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15 November 2019

ISDA publishes results of consultation on final parameters for benchmark fallback adjustments


ISDA published a report that summarises responses to a consultation on the final parameters of adjustments that will apply to derivatives fallbacks for certain interbank offered rates (IBORs).

The report, published by The Brattle Group, follows two earlier consultations that found the overwhelming majority of respondents preferred the ‘compounded setting in arrears rate’ to address differences in tenor between IBORs and overnight risk-free rates, and the ‘historical mean/median approach’ to deal with differences in credit risk and other factors.

The new report covers technical issues on specific methodologies for the two adjustments. Responses to the final parameters consultation show that a majority of participants preferred a historical median approach over a five-year lookback period. A majority also preferred not to include a transitional period in the spread adjustment calculation, not to exclude outliers, and not to exclude any negative spreads. For the compounded setting in arrears rate, a clear majority favored a two-banking-day backward shift adjustment for operational and payment purposes.

Following these results, ISDA will make the relevant amendments to the 2006 ISDA Definitions to incorporate fallbacks with these adjustments for new IBOR trades. Bloomberg has been selected to publish the adjustments and ‘all in’ fallback rates. ISDA will also publish a protocol to enable market participants to include fallbacks within legacy IBOR contracts if they choose to. Both the amended Definitions and the protocol are expected to be finalized by the end of this year, with implementation in 2020.

“The results of this consultation are a critical step towards finalizing the methodologies for the fallback adjustments. The implementation of robust fallbacks within derivatives contracts will go a long way to mitigating the systemic risk posed by current fallbacks for key IBORs,” said Scott O’Malia, ISDA’s Chief Executive.

Full report

 



© ISDA - International Swaps and Derivatives Association


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