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On November 15, 2019, ISDA published a report (the "Final Parameters Report") summarizing responses to the "Consultation on Final Parameters for Benchmark Fallback Adjustments. " As previously covered, ISDA requested feedback from market participants in order to finalize the methodologies for the adjustments that will be made to the fallbacks for certain interbank offered rates ("IBORs") referenced in derivative contracts to the extent such IBORs are permanently discontinued and replaced with certain risk-free rates ("RFRs"). ISDA intends to use the responses to finalize the methodologies for the compounded setting in arrears rate and the historical mean/median approach to the spread adjustment for such fallbacks.
The Final Parameters Report concludes that a majority or plurality of respondents preferred:
- calculation of the spread adjustment based on an historical median over a five-year lookback period;
- consistency of the spread adjustment across IBORs;
- not to include a transitional period in the spread adjustment calculation;
- not to exclude outliers from the calculation of the spread adjustment;
- not to exclude negative spreads from the calculation of the spread adjustment;
- calculation of the compounded setting in arrears rate based on a backward shift adjustment of two banking days; and
- calculation of the compounded setting in arrears rate based on the city or banking days for which the RFR is published.
ISDA notes that it expects that the amendments for all IBORs other than EURIBOR and euro LIBOR will be finalized by the end of 2019 and will take effect some time in the first half of 2020. ISDA stated that it plans to release a supplemental consultation on the spread and term adjustments for fallbacks for EURIBOR and euro LIBOR shortly.
Commentary
With the release of these results, ISDA will finalize documentation for fallbacks to the adjusted RFRs that will replace LIBOR and other interbank offered rates in the derivatives markets. ISDA plans to finalize the documentation by year end so that participants will be able to incorporate these provisions into new transactions and, through adherence to a protocol, legacy transactions in the first half of 2020. To facilitate their use, the adjusted fallback rates will be published by Bloomberg. A robust derivatives market in the adjusted RFRs is critical to the transition from IBORs in the cash markets before the expected cessation of LIBOR at the end of 2021.
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