ISDA has submitted a letter to the Official Sector Steering Group (FSB OSSG) of FSB on the pre-cessation triggers for derivative fallbacks. The communication is in response to a letter sent by the FSB OSSG to ISDA in November 2019. ISDA recognizes the importance of both scenarios outlined by FSB OSSG—the permanent cessation of a key Interbank Offered Rate (IBOR) and a determination by the UK FCA that LIBOR is no longer representative of the underlying market but continues to be published. ISDA remains fully focused on the timely delivery of a fallback solution to prevent the systemic disruption that could occur if LIBOR or another key IBOR ceases.
As the work on permanent cessation fallbacks will be finalized, ISDA will simultaneously work with regulators and the industry to increase market understanding of the implications of a “non-representative” LIBOR and will attempt to build a consensus on how to implement the pre-cessation fallbacks, in line with the FSB OSSG’s request. To further increase market understanding, ISDA believes it is critical that market participants also receive further clarity on the following:
- A statement from UK FCA and ICE Benchmark Administration that the “reasonable period” during which a “non-representative” LIBOR would be published would be minimal after FCA announces that LIBOR is no longer representative.
- A public and definitive confirmation directly from the central counterparties (CCPs) clearing LIBOR derivatives or their regulatory supervisor.
In light of the feedback received in the pre-cessation consultation, the strategy described in the November 2019 letter would require ISDA to re-consult with the market on a single documentation approach and engage with relevant competition authorities. ISDA highlighted that it is prepared to do so once the market has the benefit of appropriate clarity on the issues described above. If a strong majority of market participants supports a “non-representativeness” pre-cessation fallback trigger for LIBOR derivatives in response to the consultation, then ISDA would work to implement pre-cessation fallbacks—either along with the documentation for permanent cessation fallbacks or as a second step to complement the permanent cessation fallbacks. In any event, ISDA will offer standard language for a “non-representativeness” pre-cessation fallback trigger that market participants could use.
ISDA is on track to finalize the substantive portion of its work to develop permanent cessation fallbacks by the end of 2019 and to facilitate implementation during the first half of 2020. On November 15, 2019, ISDA released the results of a third successful industry consultation on the adjustment methodologies for permanent cessation fallbacks rates. ISDA will shortly issue a brief supplemental consultation to confirm the suitability of these adjustments for fallbacks in derivatives referencing euro LIBOR and EURIBOR. On completion of this consultation in the first quarter of 2020, ISDA will publish the Supplement to the 2006 ISDA Definitions containing the fallbacks and will open, for adherence, a protocol to include these fallbacks in existing derivatives. The amendments to new and existing derivatives contracts will take effect approximately three months later, in the second quarter of 2020. Based on feedback and support from market participants, ISDA believes that the new documentation will provide a critical backstop in contracts that continue to reference LIBOR or another key IBOR if and when that IBOR ceases.
Keywords: International, Banking, Securities, LIBOR, IBOR, Pre-cessation Triggers, Interest Rate Benchmarks, Derivatives, Fallback, FCA, FSB, ISDA
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