Correspondence with ISDA on pre-cessation triggers
In November 2019 the Co-Chairs of the FSB’s Official Sector Steering Group (OSSG) wrote to the International Swaps and Derivatives Association (ISDA) to encourage it to add a “pre-cessation” trigger alongside the cessation trigger as standard language in the definitions for new derivatives and in a single protocol without embedded optionality, for outstanding derivative contracts referencing key Interbank Offered Rates (IBORs). This would help to reduce systemic risk and market fragmentation by ensuring that as much of the swaps market as possible falls back to alternative rates in a coordinated fashion.
In December 2019 ISDA responded to the letter from the OSSG Co-Chairs. ISDA asked, amongst other things, for a statement from the UK’s Financial Conduct Authority (FCA) and the ICE Benchmark Administration that the “reasonable period” during which a “non-representative” LIBOR would be published would be minimal (i.e., a number of months not years) after the FCA announces that LIBOR is no longer representative. This letter sets out the FCA’s response to describe the laws relevant to this situation and provide clarity on how the FCA intends to apply them. ISDA also received a response to its letter from ICE Benchmark Administration and the London Clearing House has announced a rulebook consultation process regarding the inclusion of an automatic trigger.
In December 2019 the FSB published its annual progress report on implementation of recommendations to reform major interest rate benchmarks. The report emphasises that the continued reliance of global financial markets on LIBOR poses risks to financial stability and it calls for significant and sustained efforts by the official sector and by financial and non-financial firms across many jurisdictions to transition away from LIBOR before end-2021.