LIBOR Transition – The Moment the Market has Been Waiting For

On October 9, 2020, ISDA announced that on October 23, 2020 it will launch (1) the IBOR Fallbacks Supplement (Supplement) to the 2006 ISDA Definitions (Definitions) and (2) the ISDA 2020 IBOR Fallbacks Protocol (Protocol).

The effective date for the Supplement and Protocol will be January 25, 2021 (Effective Date). On the Effective Date, the Definitions will be amended to include new fallback provisions. These fallbacks will replace references to certain key interbank offered rates (IBORs) with adjusted alternative risk-free rates (RFRs) that will apply upon the occurrence of specified “index cessation events.” Signing up or “adhering” to the Protocol will allow market participants to amend relevant existing derivatives and other contracts that are covered by the Protocol, as well as certain other contracts, to include the fallbacks.

Market participants can adhere ahead of the launch, and will continue to be able to do so following the Effective Date. The Supplement and the Protocol, as well as related FAQs and forms of bilateral documentation, are now available for review by industry participants in advance of the launch date.¹

Publication of the Supplement and the Protocol had been expected during the summer of 2020, but the launch was delayed while ISDA waited for the Antitrust Division of the Department of Justice to confirm that the Supplement and the Protocol would be unlikely to produce anti-competitive effects. ISDA received this confirmation on October 1, 2020, paving the way for the launch.

The Changes

From the Effective Date, new derivatives contracts that reference the Definitions will include the new fallback provisions. The new fallbacks will be incorporated into existing contracts from the Effective Date, provided both parties to the contract have adhered to the Protocol or have otherwise agreed to incorporate the new fallbacks on a bilateral basis.² The fallbacks will apply to the relevant contracts after certain “index cessation events.” These index cessation events generally occur upon either: the discontinuation of the applicable IBOR (a permanent cessation trigger); or, for certain relevant IBORs, a declaration from the regulatory supervisor of the administrator of the IBOR that the IBOR is no longer representative (a pre-cessation trigger).

Background on ISDA Protocols

An ISDA protocol is a multilateral contractual amendment mechanism that is used to make standard amendments to ISDA documentation among adhering counterparties. Protocols are a tried and tested approach and provide an efficient way of implementing industry standard contractual changes to existing contracts with multiple counterparties, eliminating the need to separately negotiate the same amendments with individual parties.³

Market participants are being encouraged to adhere early.⁴ The Protocol is open for adherence by any market participant regardless of where the participant is domiciled and whether or not it is an ISDA member. Market participants may adhere individually in their own capacity and/or as agents on behalf of clients. The Protocol will not apply to any agreement in which the parties expressly state that the terms of the Protocol do not apply.

Significance of the Supplement and Protocol

The importance of the Supplement and Protocol should not be underestimated – the launch is widely expected to serve as a catalyst for the acceleration of the LIBOR transition generally. In a July 2020 speech, Edwin Schooling Latter, the Director of Markets and Wholesale Policy at the UK Financial Conduct Authority (FCA) stated that “[t]he FCA and other authorities have consistently and repeatedly urged market participants from all sectors – sell side, buy side, non-financial, to ensure they are ready for the end of LIBOR by adhering to the protocol that ISDA is producing.”⁵

The message from regulators on both sides of the Atlantic has been clear that industry participants need to act now to address their relevant existing contracts. For example, according to Mr. Latter, “You now need to ensure you have signed the protocol within the four-month adherence period that ISDA will offer after the protocol is published ... ISDA has extended its helping hand. Regulators and central banks have shouted for your attention and encouraged you towards it. But it is now up to you to take it. That’s a key task for you ...”⁶

This position was quickly reinforced following ISDA’s announcement, with the Alternative Reference Rates Committee (ARRC, a working group of US private-sector representatives and financial regulators), the Bank of England Working Group on Sterling Risk Free Rates and the Financial Stability Board publishing statements to welcome the announcement on the day it was released.⁷

For further information, Dechert has a dedicated LIBOR page, which is available here.

Dechert also provides periodic global LIBOR update webinars. The next webinar, which will be held on October, 28, 2020, will cover these ISDA developments as well as other topics related to the LIBOR transition. Registration for that webinar is available here. The previous session, recorded on September, 23 is available here.

Footnotes

1) The Supplement, the Protocol, the FAQs, and the ISDA forms of bilateral documentation.

2) The fallbacks will apply to existing contracts that: incorporate the Definitions; incorporate certain other ISDA definitions booklets; or reference a relevant IBOR.

3) For further information regarding ISDA’s work relating to benchmark reform and transition from LIBOR, please refer to Dechert LIBORcast with Ann Battle of ISDA.

4) The period starting from the announcement on October 9 to October 23, 2020 is the so-called “escrow period.” See ISDA Letter, Adherence to the ISDA IBOR Fallback Protocol, July 22, 2020.

5) The Latest in LIBOR Transition, The Path Forward, Edwin Schooling Latter, July 14, 2020.

6) Id., SEC Public Statement, Staff Statement on LIBOR Transition (July 12, 2019); for further information, please refer to Dechert OnPoints, SEC Staff Issues Statement on LIBOR Transition; Practical Considerations for Investment Companies, Investment Advisers and Other Financial Institutions in Proactively Addressing LIBOR Cessation and Transition (September 24, 2019) and SEC Publishes OCIE Risk Alert on LIBOR Transition Preparedness Examination Initiative (July 29, 2020).

7) See ARRC, ARRC Supports Forthcoming ISDA IBOR Fallbacks Protocol and Encourages Adherence; ARRC Urges Timely and Widespread Adherence to the Protocol, October 9, 2020, Bank of England Working Group on Sterling Risk Free Rates, Statement welcoming the announcement by ISDA on its IBOR Fallbacks Protocol and IBOR Fallbacks Supplement (Oct. 9, 2020), and Financial Stability Board, FSB encourages broad and timely adherence to the ISDA IBOR Fallbacks Protocol (Oct. 9, 2020).