There’s been a lot of debate recently about whether and how pre-cessation fallbacks should apply to derivatives following a statement from a regulator that LIBOR is no longer representative of an underlying market. Two new letters have provided some useful information that may help increase market understanding of the issues.

Today, we are publishing letters from the UK Financial Conduct Authority (FCA) and ICE Benchmark Administration (IBA) that provide some useful detail on the length of time a non-representative LIBOR would be published (see the attached PDFs). Alongside feedback from the major central counterparties (CCPs), including an announcement by LCH in December that it would consult on proposed rule book changes to implement pre-cessation fallbacks, the market is starting to get a better perspective on pre-cessation issues.

In a letter sent to the Financial Stability Board’s Official Sector Steering Group (FSB OSSG) last December, ISDA noted that further clarity on two points would help to increase market understanding of a non-representative LIBOR scenario – the ‘reasonable period’ during which a non-representative LIBOR would be published, and the specific action CCPs would take if the UK FCA determines that LIBOR is non-representative.

This followed an ISDA consultation on pre-cessation fallbacks last year. That found market participants would generally not want to continue referencing LIBOR in existing or new derivatives contracts following a statement from a supervisor that it is no longer representative of the underlying market. However, there was no consensus on how to implement pre-cessation fallbacks, including whether the permanent cessation fallback rates should apply following a non-representativeness determination.

The two new letters, alongside the information from CCPs, help set out the direction of travel in the event LIBOR is deemed to be non-representative by the FCA. It certainly appears that the official sector and IBA intend to minimize the length of time a non-representative LIBOR is published. That is an important step.

As I reflect on this, I’m reminded of my time as a Commodity Futures Trading Commission commissioner in 2010, when regulatory scrutiny of LIBOR was in full swing. It seemed clear, even back then, that the market would need to be cognizant of the potential for benchmarks to be non-representative and minimize exposure to those rates. Continued publication of a non-representative rate is clearly not in the interests of the market.

At ISDA, we welcome the additional information these letters provide, and appreciate the rapid response by the official sector and IBA. Continued focus and clarity on the shift from IBORs to RFRs by the official sector and the market is essential to effecting a smooth transition.

Interested in benchmark transition? Come along to the ISDA/SIFMA Benchmark Strategies Forum in New York on February 12 and London on February 26. Registration is free for the buy side.