Adherence to the ISDA 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

IBOR	RFRs
USD LIBOR	SOFR
GBP LIBOR	SONIA
EUR LIBOR / EURIBOR	€STR
CHF LIBOR	SARON
JPY LIBOR / JPY / EuroYen TIBOR	TONAR

ISDA has published a dedicated page for the 2020 IBOR Fallbacks Protocol (including answers to frequently asked questions) which can be found here.

More information on other updates from ISDA related to the wider IBOR transition can be found here.

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.

Instructions on how to adhere to the protocol can be found here.

Yes. The list of Adhering Parties can be found here.

Most parties adhering to the ISDA Protocol prior to 25 January 2021 do not need to pay any cost. All parties adhering after 25 January 2021 need to pay USD 500.

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.