Is now the time for financial firms to begin implementing ISDA’s Fallback Protocol?

On August 10th, 2020, Alternative Reference Rates Committee (ARRC) Chair Tom Wipf issued a letter urging every ARRC member to be prepared to sign on to the Protocol the International Swaps and Derivatives Association (ISDA) is preparing to release.1 The Association’s IBOR Fallback Protocol and IBOR Fallback Supplement are expected to implement new fallbacks for both legacy and new derivative contracts.2

The ARRC Chair emphasized in the letter that the Protocol is significant in preserving derivatives market functioning, and so permitting LIBOR derivatives contracts to perform through the transition.3 The ARRC’s Recommended Best Practices, released earlier in the year, is in support of broad adherence to the Protocol.4

What this means

On July 29th, 2020, the ISDA published a statement from its Board of Directors on adherence to the upcoming Protocol and outlining its plans for issuing the Protocol and Supplement.5 Before the official launch, many institutions should be able to enroll and indicate their desire to adhere to the Protocol “in escrow,” with participants added to a list of adherents announced during the Protocol’s official launch.6 This is an important feature as it allows the ISDA to reduce the wait and see period to identify who has signed up to the Protocol.

The ISDA stated that “The fallbacks and related triggers that will be implemented in legacy non-cleared derivatives contracts via the IBOR Fallback Protocol are based on a series of open consultations over the past two years that resulted in broad market consensus.”7

Market participants should adhere to the Protocol before it is officially launched, and with this release approaching, the moment to start preparing to implement the “Best Practice” is now.

The ARRC letter emphasized comprehensive adherence to the Fallback Protocol is a key step in the LIBOR transition, and should be crucial to addressing individual firm risks as well as systemic risks associated with the discontinuation of LIBOR and the move to alternative reference rates.8 The ARRC’s Recommended Best Practices stated market participants should adhere to the Protocol before it is officially launched, and with this release approaching, the moment to start preparing to implement the “Best Practice” is now.9

Conclusion

Tom Wipf reiterated in the letter that “I know it takes time and close coordination within your institutions to adhere to the Protocol—so do not wait for the Protocol’s official launch to prepare. I encourage everyone to start the conversation about this at your institutions immediately, so that they will be in a position to adhere to the Protocol as soon as possible.”10

The ISDA Protocol however is not a “magic bullet” solution. Financial firms still need to coordinate client and counterparty outreach to make sure all entities with whom they do business are signed up to the ISDA Protocol. Complex financial firms should sign up to the Protocol across investment banking, commercial banking and asset/wealth management entities as a tool to simplify the bulk application of hardwired contractual fallbacks into derivative documentation.

In addition, not only do firms have to manage to the Protocol, but they should update their ISDA templates and incorporate the ISDA Supplement for new transactions. The decision to sign up to the ISDA Protocol may require cross-divisional support and firms may decide to adhere for certain legal entities, but not all, as there may be legitimate justifications where it is deemed not appropriate. Management and coordination of the outreach and the logistics of tracking communication and client intentions, negotiation and potential bi-lateral re-papering is key.

Accenture can help by establishing and supporting a coordinated operational command center using tools and dashboards to help firms effectively conduct their outreach and participation in the ISDA Protocol, and thus providing continuation of business as usual (BAU) functions. Accenture can also assist with the process of updating templates for new trades.

References

  1. “Preparing to Adhere to ISDA’s Protocol,” Alternative Reference Rates Committee, August 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Letter_on_ISDA_Protocol.pdf.
  2. “ISDA Board Statement on Adherence to the IBOR Fallback Protocol,” International Swaps and Derivatives Association, Inc., July 29, 2020. Access at: https://www.isda.org/a/pFmTE/ISDA-Board-Statement-on-Adherence-to-the-IBOR-Fallback-Protocol.pdf.
  3. “Preparing to Adhere to ISDA’s Protocol,” Alternative Reference Rates Committee, August 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Letter_on_ISDA_Protocol.pdf.
  4. “ISDA Board Statement on Adherence to the IBOR Fallback Protocol,” International Swaps and Derivatives Association, Inc., July 29, 2020. Access at: https://www.isda.org/a/pFmTE/ISDA-Board-Statement-on-Adherence-to-the-IBOR-Fallback-Protocol.pdf.
  5. “Preparing to Adhere to ISDA’s Protocol,” Alternative Reference Rates Committee, August 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Letter_on_ISDA_Protocol.pdf
  6. “Preparing to Adhere to ISDA’s Protocol,” Alternative Reference Rates Committee, August 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Letter_on_ISDA_Protocol.pdf.
  7. “ISDA Board Statement on Adherence to the IBOR Fallback Protocol,” International Swaps and Derivatives Association, Inc., July 29, 2020. Access at: https://www.isda.org/a/pFmTE/ISDA-Board-Statement-on-Adherence-to-the-IBOR-Fallback-Protocol.pdf.
  8. “Preparing to Adhere to ISDA’s Protocol,” Alternative Reference Rates Committee, August 10, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Letter_on_ISDA_Protocol.pdf
  9. Ibid.
  10. Ibid.

Newsletter Author: Gerard Jacob; Mairi Bryan
Newsletter Contact Person:
Venetia Woo

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