Posted by Mark Daley on 13 October 2020
Tagged to Derivatives, ISDA, LIBOR, SONIA, Swaps

ISDA protocols and LIBOR definition amendment emerged on Friday and are all on the ISDA website.  The protocol opens for signing on 23 October and the effective date will be 25 January 2021. The new ISDA amended LIBOR definitions and protocol work in broadly the same way: taking “GBP-LIBOR-BBA” as an example, the definition is redefined (either via the protocol or via a bilateral agreement between the parties) to mean:

  • unless and until an “Index Cessation Effective Date” occurs, the rate for GBP LIBOR for the designated maturity appearing on Bloomberg at 11.55 a.m. on the rate fixing day​
  • if there is an "Index Cessation Event", then from the related "Index Cessation Effective Date", the rate is determined by reference to "Fallback Rate (SONIA)", which is the “term adjusted SONIA rate plus the spread relating to Sterling LIBOR, in each case, for a period of the Designated Maturity provided by Bloomberg… on the Fallback Rate (SONIA) Screen…”. The "Fallback Rate (SONIA) Screen" is the relevant Bloomberg page, and usually (e.g. for USD and GBP) the rates given are overnight, 1 week, and 1, 2, 3, 6 and 12 months.

There are three “Index Cessation Events” and each of them triggers the switch to SONIA on the related “Index Cessation Effective Date”, and, being specific as regards GBP LIBOR, they are:

Event

Effective Date

ICE ann​ounces it has ceased or will cease (permanently or indefinitely) to provide GBP LIBOR.

the first date when GBP LIBOR is no longer provided.

the FCA or the​ BoE or a liquidator or administrator of ICE announces that ICE has ceased or will cease (permanently or indefinitely) to provide GBP LIBOR.

the first date when GBP LIBOR is no longer provided.

the FCA announces that GBP LIBOR is not, or as from a specified future date (as from which it will be by definition “Non-representative”) will not be,  “representative of the underlying market and economic reality that [it] is intended to measure and that representativeness will not be restored…, in the awareness that the statement or publication will engage certain contractual triggers for fallbacks activated by pre-cessation announcements by [the FCA] in contracts”.

the first date when GBP LIBOR is “Non-Representative” or is no longer provided.

Similarly, for USD-LIBOR-BBA, the fallback is to “Fallback Rate (SOFR)”, which is to be found on the relevant Bloomberg page, and the switch happens in the same way (an “Index Cessation Event” – probably triggered by an FCA announcement – leading to an “Index Cessation Effective Date”); and similarly for the other LIBORS - CHF and JPY etc., and fairly similarly for non-London IBORs (but of course it would be the relevant regulator of the benchmark administrator, not the FCA, making the pre-cessation announcement).

ISDA has also produced template forms of agreement to adopt the amendment as regards some or all of their documentation, to carve-out the pre-cessation trigger, and to carve-out particular contracts from the scope of the protocol if they are both parties to it.  All details relating to the calculation of “Fallback Rate (SONIA)” are to be found via the Bloomberg page; these include the credit adjustment spread, which is the median of a 5 year lookback at the LIBOR/SONIA spread ending on the “Index Cessation Effective Date”, which is expected to be the date of the FCA announcement of non-representativeness.  It uses a 2 business day backward observation shift and annualised compounding and so has some differences from the recent LMA wording. Bloomberg has a handy seven-page guide to all this on its webpage, and ISDA has FAQs

The authors

Mark Daley
Mark Daley

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