A Hot Issue for a Hot Summer: Time to Understand ISDA IBOR Benchmark Fallbacks

As we patiently wait for the International Swaps and Derivatives Association (ISDA) to publish its long planned IBOR Fallback Protocol and IBOR Fallback Supplement for interest rate derivatives, we thought we would highlight some recent announcements on the topic.

According to ISDA’s letter on July 22, 2020 to the Alternative Reference Rates Committee (ARRC), ISDA planned to finalize the Protocol and the Supplement by the end of July.  On July 29, 2020, ISDA announced that it would publish the Protocol “soon”.  This is hardly the first time that things have been delayed, but it’s important to get it right.  Among other things, it’s possible that ISDA is still waiting for a positive business review letter from the US Department of Justice and similar feedback from competition authorities in other jurisdictions.

Even though the actual language has not been published yet, the concept behind the Protocol has been supported by the ARRC.  In its Recommended Best Practices, the ARRC suggested that market participants adhere to the Protocol within the 4-month period after it is published and before the amendments to embed the fallbacks in legacy transactions take effect. By adhering to the Protocol, market participants agree that their legacy derivatives contracts with other adherents will include the amended floating rate option for the relevant IBOR and will therefore include the fallback.

On August 10, 2020, Tom Wipf, Chair of the ARRC, reinforced the recommendation by sending a letter to the full ARRC membership urging them to sign onto the Protocol and the Supplement.  In his letter, he noted that before the official launch of the Protocol, many institutions can sign up to adhere to the Protocol “in escrow” so that they will be included among the list of adherents announced at the time of the Protocol’s official launch.

In the meantime, there are plenty of available resources on the topic. A summary of ARRC recommended fallback language for syndicated business loans can be reviewed in our prior alert. Besides recent ARRC guidance, ISDA published a brochure that provides answers for key questions for market participants including how to reduce exposure to LIBOR (or another IBOR), steps to take if market participants find themselves exposed to LIBOR (or another IBOR) at the time of discontinuation, and an explanation for a “pre-cessation” fallback for LIBOR. Market participants may also review a two-page factsheet published by ISDA to gain an understanding of IBOR benchmark fallbacks.

Stay tuned for updates on the Protocol!

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo, and Han Wang.