Reed Smith Client Alerts

On Tuesday February 25, the International Swaps and Derivatives Association, Inc. (ISDA) launched its new consultation seeking input on whether its forthcoming Supplement to the 2006 ISDA Definitions (the Definitions) should amend the rate options for LIBOR (in all of the relevant currencies, including USD and GBP) such that fallbacks would be triggered not only upon the permanent cessation of LIBOR, but also if the UK Financial Conduct Authority (FCA) (the regulator of benchmarks in the UK) were to announce LIBOR is no longer a representative rate. Such an announcement, if it were to occur prior to permanent cessation, would trigger a "non-representative" pre-cessation event (the Consultation).1

As market participants are aware, panel banks will no longer be compelled to submit LIBOR rates following the end of 2021. There is an increasing expectation in the market that a pre-cessation event (such as an FCA announcement indicating non-representativeness) will occur prior to the permanent cessation of the publication of LIBOR. This could lead to a scenario where LIBOR continues to be published, but does not provide a representative rate to the market (such rate has been dubbed "zombie LIBOR"). This potential scenario has prompted regulators to request ISDA to gain further clarity on market preferences in this scenario and potentially include this as a reference rate fallback trigger in its anticipated protocol (the Protocol).

Regardless of the results of the Consultation, ISDA will publish the Protocol which has been under development by an ISDA working group for some time to address benchmark fallbacks both in existing documents and in legacy contracts. If the responses to the Consultation meet the required criteria for positive respondents (as determined by ISDA and as set out in the Consultation), then the Protocol will allow parties to reference the amended Definitions which will reflect both permanent cessation and pre-cessation triggers in all of their legacy contracts with other adherents.

If there is an insufficient positive response to the Consultation according to ISDA's criteria (as set out in the Consultation), the Protocol will reflect the following:

  • The Supplement and Protocol to implement the permanent cessation fallbacks.
  • Amendments to the Definitions (as part of the Supplement) to allow market participants to incorporate pre-cessation fallback provisions in their new derivatives (in addition to the permanent cessation fallbacks) if they choose to do so.
  • An "annex" to the Protocol to allow market participants to "opt-in" to the pre-cessation fallback provisions with counterparties who also opt-in to those fallback provisions as part of their adherence to the Protocol implementing the permanent cessation fallbacks.

As ISDA has noted in its publications, parties are, of course, not obligated to use the Protocol; bilateral amendments are always an alternative.