International Swaps and Derivatives Association Consults on Final Fall Backs for Alternative Risk-Free Rates

Following its previous two consultations, the International Swaps and Derivatives Association has launched a consultation on the proposed final parameters that will apply to alternative risk-free rates if derivatives fall backs are triggered. Responses to the consultation should be provided by October 23, 2019. ISDA will amend the 2006 ISDA Definitions based on the feedback and also intends to publish a protocol so that market participants can include fall backs in legacy IBOR contracts, if needed. Both documents are expected to be finalized before the end of 2019, ready for implementation in 2020.

Feedback to the previous consultations indicates that the majority of market participants prefer the historical mean/median approach to the spread adjustment and the compounded setting in arrears rate. However, subsequent to that consultation, the "SOFR Surge" of September 17, 2019 has raised questions as to whether this is the correct approach. ISDA is consulting on fall backs for inclusion in the 2006 ISDA Definitions based on a compounded setting in arrears rate and the historical mean/median approach to the spread adjustment for derivatives that reference USD LIBOR, GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR, BBSW, HIBOR and CDOR. In particular, ISDA is proposing:

1. A compounded setting in arrears rate for a relevant RFR observed over a period of time that will generally be equivalent to the relevant IBOR tenor and compounded daily during that period. The rate will be calculated and published for each relevant IBOR tenor.
2. To use the historical mean/median approach to the spread adjustment. This will be based on the mean or median spot spread between the IBOR and the adjusted RFR calculated over a static lookback period prior to the relevant announcement or publication triggering the fall back provisions.

View the consultation paper.

View the Brattle Group report on the supplemental fall back consultation.

View details of the initial fall back consultation.

You may like to view our client publication, "SOFR Surge Event: What Just Happened?!".

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