More than 12,000 entities across almost 80 jurisdictions now adhere to ISDA protocol.
The week of January 25 marked a major milestone for interest rate benchmark reforms the International Swaps and Derivatives Association (ISDA) said, with more than 12,000 entities across almost 80 jurisdictions having adhered to its protocol.
The ISDA protocol allows firms to incorporate fallbacks into existing derivatives contracts linked to interbank offered rates (Ibors), which are being wound down to be replaced by alternative risk free rates (RFRs) with sounder calculation methodologies.
ISDA said the protocol will significantly reduce the systemic impact of an Ibor cessation. The UK’s Financial Conduct Authority (FCA) noted at the time that more than 85% of non-cleared interest rate derivatives in the UK referencing sterling London ibor (Libor) were covered by effective fallbacks. Once cleared derivatives and futures are added, the FCA said the number rises to 97%.
ISDA said that if UK coverage is replicated across other Libor currencies and jurisdictions and accounting for maturing contracts, risks associated with an estimated $260tn in outstanding Libor-linked contracts have been significantly reduced. Regulators are encouraging market participants to transition to RFRs as early as possible rather than waiting for Ibors to cease. ISDA noted that there is still the thorny issue of finding a solution to ‘tough’ legacy exposures.
Fitch Ratings has warned Japan could miss the end of the 2021 deadline, which is a concern given there are some large Yen Libor exposures
Another important milestone was the publication of cessation dates for 35 Libor currency tenors by the ICE Benchmark Administration Limited (IBA). About 30 of them including all the sterling, yen, Swiss franc and euro Ibors would terminate at the end of 2021.
Meanwhile, five US dollar Libor tenors will cease at end-June 2023, reflecting the logistical difficulties for participants in this vast market transitioning to RFRs. However, the US authorities have stated that these dollar Libors would only apply to legacy contracts and not new ones after the end of next year.
Fitch Ratings welcomed moving the US dollar Libor cessation date from December 2021 to June 2023, giving more time for legislators to pass a bill to address the lack of a Libor replacement for legacy structured finance products.
Singapore switch ongoing
Looking at some other jurisdictions, the Monetary Authority of Singapore (MAS) announced that the Singapore Dollar Swap Offer Rate (SOR) will end in mid-2023, rather than end of 2021 as earlier proposed reflecting the IBA’s plans. Nonetheless, the switch to the risk free Singapore Overnight Rate Average (SORA) will continue unabated.
MAS deputy managing director Leong Sing Chiong said in a speech on February 2 that the extension will mean that around 70% of legacy SOR cash products will have matured before the June 2023 deadline kicks in. However, he is telling the industry to stop creating new SOR exposures as soon as it can with its use for cash products to end by April.
Elsewhere, Fitch Ratings warned that Japan could miss the end of the 2021 deadline, which is a concern given there are some large Yen Libor exposures. The rating agency said a delay in the transition for legacy cash products could create interbank rate volatility and called for a more concerted push by regulators and industry to overcome market inertia.
The rating agency said that Japan’s authorities have made the transition more complicated by not requiring users to move to a single new benchmark rate unlike the UK and Singapore.
This article first appeared in The Banker’s sister publication Global Risk Regulator.
