ISDA has amended the standard documentation for interest rate derivatives that reference key interbank offered rates (IBORs) to include information on fallback rates that will apply on the permanent discontinuation of these IBORs and, in the case of LIBOR, if LIBOR becomes "non-representative." The amended document includes a table that sets out how the fallbacks would function for different products, including certain non-linear products. For comparison, the chart sets out standard conventions for the same products that reference IBORs and the standard and/or expected conventions for such products that reference risk-free rates (RFRs) as of the date of the document. ISDA has also published a set of frequently asked questions (FAQs) on IBOR fallback rate adjustments.
Counterparties may include the amended documentation with the fallback triggers and rates in their legacy transactions by either adhering to a "protocol" published by ISDA or entering into bilateral amendments. The fallback rates referenced in the amended documentation will be as published by Bloomberg for the relevant IBOR and tenor. The amended ISDA documentation will direct counterparties to first apply linear interpolation if the relevant IBOR is available for the next longer and next shorter tenor. If linear interpolation is not available, counterparties are directed to use the published fallback rate that corresponds to the date on which they were to reference the relevant IBOR, provided that this fallback rate appears on the relevant screen at least two business days prior to the relevant payment date. If the fallback rate for the referenced IBOR’s original fixing date is not produced by Bloomberg two business days prior to the payment date, then the amended documentation of ISDA provides for counterparties to reference the fallback rate that has been published for the most recent original fixing date for the relevant IBOR in the relevant tenor.
ISDA has produced language that counterparties could use to replace the fallbacks with triggers and fallbacks that duplicate those in hedged instruments. For certain products, counterparties may want to consider whether to amend the business days or payment dates and/or agree to use a fallback rate for a date other than the referenced IBOR’s original fixing date. In some cases, such amendments may better align the outcomes with the counterparties’ original intentions and/or with the desired outcomes for hedged instruments. Any such amendments would be strictly based on agreements between the relevant counterparties. The documentation of each transaction remains the responsibility of the parties concerned.
Keywords: International, Banking, Securities, Interest Rate Benchmarks, IBOR, Derivatives, Risk-Free Rate, LIBOR, Benchmark Reforms, Benchmark Fallbacks ISDA
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