The recent US government shutdown didn’t just create weeks of political drama – it also left inflation-linked swaps dealers with a major headache: how should they determine an initial value for new trades given the US Bureau of Labor Statistics confirmed less than a week ago that it would not publish an October figure for the consumer price index? In response, ISDA has published a recommended solution for determining a substitute level for October for use in initial fixings that avoids the risk of inconsistent methodologies, which threatened to disrupt the inflation swaps market by reducing price transparency and certainty.

The recommended solution – which is voluntary and is set out in a market practice note – is that firms should use the fallback methodology applicable for Treasury inflation-protected securities (TIPs) to determine a substitute October level for the Consumer Price Index for All Urban Consumers (CPI-U). That replacement value can be used to determine initial fixings for new trades from November 28 – the first day of trading where the October 2025 level is needed.

This follows publication of a guidance note earlier this month, which explained the contractual provisions set out in ISDA’s 2008 Inflation Derivatives Definitions for determining a substitute level for October CPI-U when calculating the final value for inflation-linked swaps that mature during this period. In the non-cleared market, the fallback for the calculation of payments is typically based on the TIPs methodology in the first instance, with a further backup based on a formula set by ISDA. In the cleared market, in contrast, clearing houses have set the ISDA methodology as the applicable fallback.

The working group swiftly convened by ISDA to hammer out a solution for the initial fixing issue therefore had options to choose from: a bifurcated approach like that used for final values or a unified approach using either the TIPS methodology or the ISDA formula. The consensus view was to opt for the TIPs methodology to align the derivatives market with the cash market, regardless of whether the derivatives are cleared or non-cleared. The working group recognized this is not without technical and operational challenges that need to be resolved in a very short period, but similar or longer-lasting issues would have existed irrespective of the solution chosen. Ultimately, given each of the possible outcomes were expected to be price neutral, having a single, consistent approach for new trades was felt to be vital for the continuing smooth functioning of the market, and that has been achieved with the consensus of working group members.

One of ISDA’s roles is to step in to convene key stakeholders to develop solutions when challenges emerge, sometimes under extreme time pressure. We do it time after time, and the market practice note is the latest example of the importance of that role. Without such action, the ad hoc use of inconsistent approaches would have inevitably produced discrepancies, a lack of price transparency for clients and unnecessary friction in the market. Instead, we brought together key stakeholders to arrive at a consensus position that creates certainty and consistency and reduces operational and commercial disruption, enabling the inflation swaps market to continue to operate safely and efficiently.