ISDA published its quarterly update in August 2019. This update highlights that progress has been made on benchmark reform and the focus is now on building liquidity and trading activity in the new risk-free rates. It also highlights that the work can move forward on finalizing and implementing the new fallbacks into derivatives contracts and reducing the systemic threat of a permanent discontinuation of LIBOR and other interbank offered rates (IBORs). Market feedback has now been sought on nine key IBORs in total, including US dollar LIBOR.
As with the first consultation last year, the latest consultation asked market participants to opine on possible methodologies to adjust for structural differences between the IBORs and the risk-free rates that will replace them if a fallback is triggered. Following a request for proposal earlier this year, ISDA has now chosen an independent service provider to calculate and publish the adjustments. Ultimately, the ISDA definitions are expected to be amended before the end of the year to implement fallbacks for the nine IBORs that have beeen subject to consultation so far. An ISDA protocol will also be developed to enable firms to adapt legacy derivatives contracts.
Going forward, a consultation on adjustments to the fallback for euro LIBOR and EURIBOR will be held after the alternative risk-free rate for euro (€STR) is published in October. There also remains an enormous amount of work to shift the market away from its use of LIBOR and other IBORs and to develop trading activity and liquidity in the alternative risk-free rates before the end of 2021. Given that the adjusted fallback will not match the relevant IBOR exactly, voluntary adoption of risk-free rates before any permanent cessation of an IBOR will be the preferable route for many. Nonetheless, the progress made on fallbacks is critical. This is a big step toward ensuring that derivatives markets are safer and more efficient by ensuring that a robust backup is in place if an IBOR permanently ceases to exist.
Keywords: International, Banking, Securities, IBORs, LIBOR, EURIBOR, Interest Rate Benchmarks, Risk-Free Rates, €STR, Fallback, ISDA
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