On September 23, 2020, Scott O'Malia, CEO of the International Swaps and Derivatives Association ("ISDA"), stated that ISDA is now on the cusp of publishing the IBOR Fallbacks Protocol (the "Protocol") and the IBOR Fallbacks Supplement (the "Supplement"), and provided an updated timetable of the remaining steps to publication and effectiveness1.
The Protocol and Supplement are being published to address the anticipated cessation of publication of LIBOR at the end of 2021, and the market transition to risk-free rates, including SONIA, SOFR, €STR, SARON and TONAR. The Protocol will enable market participants that elect to adhere to incorporate fallback language into legacy derivatives contracts with other adhering counterparties in order to transition to replacement benchmarks. The Supplement will ensure that any new derivatives contracts entered into after its effective date that incorporate the 2006 ISDA Definitions and reference a covered IBOR rate will automatically include new fallbacks without any further action by the parties.
The anticipated timetable includes a 2-week notice period to market participants of the official publication, launch date, and effective date for the Protocol and Supplement. During this notice period, market participants will be able to adhere to the Protocol "in escrow," so that their adherence will have immediate effect as of the official launch date.
Following the launch date, and subject to any regulatory input, the Protocol and Supplement are expected to take effect approximately 3 months later to provide market participants with sufficient time for outreach to counterparties and to demonstrate adherence to the new fallbacks.
Following the effective date of the Supplement, new derivatives contracts that incorporate the 2006 ISDA Definitions will automatically include these new IBOR fallbacks. The adherence of both counterparties to the Protocol will also ensure that these changes apply to all legacy contracts covered by the Protocol. In addition, in the event that regulators make any announcement before the end of 2020 on the future of LIBOR after 2021, ISDA have confirmed that this will not affect the calculation of spread adjustments under the fallback methodology, which will effectively "freeze" in contracts incorporating the Supplement and amendments under the Protocol pursuant to the terms of the IBOR Fallback Rate Adjustments Rule Book, jointly published by ISDA and Bloomberg.
Taking into account the expected timing for the successful completion of ISDA's submissions to national competition authorities, the 2-week notice period of the publication date, and the 3 months allocated for market outreach and to demonstrate adherence, the Protocol and Supplement are expected to take effect as of mid-to-late January 2021. This update to the effective date by ISDA follows feedback from market participants regarding the operational challenges of implementing these changes during the traditional code freeze period in December, and the need to avoid an effective date at year end.
The publication of the Protocol and Supplement remains contingent on ISDA's completion of its submissions to competition authorities, and in particular receiving a positive business review letter from the US Department of Justice ("DoJ"), as well as positive feedback from counsel in other jurisdictions following the disclosure of the DoJ business review letter to other national competition authorities. As ISDA have recently indicated that feedback from competition authorities may be secured in as little as 1-2 weeks' time2, market participants may expect to receive notice of the official launch date for publication soon.
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