More than 5,900 entities across roughly 70 jurisdictions have so far adhered to an ISDA protocol that will allow firms to incorporate new, more robust fallbacks into existing derivatives contracts linked to LIBOR and other key interbank offered rates (IBORs). That’s a big number, and drums home just how important viable fallbacks are. But with less than two weeks to go until the new fallbacks take effect, now’s the time for those who haven’t considered this to take action. The alternative is not having a clear back-up rate in place in the event an IBOR disappears – a situation that would create massive uncertainty for firms and their counterparties.
The new fallbacks were never intended to be a primary means of transition – they are instead a one-size-fits-all safety net intended to mitigate the systemic impact of an IBOR cessation in the worst-case scenario. Various regulators have recommended that firms implement robust, well-defined fallbacks in their derivatives contracts as a first step, and then use the remainder of 2021 to proactively negotiate a shift from LIBOR to alternative reference rates in order to achieve more tailored outcomes. Firms would then be safe in the knowledge that if they don’t finish their transition efforts in time, a workable back-up will automatically kick in.
The January 25 effective date follows the October 23 launch of the IBOR Fallbacks Supplement (which incorporates the fallbacks into new IBOR derivatives referencing the 2006 ISDA Definitions entered into from the effective date) and the IBOR Fallbacks Protocol (which inserts the fallbacks into legacy non-cleared derivatives with other counterparties that choose to adhere to the protocol). Publication of these documents was necessary because existing fallbacks simply won’t work in the event an IBOR is permanently unavailable – a scenario set to occur for most LIBOR settings at the end of 2021.
See full ISDA update here