Answers to the ISDA consultation on IBOR fallback

The Japan Banker Association (JBA) has published its Comments on the Consultation on Interbank Offered Rate (IBOR) Fallbacks for 2006 ISDA Definitions.

Their comments are similar to the ones I mentioned in my Quant Perspective on the major issues:

Forward-looking term rates

we believe that ISDA should carefully consider how the development of forward-looking term rates will have impacts on the fallbacks for derivatives

This is in essence equivalent to my Option X1: OIS Benchmark but expressed in a different way.

The existence of the working group on GBP end EUR on the specific subject of the term rate RFR was already an indication that the decision of ISDA of not including the option in its consultation is not the first choice by all market participants. We have now also a similar opinion on the JPY side.

Not achievable option


There may be some cases (for example, in LIBOR in arrears swap) where it is unable to complete the fixing in time for floating rates payment.

This is essentially my point on dates indicating that the "street favorite" option of Compounding Setting in Arrears is not achievable, again expressed in a different way. If one is unable to complete the fixing, even for one single instrument, it means, based on equality or coherence between fixings, that the option is not achievable and cannot be proposed as a practical fallback.

This is the first time that I have seen an explicit opinion that support the issue I have highlighted since the first version of my quant perspective in April.

Second consultation?


The feedback reinforces my opinion that a second consultation would be necessary. Some important options have been ignored in the first version and practical achievability of one of the major options has still to be demonstrated.

Other answers


Other answer and articles related to the fallback are:

Article in Risk: Japan dealers unhappy with all Libor fallback options (subscription needed):
https://www.risk.net/derivatives/6130946/japan-dealers-unhappy-with-libor-fallback-options

Answer by the European Financial Congress:
https://www.efcongress.com/sites/default/files/answers_of_the_efc_ibor_fallbacks.pdf

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