As milestones go, a consultation on technical adjustments to fallback rates may not be the most obvious. In fact, it’s a big one. With the latest consultation now closed, work can move forward on finalising and implementing those new fallbacks into derivatives contracts, reducing the systemic threat of a permanent discontinuation of LIBOR and other interbank offered rates (IBORs).
Market feedback has now been sought on nine key IBORs in total, including US dollar LIBOR. As with the first consultation last year, the latest asked market participants to opine on possible methodologies to adjust for structural differences between the IBORs and the risk-free rates (RFRs) that will replace them if a fallback is triggered.
Now that’s done, work can progress on fleshing out the parameters and mechanics of the chosen adjustment methodologies – analysis and questions soliciting feedback on open issues will be published for comment in the coming weeks. Following a request for proposal earlier this year, ISDA has also now chosen an independent service provider to calculate and publish the adjustments.
Ultimately, the ISDA definitions are expected to be amended before the end of the year to implement fallbacks for the nine IBORs subject to consultation so far. An ISDA protocol will also be developed to enable firms to adapt legacy derivatives contracts.
There’s still work to do. A consultation on adjustments to the fallback for euro LIBOR and EURIBOR will be held after the alternative RFR for euro, €STR, is published in October. There also remains an enormous amount of work to shift the market away from its use of LIBOR and other IBORs and to develop trading activity and liquidity in the alternative RFRs before the end of 2021. Given the adjusted fallback will not match the relevant IBOR exactly – meaning there will be winners and losers if the fallback is triggered – voluntary adoption of RFRs before any permanent cessation of an IBOR will be the preferable route for many.
Nonetheless, the progress made on fallbacks is critical – and the end is in sight. This is a big step towards ensuring derivatives markets are safer and more efficient by ensuring a robust backup is in place if an IBOR permanently ceases to exist.
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Documents (1) for The Road Ahead – IQ August 2019
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