ISDA initiated two new consultations related to amending certain floating rate options that reference interbank offered rates ("IBORs").
The first consultation (the "Supplemental Consultation") is a follow-up to the consultation that ISDA published in July 2018, which sought feedback from market participants regarding approaches for addressing certain technical issues associated with adjustments that will apply to the risk-free rate fallbacks for GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW ("July 2018 Consultation"). The July 2018 Consultation requested preliminary feedback in respect of USD LIBOR and other specified IBORs (the "Supplemental IBORS") and referred to the need to publish a supplemental consultation in respect of such IBORs. The Supplemental Consultation asked market participants whether the same approach should be adopted for the Supplemental IBORs as was adopted for the IBORs subject to the July 2018 Consultation. Additionally, the Supplemental Consultation requests feedback from market participants on the appropriate means of addressing two supplemental issues: (i) the lack of historical secured overnight financing rate ("SOFR") data in connection with applying the historical mean/median spread adjustment approach for SOFR and (ii) whether the fallback for the Singapore Dollar Swap Offer Rate should reference the adjusted SOFR fallback.
The second consultation concerns pre-cessation issues for certain IBORs, including LIBOR (the "Pre-cessation Consultation"). ISDA is seeking feedback on whether its contemplated fallback amendments to certain floating rate options that reference an IBOR (the "IBOR Amendments") should include a fallback trigger based on a public statement by the regulatory supervisor for the administrator of an IBOR announcing that such IBOR is no longer representative of the related underlying market (a pre-cessation trigger, or "PCT"). ISDA notes that it has decided to release the Pre-cessation Consultation in response to a number of recent developments, including: (i) the decision on the part of the Alternative Reference Rates Committee in the United States to release recommended template fallback language for floating rate notes and syndicated business loans that included a PCT, (ii) statements by the UK Financial Conduct Authority (the "FCA") suggesting that market participants may wish to consider including a PCT based on an announcement by the FCA in their LIBOR derivatives contracts, and (iii) a request from the Financial Stability Board Official Sector Steering Group co-chairs "encouraging ISDA to seek market opinion on the events that should trigger a move to a spread-adjusted fallback rate for LIBOR."
In asking market participants to consider the technical issues and questions presented in the Pre-cessation Consultation, ISDA acknowledges a number of the potential benefits of including a PCT in the IBOR Amendments, including: (i) alignment of new derivatives contracts with cash products that include a PCT, (ii) alignment of OTC derivatives contracts with cleared derivatives contracts to the extent central counterparties elect to exercise their discretion to include a PCT in cleared derivatives contracts and (iii) alignment of legacy derivatives contracts with new derivatives contracts, which are unlikely to continue to reference an IBOR to the extent the supervisor for the administrator of an IBOR announces that the IBOR is no longer representative.
In addition, ISDA alludes to a number of potential consequences that may arise if a PCT is included in the IBOR Amendments, including: (i) misalignment between amended derivatives contracts that include a PCT and legacy cash products that do not include PCTs and (ii) the disparity between the spread adjustment determined in respect of a derivatives contract that transitions to an adjusted risk-free rate based on the occurrence of a PCT and the spread adjustment determined in respect of a derivatives contract that transitions to an adjusted risk-free rate based on the occurrence of a permanent cessation of the relevant IBOR.
Finally, ISDA notes a number of factors that may render the inclusion of a PCT unnecessary, including: (i) the requirement that an administrator of an IBOR subject to the EU benchmarks regulation either remediate the IBOR that is not representative or cease publishing such IBOR, (ii) in the case of LIBOR, that the FCA can take steps to require that panel banks that are EU-supervised entities continue to provide submissions to support the publication of LIBOR, and (iii) statements from the FCA suggesting that market participants should not rely on the fallbacks as a strategy to transition to adjusted risk-free rates and that market participants should take steps to transition or close-out IBOR portfolios prior to the occurrence of a trigger event.
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