ISDA's IBOR Supplement and Protocol: Background, Operation, Prognosis
The International Swaps and Derivatives Association, Inc. ("ISDA") has finally published its long-awaited "Amendments to the 2006 ISDA Definitions to include new IBOR fallbacks" ("IBOR Supplement") and accompanying "protocol" ("Protocol"). The Protocol will be open for adherence on October 23, 2020, and the IBOR Supplement will be "effective" January 25, 2021.
Briefly stated, the IBOR Supplement introduces a set of "hard-wired" fallbacks that would become operational upon the demise of an IBOR such as, most pertinently, the London Interbank Offered Rate ("LIBOR"). These fallbacks consist, first, of linear interpolation between surviving IBOR tenors (if any) and, second, of the currency-specific "risk-free" rate, compounded in arrears during a given interest period with a two-day "look-back" plus a fixed tenor-specific "credit spread adjustment."
Protocol adherence permits a party to amend all (but not less than all) of its "legacy" IBOR-denominated contracts (which include, uniquely, transactions such as security finance transactions that do not typically use ISDA documentation) simultaneously with all other adherents. ISDA has also published a series of "bilateral" templates that cater to market participants who wish to conform the Protocol amendments with only one or a limited set of counterparties, who wish to narrow or expand the universe of covered documents, or who wish to tailor the Protocol amendments in various other ways.
Publication of the Protocol represents an immediate "go/no-go" decision point for the over-the-counter derivatives market, and the IBOR Supplement promises to alter the landscape for that market profoundly going forward.
