ISDA Formally Launches Protocol for Rate Fallbacks on Derivatives

The International Swaps and Derivatives Association announced today that its framework for reference rate fallbacks will launch on Oct. 23. The framework includes a supplement to ISDA’s 2006 definitions as well as its 2020 interbank offered rate fallback protocol, and they will take effect on Jan. 25, 2021, at which point all new derivatives contracts that incorporate ISDA’s 2006 definitions will include the new fallbacks.

ISDA’s announcement follows the Department of Justice’s recent determination that the fallback framework—designed to make financial instruments more durable should the London Interbank Offered Rate cease after 2021—is “unlikely to produce anti-competitive effects.” ISDA’s announcement was commended by the Alternative Reference Rates committee, whose best practices include adherence to the ISDA protocol, as well as the Financial Stability Board.

Meanwhile, the Federal Reserve said that “[e]xaminers should alert supervised firms to announcement of the Protocol and encourage those that are active in the derivatives market—particularly those with large Libor-denominated derivatives exposures—to give strong consideration to adhering to the Protocol.” Noting that derivatives account for “the vast majority” of outstanding Libor exposure, the Fed added that the ISDA protocol “provides an efficient mechanism to amend a large number of derivatives contracts with many counterparties, and therefore will play an important role in an orderly transition away from Libor.”