IBOR Fallbacks: ISDA, Linklaters and Bloomberg white paper

“Given the uncertainty about the long-term viability of certain interbank offered rates (IBORs), it is vital that robust fallbacks are included within derivatives contracts. It is also important these fallback rates are independently calculated and widely available across the market. This will dramatically reduce the systemic threat of a permanent discontinuation of LIBOR and other IBORs,” says Scott O’Malia, ISDA’s Chief Executive.

“The publication of robust fallback rates for derivatives referencing key IBORs and the addition of new fallbacks to ISDA’s standard documentation reflects four years of work by ISDA, market participants, regulators and infrastructure providers. This is a major step forward in reducing the risks associated with an IBOR discontinuation, and now work can turn to educating the market on how precisely the fallbacks will function,” says Ann Battle, ISDA’s Head of Benchmark Reform.

“Calculating and distributing IBOR fallbacks fits naturally with Bloomberg Index Services Limited's (BISL's) business model. It complements Bloomberg's capabilities and our ongoing efforts to support investors as they prepare for the transition away from LIBOR,” says Steve Berkley, BISL’s Chief Executive.

“ISDA’s work on updating the fallbacks for key IBORs has been vital in order to smooth the market impact of IBOR cessation. The creation and documentation of robust fallbacks has been complex and we’ve been pleased to work with ISDA, Bloomberg and market participants to help deliver this solution to the market,” says Deepak Sitlani, Partner at Linklaters.

With hundreds of trillions of dollars’ worth of contracts referencing LIBOR, which is expected to cease after 2021 and may be followed by the demise of other IBORs, public/private sector working groups globally started identifying alternative risk-free reference rates (‘RFRs’). These RFRs are inherently different from the IBORs. The International Swaps & Derivatives Association, Inc. (‘ISDA’) is implementing prescribed adjustments to the RFRs to serve as IBOR fallbacks based on feedback received from several market consultations regarding these inherent differences. ISDA selected Bloomberg as the official adjustment services vendor in connection with these fallbacks. This factsheet provides an overview of the methodology and implementation of IBOR fallback rate calculations.