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    ISDA on Responses to Proposal on Benchmark Fallback Adjustments

    November 15, 2019

    ISDA published a report summarizing the responses to consultation on final parameters of adjustments that will apply to derivatives fallbacks for certain interbank offered rates (IBORs). The report covers technical issues on specific methodologies for the two proposed adjustments. ISDA also expects to shortly publish a new supplemental consultation on the spread and term adjustments for fallbacks in derivatives referencing euro LIBOR and EURIBOR; this consultation will also cover the final parameters for these adjustments. If the results if the consultation are consistent with the results of the prior consultations, ISDA expects to implement fallbacks for euro LIBOR and EURIBOR in 2020, in line with the fallbacks for nine other IBORs covered by the earlier consultations.

    This report, which is published by The Brattle Group, follows two earlier consultations that found the overwhelming majority of respondents preferred the "compounded setting in arrears rate" to address differences in tenor between IBORs and overnight risk-free rates, and the "historical mean/median approach" to deal with differences in credit risk and other factors. This consultation is intended to finalize the methodologies for the adjustments that will be made to derivatives fallbacks in the event certain interbank offered rates (IBORs) are permanently discontinued. These adjustments are necessary because of the differences between the IBORs and the risk-free rates. The adjustments reflect that the IBORs are  available in multiple tenors, but the risk-free rates identified as fallbacks are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors, while risk-free rates do not. The Brattle Group report confirms preliminary findings that the overwhelming majority of respondents preferred the "compounded setting in arrears rate" to address the difference in tenors and the "historical mean/median approach" to address the difference in risk premia. 

    Responses to the final parameters consultation show that a majority of participants preferred a historical median approach over a five-year lookback period. A majority also preferred not to include a transitional period in the spread adjustment calculation, not to exclude outliers, and not to exclude any negative spreads. For the compounded setting in arrears rate, a clear majority favored a two-banking-day backward shift adjustment for operational and payment purposes. Following these results, ISDA will make relevant amendments to the 2006 ISDA Definitions to incorporate fallbacks with these adjustments for new IBOR trades. Bloomberg has been selected to publish the adjustments and "all in" fallback rates. ISDA will also publish a protocol to enable market participants to include fallbacks within legacy IBOR contracts if they choose to. Both the amended Definitions and the protocol are expected to be finalized by the end of this year, with implementation in 2020.


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    Keywords: International, Banking, Securities, IBORs, LIBOR, Benchmark Fallbacks, Interest Rate Benchmarks, Risk-Free Rates, ISDA Protocol, ISDA

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