LIBOR Transition – ISDA Prepares to Launch 2020 IBOR Fallbacks Protocol and Supplement

October 19, 2020 - Following a favorable review from the Antitrust Division of the U.S. Department of Justice, the International Swaps and Derivatives Association (“ISDA”) announced on October 9, 2020 that it intends to publish a protocol, along with updates to its standardized documentation to provide for fallback rates and procedures to account for the potential discontinuation of certain interbank offered rates (“IBORs”), including LIBOR (the London Inter-bank Offered Rate), at the end of 2021.

Background

ISDA will launch the IBOR Fallbacks Supplement to the 2006 ISDA Definitions (the “Supplement”) and the ISDA 2020 IBOR Fallbacks Protocol (the “Protocol”) on October 23, 2020.

The Supplement and the amendments made by the Protocol will take effect on January 25, 2021. On this date, all new derivatives contracts that incorporate the 2006 ISDA Definitions and reference one of the covered IBORs will contain the new fallbacks. Legacy derivatives contracts will be deemed to be amended to incorporate the new fallbacks if both counterparties to an ISDA Master Agreement have “adhered” to the Protocol or otherwise bilaterally agree to amendments to include the new fallbacks in their contracts. As with prior ISDA protocols, the Protocol will remain open for adherence after the effective date.

Although adherence to the Protocol is voluntary, global regulators have urged regulated entities and other market participants to comply given the importance of a smooth IBOR transition. While the vast majority of the market is likely to adhere to the Protocol, market participants can continue to bilaterally amend their contracts to incorporate the fallbacks using ISDA standard documents that it has published for this purpose.

Next Steps

Clients should be carefully reviewing their derivatives documentation and be coordinating with their trading counterparties to consider whether to adhere to the Protocol or, alternatively, whether to amend documentation on a bilateral basis to incorporate the new fallbacks. The effective date of the Protocol is January 25, 2021, but a plan to address these issues should be made well in advance.