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 Wednesday 20 January 2021

IBOR Fallbacks Supplement and Protocol – going live 25 January 2021

Interbank offered rates (IBORs) have been referenced in financial contracts for many years.  However, following the LIBOR Scandal which came to light in 2012, regulators and industry participants across the globe have been looking at solutions to implement interest rate benchmark reforms. Many OTC derivative market participants have been transitioning to risk-free rates (RFRs) as alternatives to IBORs. 

Various IBORs are expected to be discontinued / cease publication by the end of 2021 (e.g. GBP, EUR, CHF and JPY LIBORs).  A review of the 2006 Definitions was undertaken and it was identified that the fallback positions were not sufficiently robust. Market consultations were held and resulted in the publication of the IBOR Fallback Supplement to the 2006 ISDA Definitions in October 2020.  However, the terms of the Supplement will only be applied to new trades entered into on or after 25 January 2021 and which reference the 2006 Definitions.

ISDA also published the ISDA 2020 IBOR Fallbacks Protocol in October 2020 and this also goes live on 25 January 2021.  When a party adheres to this Protocol, legacy trades in place with other adhering parties will also incorporate fallback terms.

This Protocol is wider than some other protocols in the past because it does not only cover ISDA documentation but also other industry documentation including GMRAs, GMSLAs and FBFs.  However, the DRV is not included.

To date the Protocol has over 8,500 adhering parties.  While it will still be possible to adhere to this Protocol on or after 25 January 2021, parties are encouraged to adhere in advance of the Protocol Effective Date and there is an added incentive for parties who are not ISDA Primary Members because there is no fee to adhere to the Protocol before 25 January 2021 but a one-off USD 500 fee will apply from this date.

The Supplement and Protocol both provide fallbacks following the cessation of an IBOR.  Unfortunately, it does not mean that all the work is done.  Many market participants have adhered to the Protocol with a view that is a safety net if terms cannot be agreed in time.  However, parties are often actively working to negotiate a move from IBORs to RFRs on a bilateral basis with their counterparties on commercially acceptable terms. 

There is also the remaining outstanding question of the treatment of “tough legacy” contracts (i.e. contracts which are unable to move to a non-IBOR rate before its discontinuation and which cannot be amended to include fallbacks e.g. complex structures or OTC derivative hedging linked to such structures) which is still being considered by regulators and the market as a whole.

Posted by Abigail Harding

Category: ISDA negotiation

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