GovernanceInterest RatesOpinion divided on LIBOR pre-cessation

Opinion divided on LIBOR pre-cessation

Derivatives users have given mixed reviews on whether and how to add a fallback trigger for legacy LIBOR swaps, according to an ISDA consultation.

The International Swaps and Derivatives Association (ISDA) has issued the initial results of its consultation on including pre-cessation triggers in fallbacks that would be activated if regulators determine that LIBOR is no longer a representative benchmark.

Derivatives users have given mixed reviews on whether and how to add a fallback trigger for legacy LIBOR swaps, creating an outlook of a split transition to alternative reference rates for cleared and non-cleared products.

A variety of market participants including banks and broker-dealers, insurance companies, asset managers, government/federal entities and central counterparties (CCPs) were included in ISDA’s Consultation on Pre-Cessation Issues for LIBOR and Certain Other Interbank Offered Rates (IBORs).

A wide variety of views

The pre-cessation triggers discussed in the consultation, launched in May, are supplementary to the fallbacks ISDA will implement to address the permanent cessation of LIBOR and other IBORs.

The responses fell into three categories, supporting the following without a clear majority in any one category:

  • Adding a pre-cessation trigger to the permanent cessation triggers in the hard wired amendment to the 2006 ISDA Definitions and related protocol.
  • Using the pre-cessation trigger if it was implemented with optionality and flexibility (or indicated that their support for the trigger depended on several factors).
  • Opposing the pre-cessation trigger.

Solution to avoid unnecessary complication and optionality

ISDA aims to publish an anonymised and aggregated summary of the feedback received in September 2019, alongside a proposed documentation solution for derivatives that incorporates a pre-cessation fallback trigger while still accounting for respondents’ views and concerns.

Any decision or action by ISDA will remain subject to the advice and feedback it receives from its advisors and government and regulatory agencies, with whom it will continue to engage to determine how best to address pre-cessation issues for derivatives.

ISDA quoted: “Among other things, the proposed solution will seek to avoid unnecessary complication and optionality, or anything that could jeopardize broad market adoption of the permanent cessation fallbacks. The consultation period for ISDA’s proposed solution will allow market participants to indicate whether the proposal addresses their concerns and raise any additional concerns they may have.”

Continue to work and seek advice

The public statement conveyed that ISDA will also continue to work with market participants and regulators to determine how best to address concerns regarding non-representative benchmarks and implementation of pre-cessation fallbacks for derivatives.

ISDA will continue to seek advice from its independent advisors and feedback from government and regulatory agencies, and any decision or action by ISDA remains subject to the advice and feedback it receives from its advisors and government and regulatory agencies.

Organisations need to do more to prepare for the switch from the discredited LIBOR interest rate benchmark , according to Dave Ramsden, the Deputy Governor for Markets & Banking at the Bank of England (BoE).

With regulators across the globe getting ready to shift away from LIBOR, here is what treasurers should be doing now in order to prepare their organisations for the future.

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