ISDA APAC Benchmark Working Group (“ISDA APAC WG”)
Minutes for ISDA APAC WG call held on 8 March 2018
ISDA: Ann Battle, Jing Gu
Attendees: ANZ, ASX, Barclays, BlackRock, Clifford Chance, DBS, Deutsche Bank, HSBC, JP Morgan, Mizuho, Standard Chartered, Westpac
Counsel: Linklaters LLP
ISDA read the anti-trust competition reminder to all participants on the call.
Purpose of the call
ISDA explained that it had attended a call with the Financial Stability Board’s Official Sector Steering Group (the “OSSG”) Subgroup on Contractual Robustness (the “OSSG Subgroup”) on 5 March 2018. ISDA noted that the OSSG Subgroup includes regulators from Australia and Singapore. ISDA also explained that regulators from Hong Kong participate in the OSSG but are not members of the OSSG Subgroup. On the call, ISDA received formal feedback from the OSSG Subgroup regarding the letter which ISDA and the ISDA APAC, US Dollar, Euro, Sterling, Swiss Franc and Japanese Yen Benchmark Working Groups (the “ISDA IR Benchmark Working Groups”) sent to the OSSG Subgroup on 26 January 2018 with the January version of the working draft note included at Annex 2 (the “Draft Note” and together with the letter, the “Update Letter”).
OSSG Subgroup feedback
Implementation timeline and progress
ISDA explained that the OSSG Subgroup requested that ISDA produce a timeline setting out the target dates in respect of the group’s work and the various implementation milestones.
The OSSG Subgroup emphasised the need to finalise and implement new fallbacks for the interbank offered rates (the “IBORs”) as quickly as possible. ISDA suggested that, given that the alternative risk-free rates (“RFRs”) have now been identified for most currencies, the major milestones in respect of the group’s work are: (i) development and publication of a market-wide consultation to establish a consensus regarding the preferred credit spread methodology and term fixing issue, (ii) the consultation period required for market participants to consider the information provided in the consultation paper, (iii) outreach to potential third party vendors interested in calculating and publishing the credit spread using the preferred credit spread methodology, (iv) conducting a formal request for proposal (“RFP”) process for potential third party vendors, (v) the period of time necessary for the chosen third party vendor to build the necessary systems to publish and calculate the credit spread and (vi) drafting (A) amendments to the 2006 ISDA Definitions to incorporate the selected fallbacks in new transactions and (B) a protocol to facilitate incorporation of the fallbacks in legacy transactions.
ISDA explained that the implementation targets outlined in the timeline will apply to those RFRs that already exist and will not apply to those RFRs which have not yet been selected, such as the RFR for the euro. ISDA explained that the ISDA APAC WG can consider which APAC rates to include in the timeline and noted that it plans to include the Bank Bill Swap Rate (“BBSW”).
Credit spread methodologies
ISDA explained that the OSSG Subgroup suggested that the descriptions of the credit spread methodologies within the Draft Note should be expanded to include more detail and to ensure that all market participants understand the proposed methodologies. On this basis, the OSSG Subgroup was not able to give substantive feedback on the proposed credit spread methodologies. ISDA noted that it is building out the specifics of each proposed methodology so that full descriptions and example calculations can be included in the market consultation.
ISDA explained that the OSSG Subgroup has not definitively indicated whether it will provide feedback on the proposed credit spread methodologies and noted that, once it has gathered sufficient information regarding the credit spread methodologies, it will proceed with the market consultation regardless of whether further feedback from the OSSG Subgroup has been received.
ISDA noted that, in the first instance, example calculations will be included in the market consultation for those RFRs that currently exist. Once feedback has been provided in respect of these example calculations, a decision can be made regarding how to proceed in respect of the other relevant currencies.
In relation to the OSSG Subgroup’s preliminary feedback that the fallbacks to the IBORs cannot rely on overnight index swap-based forward-looking term fixings, ISDA explained that the OSSG Subgroup has asked the ISDA IR Benchmark Working Groups to provide precise feedback explaining why a fallback based on a compounded version of the RFR would not be suitable for certain market participants. The OSSG Subgroup has also asked for further information regarding the market participants for which this approach would cause issues.
ISDA noted that this raises questions as to whether it would be necessary to develop two alternative fallbacks for each relevant IBOR with one fallback to the RFR compounded in arrear and another fallback to a term RFR based on forward-looking overnight index swaps. ISDA explained that this issue needs to be considered in further detail.
Questions from participants
In response to a question, ISDA explained that the fallbacks for the IBORs will be based on the relevant RFR. ISDA also noted that the IBORs are term rates whereas the RFRs are overnight rates so an adjustment will be required to account for the lack of term structure in relation to the RFR (such as compounding the RFR in arrear). In addition to this, a credit spread will be applied to the RFR to account for the interbank credit risk premium included in the relevant IBOR but not the fallback RFR. ISDA explained that the adjustment to account for the lack of term structure could be based on compounding the RFR in arrear for the relevant term or, alternatively, on forward-looking overnight index swaps referencing the relevant RFR. ISDA clarified that, although it is possible that there may be two different credit spread methodologies depending on the method used to create a term structure, at this stage it contemplates the use of one credit spread methodology regardless of the method used to create a term structure for the RFR.
The participant also asked whether the methodology for the credit spread will be the same across all the relevant IBORs. ISDA noted that there is no requirement to apply the same methodology across all the different IBORs and indicated that whether the same methodology applies will be determined based on the feedback received during the market consultation process.
Update on the RFR for the Hong Kong dollar
ISDA relayed to the group that it has been informed by the Hong Kong Monetary Authority (“HKMA”) that the Treasury Market Association (“TMA”) members have discussed the alternative RFR for the Hong Kong dollar and indicated a preference for the Hong Kong Overnight Index Average (“HONIA”), supplemented by “Exchange Fund Bills” yields. ISDA explained that the rationale for having two RFRs is to ensure that a term structure can be provided. ISDA further explained that HONIA is an overnight rate with no term structure whereas “Exchange Fund Bills” do have a term structure up to one year.
ISDA noted that the TMA members are also discussing the calculation of the credit spread to apply to the RFR and will provide feedback to ISDA in due course.
Next steps and housekeeping
ISDA agreed to notify the group if it receives any further feedback or updates from the OSSG Subgroup.
ISDA also noted that it would keep members informed as to how ISDA intends to proceed with building-out the term fixing solutions and credit spread methodologies for the purposes of the market consultation.