Featured Product

    ISDA Consults Again on Implementing Pre-Cessation Derivative Fallbacks

    February 25, 2020

    ISDA launched a new consultation on the implementation of pre-cessation fallbacks for derivatives. The new consultation asks whether 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. The new consultation is open until March 25, 2020. ISDA aims to publish the results of this consultation, along with the information on next steps, in late April or early May.

    ISDA intends to amend the 2006 ISDA Definitions by publishing a supplement to the 2006 ISDA Definitions. The supplement will implement the fallbacks by amending and restating the relevant rate options for London Interbank Offered Rate (LIBOR) in each currency in which it is published (such as USD, GBP, CHF, JPY, and EUR) and for the other IBORs for which ISDA is implementing fallbacks. On publication of the supplement, all transactions incorporating the 2006 ISDA Definitions that are entered into on or after the effective date of the supplement will include the amended terms. Transactions entered into prior to the effective date of the supplement (so called legacy derivative contracts) will continue to be based on the 2006 ISDA Definitions as the 2006 ISDA Definitions existed at the time of trading and, therefore, will not include the updated fallback provisions.

    However, ISDA also intends to publish a protocol to facilitate multilateral amendments to incorporate the amended terms, and therefore the fallback provisions, in legacy derivative contracts. By adhering to the protocol, market participants would agree that all of their legacy derivative contracts, with all other adherents, will include the amended terms. Therefore, these contracts will include the same fallback provisions that will be included in transactions entered into after the effective date of the supplement and will incorporate the amended 2006 ISDA Definitions, except to the extent that two adherents separately bilaterally negotiate different terms. Also, adherence to any such protocol will be voluntary and will only amend contracts between two adhering parties.

    LIBOR and the other IBORs for which ISDA is implementing fallbacks are published in various tenors and incorporate bank credit risk premia and a variety of other factors. To account for these differences in the event that the fallback provisions apply (whether as the result of a non-representativeness determination or permanent cessation), each overnight rate will be subject to two adjustments. First, the overnight rate will be compounded in arrears over the tenor of the relevant IBOR (for example, one month, three months). Then, a spread adjustment will be added to the compounded rate. For LIBOR, the spread adjustment will be calculated based on the median of the historical differences between LIBOR in the relevant currency for the relevant tenor and the corresponding fallback rate compounded over a time period with the same length as the tenor, over a five-year period prior to the announcement triggering the fallbacks.

    ISDA announced its decision to consult on the pre-cessation issues on February 05, following the statements from FCA, ICE Benchmark Administration (IBA), and LCH that provided additional information to the market on this topic. The statements and this new consultation follow a 2019 consultation that was unable to find market consensus on how to implement pre-cessation fallbacks in derivatives contracts.

     

    Related Links

    Comment Due Date: March 25, 2020

    Keywords: International, Banking, Securities, Insurance, Pre-Cessation Triggers, Fallback Provisions, ISDA Definitions, IBORs, Benchmark Reforms, ISDA

    Related Articles
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    News

    FASB Proposes Improvements to 2023 GAAP Reporting Taxonomy

    The Financial Accounting Standards Board (FASB) is seeking comments, until November 03, 2022, on the proposed technical and other conforming improvements for the 2023 GAAP Financial Reporting Taxonomy.

    November 03, 2022 WebPage Regulatory News
    News

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.

    November 02, 2022 WebPage Regulatory News
    News

    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)

    October 31, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8588