ISDA IBOR Fallbacks Supplement, Protocol Come Into Effect

More than 12,000 entities across nearly 80 jurisdictions have so far adhered to the protocol, which will remain open for adherence.

The new fallbacks for derivatives linked to key IBORs came into effect on Monday (25 January).

The new fallbacks ensure a viable safety net is in place in the event an IBOR becomes permanently unavailable while firms continue to have exposure to that rate, ISDA says in a statement.

The fallbacks, published by ISDA in October, will be incorporated into all new derivatives contracts that reference ISDA’s standard interest rate derivatives definitions.

They will also be included in legacy non-cleared derivatives if the counterparties have bilaterally agreed to include them or both have adhered to the IBOR Fallbacks Protocol.

ISDA says more than 12,000 entities across nearly 80 jurisdictions have so far adhered to the protocol, which will remain open for adherence.

> ALSO READ: ISDA Urges Adherence to IBOR Fallbacks Protocol (18 Jan 2021)

“Today, the fallbacks take effect for new and legacy derivatives contracts, following a successful protocol adherence process in which thousands of buy- and sell-side firms across the globe adhered to the protocol,” said ISDA chief Scott O’Malia.

“Having a fallback based on a clear, consistent and transparent methodology will significantly reduce the risk of market disruption if a key IBOR ceases to exist or LIBOR is deemed to be non-representative before transition efforts are complete.”

The IBOR Fallbacks Supplement incorporates the fallbacks into new covered IBOR derivatives referencing the 2006 ISDA Definitions (unless the parties specifically agree to exclude them).

The IBOR Fallbacks Protocol includes the fallbacks into legacy non-cleared derivatives trades with other counterparties that choose to adhere to the protocol.

The fallbacks cover Australia’s BBSW, Canada’s CDOR, euro LIBOR, EURIBOR, Hong Kong’s HIBOR, Singapore’s SOR, sterling LIBOR, Swiss franc LIBOR, Thailand’s TIBOR, euroyen TIBOR, yen LIBOR and US dollar LIBOR.

As of the 25 January effective date, 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 IBOR Fallbacks Supplement is available here. The IBOR Fallbacks Protocol is available here.

Below is a video on the issues firms should consider when implementing fallbacks.

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