ISDA announced that it will re-consult on how to implement pre-cessation fallbacks. The new consultation is expected to be published later this month and will ask if the 2006 ISDA Definitions should be amended to include fallbacks that would apply to all covered derivatives, following the permanent cessation of an interbank offered rate (IBOR) or a non-representative pre-cessation event, whichever occurs first. Based on the results of the consultation, ISDA will move quickly to deliver the appropriate, industry endorsed fallback solution later this year.
Under this scenario, a single protocol would also be launched to allow participants to include both pre-cessation and permanent cessation fallbacks within their legacy derivatives trades. If there is insufficient support for this approach, then ISDA will amend the 2006 ISDA Definitions to enable derivatives counterparties to incorporate pre-cessation fallbacks alongside the permanent cessation fallbacks if chosen. A protocol for amending legacy derivatives would also be published with a similar ability to opt-in to pre-cessation fallbacks when implementing the permanent cessation fallbacks.
The decision to re-consult on pre-cessation fallbacks follows the release of new information by FCA and ICE Benchmark Administration on the length of time the LIBOR may be published following a regulatory statement that the benchmark is no longer representative of the underlying market. Furthermore, an earlier consultation on pre-cessation fallbacks last year failed to achieve market consensus on how to implement pre-cessation fallbacks in derivatives contracts.
ISDA had intended to publish amendments to the 2006 ISDA Definitions to incorporate permanent cessation fallbacks in the first half of 2020, along with a protocol to include permanent cessation fallbacks into legacy trades. The timing of publication will now be subject to the results of the new consultation. In the meantime, ISDA will continue to work with Bloomberg to publish indicative spread calculations and all-in fallback rates during the first half of 2020 to help facilitate operational readiness for fallback implementation.
Keywords: International, Banking, Insurance, Securities, Pre-Cessation Triggers, Fallback Provisions, ISDA Definitions, IBORs, Benchmark Reforms, OTC Derivatives, Interest Rate Benchmark, ISDA
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