ISDA reviewed upcoming developments in the transition from LIBOR to risk-free rates ("RFRs").
In a Research Note, ISDA described:
- the calculation and publication by Bloomberg of fallback rates based on adjusted RFRs in the first half of 2020;
- amendments to the 2006 ISDA Definitions incorporating IBOR fallbacks and a protocol to amend legacy contracts;
- the change of discounting from Euro Overnight Index Average (EONIA) by central counterparties ("CCPs") in June 2020;
- the change of discounting from effective federal funds rate (EFFR) by CCPs in October 2020;
- the change of market convention for British pound sterling (GBP) rate swaps from LIBOR to Sterling Overnight Index Average (SONIA) on March 2, 2020; and
- expected continued growth in the issuance of cash products referencing RFRs.
ISDA Chief Executive Scott O'Malia urged market participants to prepare for reform. In a speech at the ISDA/SIFMA AMG Benchmark Strategies Forum, Mr. O'Malia cited benchmark reform as "one of the biggest challenges" facing the industry and argued that stakeholders have a responsibility to facilitate active markets in the alternative RFRs. He urged market participants to:
- assess the implications of the amended 2006 ISDA Definitions;
- implement the necessary infrastructure to properly address the compounded setting arrears calculation included in the fallback methodology; and
Commentary Nihal Patel
The ISDA Research Note is a good starting point for persons looking to begin understanding current issues relating to benchmark transition.