Adherence to the ISDA Protocol
London Interbank Offer Rates (LIBOR) and other Interbank Offer Rates (collectively, IBORs) are expected to be discontinued after 31 December 2021 and replaced with certain Alternative Reference Rates (ARRs), with the exception of certain USD LIBOR rates which are expected to be discontinued on 30 June 2023 . LIBOR and IBOR rates typically underpin a significant proportion of derivatives transactions including, potentially, a material proportion of your derivative transactions.
The International Swaps and Derivatives Association (ISDA), has launched the ISDA 2020 IBOR Fallbacks Protocol (the ISDA Protocol) to facilitate the smooth transition away from IBORs to ARRs, as well as a supplement to the 2006 ISDA Definitions (the Supplement). FAB has adhered to the ISDA Protocol. FAB encourages all of its clients to inform themselves about the ISDA Protocol and the Supplement and consider whether it would be appropriate for them to adhere to the ISDA Protocol. FAB has prepared this communication to highlight publicly available information about the ISDA Protocol and the Supplement, in order to further inform your decision-making process.
Many leading regulators and industry groups2345 are encouraging market participants to adhere to the ISDA Protocol as one of the key milestones to transition away from IBORs.
Introduction to ISDA 2020 IBOR Fallbacks Protocol
The ISDA Protocol was published in order to efficiently amend the large number of existing derivative contracts that reference IBORs that are expected to be discontinued. The effect of the ISDA Protocol is to include in existing derivative contracts a new set of fallback provisions. The fallback provisions are a framework enabling derivatives contracts to transition away from IBORs to the new industry-agreed ARRs (plus spread adjustments), as and when such IBORs are discontinued. All the amendments and contractual framework discussed in this communication have been developed at a global industry level coordinated by ISDA. FAB has had no involvement or input in such amendments or contractual framework.
The ISDA Protocol enables market participants to automatically incorporate a robust risk-free rate based fallback into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the ISDA Protocol (rather than having to go through a manual process of amending each in-scope agreement). The ISDA Protocol is currently open for adherence, and will become effective on 25 January 2021. (Source: ISDA)
The Protocol applies where: (i) the relevant document (master agreement, credit support document or trade confirmation) incorporates the 2006 ISDA Definitions (or one of the equivalent earlier legacy ISDA definitions booklets) and (ii) the relevant document references a relevant IBOR. (Source: ISDA)
In addition, some non-ISDA documents will be within scope of the Protocol, but only if those documents are listed in the Protocol as “Additional Master Agreements” or “Additional Credit Support Documents”. The Protocol is available here for your reference. New derivatives transactions entered into on or after 25 January 2021 that incorporate the 2006 ISDA Definitions will automatically contain the fallbacks set out in the ISDA Protocol.
The following IBORs are covered in the by the ISDA protocol (as well as IBORs pertaining to certain lesser used currencies):
IBORs and corresponding RFRs
| USD LIBOR | SOFR |
| GBP LIBOR | SONIA |
| EUR LIBOR / EURIBOR | €STR |
| CHF LIBOR | SARON |
| JPY LIBOR / JPY / EuroYen TIBOR | TONAR |
The fallback rate to be applied under the Protocol upon a cessation or pre-cessation event for an IBOR is made up of a term-adjusted risk-free rate (RFR) plus a spread adjustment.
The term adjusted RFR for an IBOR will be the corresponding risk-free rate mentioned in Table 1, which is an overnight rate, compounded in arrears over an accrual period corresponding to the tenor of the IBOR (e.g. 1, 3, 6 months).
The spread adjustment will be the historic median difference between the relevant IBOR and the RFR over a five-year lookback period.
In addition, a two days offset lag will apply to the calculation period for the adjusted RFR, so payment amounts will be known at least two days before payments are due. Public statements from the rate administrators that it has or will cease to publish the relevant rate permanently (or, LIBOR has or will become non-representative of the underlying market) will trigger the calculation of the spread adjustment which will be fixed on such announcement date. The fallback rate will then be effective on the announced cessation date. The announced cessation date may or may not be the same as the announcement date.
By way of an example, the fallback rate for USD LIBOR would be as follows:
The fallback rate in the relevant currency would apply as a fallback following a pre cessation or permanent cessation of the IBOR in that currency (a cessation trigger). For derivatives that reference LIBOR only, the fallback rate in the relevant currency would also apply as a fallback following a determination by the FCA that LIBOR in that currency is no longer representative of its underlying market, even if it continues to be published (a pre-cessation trigger).
Yes. ISDA has published a set of “Template Bilateral Documents” that allows parties to bilaterally adopt the Protocol (instead of adhering to the ISDA Protocol) in the form of an amendment agreement. These documents are templates and parties are free to tailor the terms to meet their circumstances. However, this method increases the time and cost of remediation for all parties.
Yes, FAB has adhered to the ISDA Protocol.
FAB is currently reviewing its portfolio of such products and aligning them to its overall transition strategy. FAB intends to adhere to the various transition milestones set by regulators and industry groups. Post our review, we will reach out to specific clients and discuss the transition, where relevant.
We recommend that you carry out a review of all your IBOR-linked transactions, including portfolios with other financial institutions, with such external advisers as you deem appropriate, in order to establish a suitable transition strategy for your portfolios.
FAB initiated its IBOR transition project in 2019 and has maintained momentum towards preparing for the incoming ARRs ever since. Apart from internal preparations, FAB has also shown its commitment in keeping its valued clients informed and aware about the benchmark reform. FAB, in collaboration with the leading law firm, Clifford Chance, hosted a webinar for its clients concerning different aspects of the Protocol. To view this webinar, please get in touch with your FAB Relationship Manager.
For more information on the ISDA Protocol and Fallbacks, please click here.
Important Notice:
This communication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal, financial or other advice. By reviewing this communication, you agree that FAB is not acting as your advisor and is not providing legal or financial advice or making any recommendation to adhere to the ISDA 2020 IBOR Fallbacks Protocol; it being understood that any information or explanations pertaining to the terms of ISDA 2020 IBOR Fallbacks Protocol provided via this communication shall not be considered legal or financial advice or a recommendation to enter into same.
Each recipient of this communication will make its own independent decisions regarding whether to adhere to ISDA 2020 IBOR Fallbacks Protocol and as to whether such protocol is appropriate or proper for it based upon its own judgement and upon advice from such advisors as it has deemed necessary.
Any information which is provided on IBORs in this document should be read in conjunction with About IBOR Transition (Conventional Products) and About IBOR Transition (Islamic Products).
- The ICE Benchmark Administrator (IBA) has released a consultation on discontinuing one-week and two-month USD LIBOR with effect from 31 December 2021, but has proposed to extend the cessation dates for the publication of O/N, 1M, 3M, 6M and 12M USD LIBORs to 30 June 2023.
- Alternative Reference Rates Committee
- Financial Stability Board
- The Working Group on Sterling Risk-Free Reference Rates, the Financial Conduct Authority and the Bank of England
- The working group on euro risk-free rates, the European Central Bank, the European Securities and Markets Authority, the European Commission and the Financial Services and Markets Authority
FAB does not accept any responsibility for, and shall not have any liability with respect to, the administration, submission or any other matter related to benchmark rates such as IBORs or any alternative rate including, without limitation, whether the composition or characteristics of any alternative rate will be similar to, or produce the same value or economic equivalence as, the original benchmark rates (including IBORs) or whether any alternative rate will have the same volume or liquidity as the original benchmark rate prior to its discontinuance or unavailability.
Except where we otherwise agree with you in writing, FAB does not provide advice, or recommendations on the suitability of your product choice or financing solution. You should consider whether you need to obtain professional independent advice (legal, financial or otherwise), prior to entering into any agreement or investing in a product which references a benchmark rate such as an IBOR. FAB does not owe you any duties or have any liability to you in relation to its management of the transition from IBOR benchmark rates to alternative rates. FAB is not under an obligation to update the information in this explanation and general risk warning.