On 15 April 2020, ISDA announced the preliminary results of its consultation on the implementation of pre-cessation triggers in fallback provisions for LIBOR derivatives.1 This trigger would arise if, prior to a permanent cessation of LIBOR, LIBOR were deemed by the UK Financial Conduct Authority to be “no longer capable of being representative” or “non-representative” of underlying financial reality. This announcement is welcome, and will likely assist many firms in dealing with LIBOR transition.

The results indicated that a significant majority of respondents to the consultation were in favor of including both pre-cessation and permanent cessation fallback triggers as standard language in the amended 2006 ISDA Definitions for new LIBOR trades and in an anticipated protocol that would allow parties to have the amended definitions apply to legacy trades among protocol adherents.

The amended 2006 ISDA Definitions and the protocol are expected to be published in the third quarter of 2020, with a delayed implementation window of four months for parties to adhere to the protocol before it becomes effective at the same time as the amendments to the 2006 ISDA Definitions on a “big bang” date. Work on both the amended definitions and protocol has been under way for some time, and had been delayed pending the completion of this consultation. The amended definitions and protocol had previously contemplated fallback triggers based solely on a permanent cessation of LIBOR. ISDA is also currently working on a complete update of the 2006 ISDA Definitions, to be published as the 2020 ISDA Interest Rate Derivatives Definitions, which are expected to incorporate the revised fallback provisions of the 2006 ISDA Definitions once those are finalized.

Although ISDA noted that the results were subject to further analysis, it stated that it expected to move forward on the basis that pre-cessation fallbacks and permanent cessation fallbacks would apply to all new and legacy derivatives referencing LIBOR that incorporate the amended definitions. The amended definitions for other covered interbank offered rates (IBORs) will continue to include permanent cessation fallbacks only.

The inclusion of pre-cessation fallbacks in the amended definitions and protocol enables such provisions to be in alignment with pre-cessation triggers that have been included in LIBOR fallbacks for cash products recommended by the US ARRC and other working groups. This will allow parties to avoid basis risk between their LIBOR-based derivatives and underlying cash products.

This consultation had been undertaken at the request of the Official Sector Steering Committee of the Financial Standards Board2 following the results of another ISDA consultation on the same topic in 2019. The results of the 2019 consultation indicated that, although a majority of the respondents would generally not want to continue referencing a covered IBOR in existing or new derivatives contracts following a statement from a supervisor that it is no longer representative of the underlying market, no consensus emerged on how to respond to such a statement. The recently concluded ISDA consultation was undertaken following some clarification from the FCA and ICE Benchmark Administration that any publication of a non-representative LIBOR would be limited in duration.3

Please refer to Baker McKenzie’s LIBOR hub page for additional information on LIBOR transition.

ISDA Announces Preliminary Results of Consultation on Pre-cessation Fallbacks for LIBOR.

2 15 November 2019 Letter from Official Sector Steering Committee of Financial Standards Board to ISDA.

See ISDA 4 December 2019 letter to FSB OSSG re: ISDA Pre-Cessation Triggers for Derivatives Fallbacks; November 2019 letter from the OSSG to ISDA regarding pre-cessation triggers; January 2020 letter from FCA to ISDA; and January 2020 letter from ICE Benchmark Administration to ISDA.
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