ISDA Receives Positive Business Review Letter from DOJ

The positive business review letter from the DOJ’s Antitrust Division brings ISDA a step closer to publishing a supplement and related protocol that will make IBOR fallbacks in derivatives a reality.

The US Department of Justice’s Antitrust Division has concluded it will not challenge ISDA’s proposed amendments to its standard documentation for derivatives to account for the potential discontinuation of certain IBORs.

“ISDA’s process, including its cooperation with government regulators and its consultation-driven process for obtaining feedback from industry participants, has had the effect of clarifying the practical issues involved in planning for when LIBOR and other IBORs are no longer available and preparing for a smooth transition away from IBORs to other reference rates,” said Assistant Attorney General Makan Delrahim.

“ISDA has put in place safeguards to avoid harm to competition, such as making the selection of the fallback rates voluntary, which allows contracting parties the flexibility to designate alternative competitive rates they may think are more appropriate.”

ISDA’s model documents are widely used by financial institutions to hedge risks by engaging in derivatives contracts which incorporate various IBORs, including LIBOR. The DOJ’s business review letter recognises that ISDA’s proposed amendments to its standard documentation for derivatives contracts are part of a larger effort to replace IBORs in financial instruments with alternative reference rates.

The letter also recognises ISDA’s work with regulators and industry participants on proposed amendments to its standardised documentation to incorporate fallback rates and calculation methods so that market participants can refer to different rates in future derivatives contracts and efficiently amend existing contracts to incorporate the different rates.

The DOJ’s business review letter follows a June 2019 request from ISDA seeking confirmation that its coordination with competing market entities to develop a fallback methodology for derivatives would not be subject to enforcement by the DOJ’s Antitrust Division.

The positive business review letter from the DOJ, available here, brings ISDA a step closer to publishing a supplement to the 2006 ISDA Definitions to incorporate fallbacks for new trades, and a related protocol that will enable market participants to include fallbacks within legacy IBOR contracts if they choose to.

Both the supplement and protocol were initially due to be published in the first quarter of 2020, but the timetable hinged on hinges upon ISDA receiving a positive business review letter from the DOJ’s Antitrust Division, and the finalisation of work with competition authorities in other jurisdictions including the EU, Australia, and Canada.

ISDA signaled last month that once this work was complete it would give market participants approximately two weeks’ notice of the official launch date for the supplement and protocol, and that the effective date for both was expected to be in mid- to late-January 2021.

Following the effective date, all new derivatives referencing the 2006 ISDA Definitions will automatically include the updated fallbacks for covered IBORs. The changes will apply to legacy derivatives as well if both counterparties have adhered to the protocol or have agreed similar bilateral amendments.

As there is no regulation requiring institutions to incorporate new fallbacks into legacy trades, broad adherence to the forthcoming IBOR fallback protocol is the “most efficient way” for market participants to mitigate against the risks associated with the discontinuation of a key IBOR, ISDA’s board of directors said in July.

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