EUR fallback consultation: the results
I have finally found
the "summary" of responses to the ISDA EUR fallbacks consultation. It
was published a couple of weeks ago, but the document is not easy to
find. It is available on the web at the address
http://assets.isda.org/media/96f5c002/c9c0e040-pdf/ but to my knowledge
there is no link to it, at least not on the main ISDA site and certainly
not on the consultation or the consultation result pages.
The document is called "summary" but it would better be called "some statistics and subjective selection of some comments".
The full texts of the answers with the arguments provided by the respondents for the answers are not available. My answers are available on SSRN: https://ssrn.com/abstract=3520619. Don't hesitate to indicate in the comments links to other published answers.
There were only 57 answers and only one from Belgium (where has the previous other Belgian respondent gone?). The headline as provided by ISDA was that more than 90% of the respondents answered "yes". That yes as to be taken with a pinch of salt as some indicated issues with the proposal, so the "yes" is at best "yes, but".
My main answer was "no". If it had been a (french speaking) Belgian consultation my answer would have been "Oui, surement!". My compatriots will certainly understand what I mean by that, but I was not sure that ISDA would understand the subtlety and refinement of such an answer, so I went for "no".
There is one footnote (footnote 19, page 22) in the document that indicates "This respondent was consistently opposed to the options proposed for all questions in the Euro Consultation." and I guess it refers to me. This qualification is maybe technically correct but does not represent the essence of my answer. I consistently proposed meaningful options that to my opinion are better than any of the limited set proposed in the consultation. Other users may disagree that my proposals are the best, but I don't think that anybody can objectively say that the proposals are not worth the discussion. That important point does not appear in the so-called "summary" of the answers.
There were two important items proposed in my answers (none of them made it to the summary): EUR-EURIBOR as a fallback for EUR-LIBOR and questions about the compliance of proposed spread computation mechanism with EU BMR.
On the second item, my answer included the question: "Did ISDA obtain an explicit written indication from ECB, ESMA and/or national regulators that using EONIA figures in the fallback wording to LIBOR/EURIBOR-linked transactions is acceptable under EU BMR regulation after 1 January 2022?" The question was also published on my blog "Is ISDA proposed fallback for EUR-LIBOR and EURIBOR EU BMR compliant?" :
A couple of lines could be enough to solve that issue. If ISDA could simply answer to the above question with something like "Yes, we have. The full question asked to and answers from ECB/ESMA/regulators are available at XXX" then the issue would be closed. I hope for such an answer before the proposal goes into the new ISDA definitions.
My answers are quoted several times in the document (once more without concern about the copyright associated to my original contributions). One of those quotes are in point 25 where the report reads "... [a]nother step in the fallback's waterfall should be a term rate based on ESTR if such a IOSCO principles and EU BMR regulation compliant benchmark exists, at the time of cessation. If several of those benchmarks exist, the fallback should propose a mechanism to choose between them.”
While my original answer contains the above quote you may notice it starts with "another step", so what was the first (and most important) step proposed? That proposed first step did not made it to the "summary" and is related to my first item above: "For EUR-LIBOR: The first step of the fallback waterfall should be to EUR-EURIBOR (plus a potential adjustment spread). EUR-EURIBOR is of the same nature in term of credit risk, liquidity feature and term than LIBOR. The fallback would be significantly easier, and the adjustment spread, if any, would be smaller and more stable." Why is the less important and secondary proposal quoted and not the main one? The only explanation that I can imagine is that the proposal does make perfect sense but for some mysterious reasons should not be discussed.
In point 31, the summary reads "There was only one respondent that did not support using pre-€STR data or using EONIA minus a fixed spread of 8.5 basis points, if data prior to March 15, 2017 were required to calculate the spread adjustment. This respondent generally noted that such data was not intended to be used as a benchmark, prior to its official publishing date (October 2, 2019)." Again I guess this is a reference to my answer. But my comment was not a simple "no" it was a "no, except if" with a request for information. I'm still waiting for the information (see above).
In point 42, the summary reads "For instance, one of the respondents, a European professional services firm, suggested that “generic choices are not appropriate. Each market and each benchmark has its own idiosyncrasies. The fallback methodology should be tailor made to the specific features of the discontinued benchmark and its proposed replacement. A specific methodology is required for each of them. It is not possible to approve a methodology without knowing to which benchmarks it will be applied. The fallback mechanism should depend strongly on the structure of the underlying market. None of the mechanisms proposed are acceptable for undefined Ibors to fallback on undefined RFR. No fallback is acceptable for Ibors that are not explicitly listed with an explicit fallback rate explicitly adapted to the structure of the underlying market.” That seems fair, state explicitly in which cases this will be used and I will give you an explicit answer. And I'm not the only one asking for it: "The other respondent, an Asia-Pacific bank/broker-dealer, supports “[c]onsidering the characteristics of the each IBOR, another method should be considered and applied in some cases.” "
My answers have been read, in some cases even partially heard but very little seems to be done about them.
I continue to read and answer to the consultations and contribute to the discussion about the benchmarks in transition. If you are interested by my analysis of those issues and my contribution on quantitative finance aspects related to it, I would be happy to present them in-house.
The document is called "summary" but it would better be called "some statistics and subjective selection of some comments".
The full texts of the answers with the arguments provided by the respondents for the answers are not available. My answers are available on SSRN: https://ssrn.com/abstract=3520619. Don't hesitate to indicate in the comments links to other published answers.
There were only 57 answers and only one from Belgium (where has the previous other Belgian respondent gone?). The headline as provided by ISDA was that more than 90% of the respondents answered "yes". That yes as to be taken with a pinch of salt as some indicated issues with the proposal, so the "yes" is at best "yes, but".
My main answer was "no". If it had been a (french speaking) Belgian consultation my answer would have been "Oui, surement!". My compatriots will certainly understand what I mean by that, but I was not sure that ISDA would understand the subtlety and refinement of such an answer, so I went for "no".
There is one footnote (footnote 19, page 22) in the document that indicates "This respondent was consistently opposed to the options proposed for all questions in the Euro Consultation." and I guess it refers to me. This qualification is maybe technically correct but does not represent the essence of my answer. I consistently proposed meaningful options that to my opinion are better than any of the limited set proposed in the consultation. Other users may disagree that my proposals are the best, but I don't think that anybody can objectively say that the proposals are not worth the discussion. That important point does not appear in the so-called "summary" of the answers.
There were two important items proposed in my answers (none of them made it to the summary): EUR-EURIBOR as a fallback for EUR-LIBOR and questions about the compliance of proposed spread computation mechanism with EU BMR.
On the second item, my answer included the question: "Did ISDA obtain an explicit written indication from ECB, ESMA and/or national regulators that using EONIA figures in the fallback wording to LIBOR/EURIBOR-linked transactions is acceptable under EU BMR regulation after 1 January 2022?" The question was also published on my blog "Is ISDA proposed fallback for EUR-LIBOR and EURIBOR EU BMR compliant?" :
A couple of lines could be enough to solve that issue. If ISDA could simply answer to the above question with something like "Yes, we have. The full question asked to and answers from ECB/ESMA/regulators are available at XXX" then the issue would be closed. I hope for such an answer before the proposal goes into the new ISDA definitions.
My answers are quoted several times in the document (once more without concern about the copyright associated to my original contributions). One of those quotes are in point 25 where the report reads "... [a]nother step in the fallback's waterfall should be a term rate based on ESTR if such a IOSCO principles and EU BMR regulation compliant benchmark exists, at the time of cessation. If several of those benchmarks exist, the fallback should propose a mechanism to choose between them.”
While my original answer contains the above quote you may notice it starts with "another step", so what was the first (and most important) step proposed? That proposed first step did not made it to the "summary" and is related to my first item above: "For EUR-LIBOR: The first step of the fallback waterfall should be to EUR-EURIBOR (plus a potential adjustment spread). EUR-EURIBOR is of the same nature in term of credit risk, liquidity feature and term than LIBOR. The fallback would be significantly easier, and the adjustment spread, if any, would be smaller and more stable." Why is the less important and secondary proposal quoted and not the main one? The only explanation that I can imagine is that the proposal does make perfect sense but for some mysterious reasons should not be discussed.
In point 31, the summary reads "There was only one respondent that did not support using pre-€STR data or using EONIA minus a fixed spread of 8.5 basis points, if data prior to March 15, 2017 were required to calculate the spread adjustment. This respondent generally noted that such data was not intended to be used as a benchmark, prior to its official publishing date (October 2, 2019)." Again I guess this is a reference to my answer. But my comment was not a simple "no" it was a "no, except if" with a request for information. I'm still waiting for the information (see above).
In point 42, the summary reads "For instance, one of the respondents, a European professional services firm, suggested that “generic choices are not appropriate. Each market and each benchmark has its own idiosyncrasies. The fallback methodology should be tailor made to the specific features of the discontinued benchmark and its proposed replacement. A specific methodology is required for each of them. It is not possible to approve a methodology without knowing to which benchmarks it will be applied. The fallback mechanism should depend strongly on the structure of the underlying market. None of the mechanisms proposed are acceptable for undefined Ibors to fallback on undefined RFR. No fallback is acceptable for Ibors that are not explicitly listed with an explicit fallback rate explicitly adapted to the structure of the underlying market.” That seems fair, state explicitly in which cases this will be used and I will give you an explicit answer. And I'm not the only one asking for it: "The other respondent, an Asia-Pacific bank/broker-dealer, supports “[c]onsidering the characteristics of the each IBOR, another method should be considered and applied in some cases.” "
My answers have been read, in some cases even partially heard but very little seems to be done about them.
I continue to read and answer to the consultations and contribute to the discussion about the benchmarks in transition. If you are interested by my analysis of those issues and my contribution on quantitative finance aspects related to it, I would be happy to present them in-house.
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