ISDA’s IBOR Fallbacks Supplement and Protocol came into effect today. These fallbacks, which are discussed in more detail here, will be incorporated with immediate effect into all new derivatives contracts which incorporate the 2006 ISDA Definitions, and in all legacy non-cleared derivatives where both parties have adhered to ISDA’s IBOR Fallbacks Protocol. To date, over 12,000 parties have adhered to the Protocol, which remains open for adherence for the foreseeable future.

The Fallbacks Supplement and Protocol is an important step in the transition from IBORs to risk free rates. “Having a fallback based on a clear, consistent and transparent methodology will significantly reduce the risk of market disruption if a key IBOR ceases to exist or LIBOR is deemed to be non-representative before transition efforts are complete,” said Scott O’Malia, ISDA’s Chief Executive.

As of today’s effective date, the fallbacks for a particular currency will apply following a permanent cessation of the IBOR in that currency. For derivatives that reference LIBOR, the fallbacks in the relevant currency would also apply following a determination by the UK Financial Conduct Authority that LIBOR in that currency is no longer representative of its underlying market. In each case, the fallbacks will be adjusted versions of the risk-free rates identified in each currency.

Parties who have not adhered to ISDA’s IBOR Fallbacks Protocol are encouraged to consider their outstanding IBOR-referencing positions, and whether they should adhere to the Protocol in order to reduce the risk of disruption should the relevant IBOR cease, or cease to be representative. The ISDA IBOR Fallbacks Supplement and Protocol can be accessed via the ISDA website.

Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the IBOR transition.