As markets globally prepare for the transition from LIBOR and other interbank offered rates (IBORs) to risk-fee rates (RFRs), the International Swaps and Derivatives Association (ISDA) has been working on amending its 2006 ISDA Definitions (the “2006 Definitions”) to include new language detailing the circumstances in which trades will transition away from IBORs (such circumstances are known as “triggers”) and the RFRs to which trades will transition (such RFRs are known as “fallbacks”). ISDA’s triggers in the latest draft of its amended 2006 Definitions only include instances when LIBOR permanently ceases or will permanently cease to be published, but ISDA is planning to consult the market again in the first quarter of this year on whether pre-cessation triggers should also be included.
ISDA’s fallback rate for USD LIBOR will be adjusted to SOFR plus a spread adjustment. Based on the results of ISDA’s recent consultations, in the amended 2006 Definitions SOFR will be based on the compounded setting in arrears rate with a five-year historical median approach for the spread.
All future derivatives trades that incorporate the 2006 Definitions after the amended 2006 Definitions go into effect will include ISDA’s new triggers and fallback language. For active derivatives trades entered into before the effective date of the amended 2006 Definitions (“legacy trades”), ISDA is planning to release a new ISDA 2020 IBOR Fallbacks Protocol (the Protocol). If counterparties to legacy trades choose to adhere to the Protocol, ISDA’s new triggers and fallback language will be incorporated into the counterparties’ legacy trades. If counterparties to legacy trades choose not to adhere to the Protocol, they can instead negotiate a bilateral amendment agreement to add their own agreed upon triggers and fallback language to their trades.
ISDA plans to open up the Protocol for adherence sometime in the first quarter of this year. However, the Protocol will not become effective until three months after its release (likely the second quarter of this year), on which date the amended 2006 Definitions will also be released for use in derivatives trades entered into after that date. To date, ISDA has not published the fee to adhere to this protocol.