ISDA Launches IBOR Fallbacks Supplement, Protocol

The implementation of fallbacks for derivatives will help to mitigate the systemic risk that could occur following the disappearance of LIBOR.

ISDA on Friday (23 October) launched the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, marking a major step in reducing the systemic impact of a key IBOR becoming unavailable while market participants continue to have exposure to that rate.

The supplement will amend ISDA’s standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes coming into effect on 25 January 2021.

From that date, all new cleared and non-cleared derivatives that reference the definitions will include the fallbacks.

The IBOR Fallbacks Supplement is available here

The protocol will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the protocol.

The protocol is now open for adherence, and will become effective on the same date as the supplement: 25 January 2021.

At launch, 257 derivatives market participants had adhered to the protocol during the two-week pre-launch ‘escrow period’.

The IBOR Fallbacks Protocol is available here.

The fallbacks for a particular currency will apply following a permanent cessation of the IBOR in that currency. For derivatives that reference LIBOR, the fallbacks in the relevant currency would also apply following a determination by the UK FCA (Financial Conduct Authority) that LIBOR in that currency is no longer representative of its underlying market.

In each case, the fallbacks will be adjusted versions of the RFRs (risk-free rates) identified in each currency. More background on fallbacks and the adjustment methodology is available here.

“The implementation of fallbacks for derivatives will go a long way to mitigating the systemic risk that could occur following the disappearance of LIBOR or another key IBOR,” said ISDA chief Scott O’Malia.

“With the fallbacks in place, derivatives market participants will be able get on with transitioning their IBOR exposures with confidence that there is a robust back-up in case of need.”

ISDA is holding a virtual event on the supplement and protocol, details here.

ISDA has published three webinars on fallbacks:

A User Guide to IBOR Fallbacks and Risk-free Rates is available here.

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