Widespread adoption is a tangible step financial and non-financial firms can take to avoid disruptions in derivatives markets and mitigate risks at a system-wide level, the FSB says.
ISDA will launch the IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol on 23 October, according to a statement from its Board of Directors.
The statement says the supplement and the amendments made by the protocol will take effect on 25 January 2021:
“On this date, all new derivatives contracts that incorporate the 2006 ISDA Definitions and reference one of the covered IBORs will contain the new fallbacks. Derivatives contracts existing as of this date will incorporate the new fallbacks if both counterparties have adhered to the protocol or otherwise bilaterally agreed to include the new fallbacks in their contracts. The protocol will remain open for adherence after this effective date.”
The announcement follows a business review letter from the US DOJ (Department of Justice) stating that it has no present intention to challenge ISDA’s proposal to amend its standard documentation.
ISDA says it has kept competition authorities in other jurisdictions including the EU, Australia, and Canada fully informed of the issues covered in the DOJ letter, and that it does not anticipate adverse action by these authorities with respect to its implementation of new fallbacks in ISDA’s standard documentation for derivatives.
The FSB (Financial Stability Board) issued a statement welcoming ISDA’s announcement and encouraging “widespread and early adherence” to the supplement and protocol.
“The FSB encourages adherence to the Protocol as a tangible step that can be taken by both financial and non-financial firms to avoid disruptions in covered derivatives contracts if the IBOR they currently reference is discontinued or, in the case of LIBOR, becomes non-representative,” the statement says.
“Widespread adoption of the Protocol will be necessary to ensure it is effective in mitigating risks at a system-wide level. Any market participants who choose not to do so for some or all of their relevant trades will need to take robust alternative steps, such as closing out these positions or appropriate bilateral amendments, to avoid the risk of disruption.”
The FSB reiterated its view that firms across all jurisdictions should continue their efforts to reduce reliance on IBORs where appropriate and, in particular, remove remaining dependencies on LIBOR by the end of 2021.