ISDA launched a supplemental consultation on the spread and term adjustments that would apply to fallbacks for derivatives referencing euro LIBOR and EURIBOR in the event those benchmarks are permanently discontinued. The consultation also covers technical issues related to the adjustment methodology and seeks feedback on whether the adjustments would be appropriate for lesser-used interbank offered rates (IBORs) if ISDA implements fallbacks for those benchmarks in the future. The consultation is open until January 21, 2020. The Brattle Group has also provided a workbook, along with the instructions for using the workbook, to help market participants understand the implications of the different options and variations for the historical mean or median approach to the spread adjustment.
The consultation seeks input on the approach to address certain issues associated with adjustments that would apply to €STR if fallbacks in EURIBOR or EUR LIBOR take effect, including the final parameters for these adjustments. It also addresses adjustments that could apply if fallbacks take effect in less widely used IBORs. These adjustments are necessary because of the differences between IBORs (such as EURIBOR and EUR LIBOR) and risk-free rates (such as €STR). These adjustments reflect that IBORs are currently available in multiple tenors, but RFRs identified as fallbacks are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors (such as liquidity and fluctuations in supply and demand), while risk-free rates do not.
ISDA will subsequently publish amendments to the 2006 definitions to incorporate fallbacks for new trades referenced to the nine IBORs covered so far, which are sterling LIBOR, Swiss franc LIBOR, yen LIBOR, yen TIBOR, euroyen TIBOR, the Australian Bank Bill Swap Rate, US dollar LIBOR, Canadian CDOR, and Hong Kong’s HIBOR. A protocol will also be published to enable market participants to include fallbacks within legacy IBOR contracts if they choose. Both will be published in the first quarter of 2020, and will take effect three months later. If the feedback for euro LIBOR and EURIBOR is consistent with prior consultations, ISDA expects to implement these fallbacks at the same time. This consultation follows three earlier consultations, of which on consultation is on the final parameters for the adjustment methodology and two consultations set out options for the adjustments that will apply to the relevant risk-free rates if fallbacks are triggered for derivatives referencing nine IBORs.
Comment Due Date: January 21, 2020
Keywords: International, Banking, Securities, IBORs, LIBOR, Risk-Free Rates, Interest Rate Benchmarks, EURIBOR, Fallback Provisions, ISDA Protocol, €STR, ISDA
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