ISDA CEO Scott O'Malia outlined recent and forthcoming efforts to address benchmark reforms.
Mr. O'Malia highlighted ongoing efforts by ISDA to respond to questions about the "robustness and viability" of certain benchmarks (including LIBOR). He highlighted the need to address a number of markets with differing characteristics, and the various approaches being taken in different jurisdictions. In addition, Mr. O'Malia highlighted the results of a recent survey performed by ISDA (the results of which are not final), noting four key themes: (i) increased levels of awareness of the potential problems, (ii) the initial work being done by many member firms, (iii) the prioritization of sufficient liquidity in derivatives that reference new benchmarks and (iv) the "critical" need to develop robust fallbacks.
Mr. O'Malia affirmed that ISDA has focused on improving fallback provisions when contracts that reference interbank offered rates ("IBORs") are permanently discontinued. He said that current fallback provisions "are not robust enough to eliminate uncertainty should an IBOR cease to exist," and that this fact presents a "real systemic risk." He indicated that ISDA's work is expected to use risk-free rates ("RFRs") as a fallback, and added that one key issue that has yet to be addressed is how to deal with the fact that RFRs, unlike IBORs, do not reflect bank credit risk. To this end, Mr. O'Malia noted that ISDA expects to "very shortly" release a consultation on credit spread methodology and term fixing adjustments that will be open to the public, not just to ISDA members. Following the consultation, ISDA expects to seek a vendor to publish the relevant data; then, it will publish a protocol to allow market participants to incorporate the fallback provisions.
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