Industry has been urged by the authorities around the globe to implement more robust fallbacks for LIBOR and other key interbank offered rates (IBORs). These fallbacks are critical to ensure that financial instrument contracts continue to reference clear, transparent and consistent rates if the IBOR they currently reference is discontinued or, in the case of LIBOR, becomes non-representative. The new fallbacks are based on adjusted versions of the risk-free rates identified as alternatives to LIBOR and other IBORs in the relevant jurisdictions.
For derivatives contracts, the International Swaps and Derivatives Association (ISDA) is providing a straightforward solution through a supplement (the Supplement) and protocol (the Protocol) launching on 23 October 2020. ISDA is a trade organisation of participants in the market for over-the-counter derivatives. It provides a standardised contract to enter into derivatives transactions that is widely used in institutional markets around the world.
ISDA is amending certain ‘rate options’ in the 2006 ISDA Definitions to include fallbacks that would apply upon the permanent discontinuation of LIBOR and other key IBORs and upon a ‘non-representative’ determination for LIBOR. ISDA is amending certain floating rate options that use US dollar LIBOR as an input to include fallbacks that would apply if US dollar LIBOR is permanently discontinued. As it has done in the past, ISDA is amending the 2006 ISDA Definitions by publishing a supplement.
The Supplement and the amendments made by the Protocol will take effect on 25 January 2021. Transactions incorporating the 2006 ISDA Definitions that are entered into on or after the date of the supplement (25 January 2021) will include the amended floating rate option with the fallback for the relevant IBOR. Transactions entered into prior to 25 January 2021 (so-called legacy derivatives contracts) will continue to be based on the 2006 ISDA Definitions as they existed before they were amended pursuant to the Supplement, and therefore will not include the amended floating rate option with the fallback.
The Protocol facilitates multilateral amendments to include the amended floating rate options, and therefore the fallbacks, in legacy derivatives contracts. By adhering to the Protocol, market participants agree that their legacy derivatives contracts with other adherents will include the amended floating rate option for the relevant IBOR and will therefore include the fallback. Use of the Protocol is voluntary and amends contracts only between two adhering parties (i.e. it will not amend contracts between an adhering party and a non-adhering party or between two non-adhering parties). ISDA is also publishing bilateral forms of amendment that market participants could use to amend their legacy derivatives contracts.
For additional information from ISDA directly, visit the ISDA benchmark reform and transition from LIBOR page.