ISDA updated the co-chairs of the Financial Stability Board Official Sector Steering Group ("OSSG") on the status of implementing fallbacks for derivative contracts that reference key interest rate benchmarks.
In its letter, ISDA reported that:
- it expects to amend certain "Rate Options" in the 2006 ISDA Definitions to incorporate fallbacks that would apply upon the permanent cessation of key interbank offered rates ("IBORs");
- it will release a consultation on the "preferred approach for addressing pre-cessation" matters in derivatives that refer to LIBOR and potentially other IBORs;
- it launched consultations on various aspects of fallbacks;
- it is administering a request for proposal to choose a vendor that will calculate and publish the term-adjusted RFR and spread adjustment for each IBOR;
- it will request feedback from all market participants before implementing fallbacks in its definitions; and
- it expects to release a protocol to enable multilateral amendments to incorporate the amended rate options.
In addition, ISDA noted that the working groups that are developing fallback rates for cash products are considering forward-looking term SOFR rates. ISDA expressed concern that market participants may be confused by the working groups' statements supporting forward-looking term rates and may believe that such support extends to the use of forward-looking term rates as fallbacks for derivatives generally, in addition to cash products (and derivatives used to hedge such cash products). ISDA said that this misunderstanding may jeopardize uptake of its fallback approach (which does not rely on forward-looking term rates), leading to fragmentation of the derivatives market.
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