LIBOR transition gets a jumpstart: ISDA announces ISDA IBOR fallbacks provisions and related protocol

As we have previously reported, in July 2017, the UK Financial Conduct Authority announced that it would no longer use its legal powers to persuade or compel contributing banks to make the transaction data submissions necessary to determine the London Interbank Offered Rate (LIBOR) after the end of 2021.1 Since that time, on their own and with pressure from regulators, individual market participants, various industry associations and other working groups have been preparing for “life without LIBOR.” 2

Last week, the International Swaps and Derivatives Association (ISDA) jumpstarted this process by announcing its publication of the effective dates for its two-pronged solution to address the anticipated cessation of the officially sanctioned use of LIBOR and other Interbank Offered Rates for various currencies (including US dollars, British pounds sterling, Euros, Swiss francs and Japanese yen) as recognized primary benchmarks for rates of interest or for determining other payments used in myriad loans, deposits, derivatives, debt securities and other investments. ISDA’s efforts represent a major step in the financial markets’ transition away from LIBOR since its solution allows a uniform and efficient process for migration of the trillions of dollars of derivatives transactions, the bulk of outstanding transactions using LIBOR and other IBORS, to new benchmarks. The markets’ acceptance of ISDA’s solution has been swift with over 400 major swap dealers and other financial institutions agreeing to its adoption.[1]

ISDA’s solution consists of two parts: (i) the ISDA IBOR Fallbacks Supplement, which will amend the ISDA definitions4 used to determine LIBOR and the other IBORs in transactions using the over-the-counter derivatives master agreements published by ISDA (ISDA Master Agreements) on a going-forward basis; and (ii) a related ISDA IBOR Fallbacks Protocol (the Protocol), which allows parties to incorporate the same amendments to these definitions in pre-existing “legacy” transactions and agreements, including those transactions documented only under ISDA Master Agreements, but also under a wide range of other agreements listed in the Protocol.5

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