation requiring institutions to incorporate new fallbacks into legacy trades, having backing for the protocol from day one will hopefully establish strong support for use of the fallbacks, even without a regulatory edict. The supplement and protocol will officially launch after this escrow period. As with all ISDA protocols, the IBOR Fallbacks Protocol will be voluntary—firms could alternatively choose to make changes to their legacy contracts on a bilateral basis, or opt to keep their outstanding trades unchanged. The supplement and protocol will then take effect approximately three months later.
From that point on, all new derivatives referencing the 2006 ISDA Definitions will automatically include the updated fallbacks for covered IBORs. The changes will apply to legacy derivatives as well if both counterparties have adhered to the protocol or have agreed similar bilateral amendments. Certain central counterparties also plan to apply the updated fallbacks to all cleared over-the-counter derivatives from the effective date. It is s possible that regulators could make an announcement before the end of this year on the future of LIBOR after 2021—in fact, the FCA has suggested as much. However, if there is an announcement on post-2021 dates for the cessation and/or non-representativeness of LIBOR, then the spread adjustments set out under the fallback methodology would be calculated and frozen from that point. In other words, the calculation of the spread adjustment would occur in the same way, irrespective of whether a regulator announcement comes before or after the effective date of the supplement and protocol.
Keywords: International, Banking, Securities, Benchmarks Reforms, Fallback Rate Benchmarks, IBOR, Timeline, Basel, ISDA
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