May 16, 2019

ISDA published two consultations on benchmark fallbacks, the comment periods for which expire on July 12, 2019. One of these consultations covers adjustments that would apply to fallback rates in the event certain interbank offered rates (IBORs) are permanently discontinued while the other consultation related to the pre-cessation issues for LIBOR and certain other IBORs.

The first consultation sets out options for adjustments that will apply to the relevant risk-free rates (RFRs) if fallbacks are triggered for derivatives referencing US dollar LIBOR, Hong Kong’s HIBOR, and Canada’s CDOR. Feedback is also sought on a proposed fallback for Singapore’s SOR following a permanent cessation of US dollar LIBOR, given US dollar LIBOR is currently used as an input to calculate the Singapore rate. These adjustments reflect that the IBORs are currently available in multiple tenors—for example, one, three, six and 12 months—but the 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 RFRs do not.

The consultation on pre-cessation issues seeks comment on how derivatives contracts should address a regulatory announcement that LIBOR or certain other IBORs categorized as critical benchmarks under the EU Benchmarks Regulation are no longer representative of an underlying market. Anything implemented as a result of this consultation would be in addition to the fallbacks ISDA expects to implement to address a permanent cessation of a key IBOR. This consultation follows a request by the Official Sector Steering Group of FSB (FSB OSSG) for ISDA to request comment on the events that should trigger a move to a spread-adjusted fallback rate for LIBOR.

 

Related Links

Comment Due Date: July 12, 2019

Keywords: International, Banking, Insurance, Securities, IBOR, OTC Derivatives, Interest Rate Benchmarks, Benchmark Fallbacks, Risk-Free Rates, ISDA

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