ISDA Consultation on LIBOR Pre-Cessation Reveals Mixed Results

ISDA received responses from 89 entities expressing a “wide variety of views” on whether and how to implement a pre-cessation trigger, with no clear majority for any approach.

ISDA (the International Swaps and Derivatives Association) has published a statement summarising the preliminary results of its consultation on how derivatives contracts should address a regulatory announcement that LIBOR or certain other IBORs considered “critical benchmarks” are no longer representative of the underlying market.

The pre-cessation triggers discussed in the consultation, launched in May, are supplementary to the fallbacks ISDA will implement to address the permanent cessation of LIBOR and other IBORs.

In the case of LIBOR, the pre-cessation trigger would apply in the event the FCA (Financial Conduct Authority) assesses that the number of panel banks or the market share of the banks remaining have shrunk so significantly that the rate is no longer considered representative of the underlying market.

The 89 entities who responded to the consultation expressed a “wide variety of views” regarding whether and how to implement a pre-cessation trigger, and in general fell into three categories, with no clear majority in any:

  • Those who supported adding a pre-cessation trigger to the permanent cessation triggers in the “hard wired” amendment to the 2006 ISDA Definitions and related protocol.
  • Those who supported use of the pre-cessation trigger provided that it was implemented with optionality and flexibility, or indicated that their support for the trigger depended on a number of factors.
  • Those who opposed the pre-cessation trigger.

Respondents also expressed a number of issues for consideration related to the potential pre-cessation trigger itself and how to implement such a trigger, ISDA said.

It aims to publish an anonymised and aggregated summary of the feedback received in September 2019, alongside a proposed documentation solution for derivatives that incorporates a pre-cessation fallback trigger while still accounting for respondents’ views and concerns.

“Among other things, the proposed solution will seek to avoid unnecessary complication and optionality, or anything that could jeopardize broad market adoption of the permanent cessation fallbacks,” ISDA said. “The consultation period for ISDA’s proposed solution will allow market participants to indicate whether the proposal addresses their concerns and raise any additional concerns they may have.”

Any decision or action by ISDA will remain subject to the advice and feedback it receives from its advisors and government and regulatory agencies, with whom it will continue to engage to determine how best to address pre-cessation issues for derivatives.

Two weeks ago, ISDA also released the preliminary results of its supplemental consultation on adjustments that would apply to fallback rates in the event of permanently discontinuation of US dollar LIBOR, Hong Kong’s HIBOR and Canada’s CDOR. This followed last year’s similar exercise covering sterling LIBOR, Swiss franc LIBOR, yen LIBOR, yen TIBOR, euroyen TIBOR and Australia’s BBSW.

The benchmark fallbacks ISDA will include in its standard definitions are aligned with market preference to use the ‘compounded setting in arrears rate’ for the adjusted RFR (risk-free rate) and the ‘historical mean/median approach’ for the spread adjustment.

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