Fact-check on ISDA fallback fact sheet

ISDA has published yesterday a fact sheet called "Understanding IBOR Benchmark Fallbacks". I did my personal fact-check about the fact sheet.

  1. Q: "What is benchmark fallback?" A: "benchmark becomes unavailable". True.
  2. "FCA has stated that it will not compel banks to make LIBOR submission after the end of 2021." True, but almost irrelevant. This power to compel banks is very new (EU BMR, 2016), has never been used and has never been a factor since 1986. The only thing that FCA is saying is that it will not use its newly acquired EU regulation based power that has never been used in history, nothing more, nothing less.
  3. "In was determined that the fallback will the adjusted versions of the RFR." Partially true. True: It has been determined by ISDA (and others) that this will be the only fallback appearing in ISDA definition. Partial: But other market players have decided/determined that they will use other fallbacks. Also derivative users trading under the current ISDA master agreement could chose to sign bilateral contracts with fallback differing from ISDA determination.
  4. "continue to meet the original objective of the counterparties to the maximum extent possible". False. If it was to the "maximum extent possible", consultations would have included many more choices (e.g. term rates and credit sensitive rates like IBA Bank Yield Index) proposed by different users groups and experts. Also, the fallback would have included options to meet "the original objective of the counterparties" and not simply the objectives of ISDA and/or regulators. Minimal options would be around pre-cessation trigger and several fallback rates.
  5. "LIBOR only [...] would also apply as a fallback following a determination by the FCA that LIBOR in that currency is no longer representative". Not true, not false, just an arbitrary choice. Suddenly for LIBOR, a pre-cessation trigger (that did not even appear in the "What is a a benchmark fallback?" section) appears and the trigger is decided by a fourth party not related to the contract - the FCA.
  6. "Parties could also agree to incorporate the new fallbacks by bilaterally amending their legacy non-cleared contracts." True, but difficult to put in place. To the best of my understanding, ISDA is not proposing a template contract to do so. Only the bilateral agreement allows for fair compensation. 
  7. The protocol "avoids the need to bilaterally negotiate the same amendments with each party individually". True, but as a consequence does not allow to negotiate fair compensation.
  8. The document indicate that "Bloomberg will publish the rates". Probably true, only future will tell. But I did that also on my blog and this is not stated in the document. There is no indication on why Bloomberg stated that a (costly) license from them would be required. There is no information on why Bloomberg name appear on the "fact sheet" and how much they have paid for the privilege.
  9. "Moving away from key IBORs voluntarily by amending or closing out contracts that reference those rates allows counterparties to tailor their strategies to their specific portfolios, and could allow firms to negotiate terms that avoid the adjustment mechanisms for fallbacks." True. And to my opinion the most important part. In particular, it includes "negotiate terms".


Comments

Post a Comment

Popular posts from this blog

Multi-curve framework book: new edition in progress

Image
Subject: Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation It has been more than 10 years since I wrote the first edition of the multi-curve framework book. What happened in those 10 years? Why did it take me so long to start a new version? It took me roughly 10 years to write the first edition. The reason it took so long at that time, was that I did not know that I was writing it! I thought I was writing a couple of pages on an obscured and theoretical idea that there was not a `` one curve to rule them all '' but multiple curves. It turned out that it became the actual practice for very clear and important reasons. That was the excuse for the first edition, what is the excuse for the second edition? Since the first edition, many things happen, in particular: March 2015: BCBS - IOSCO: margin requirements for non-centrally cleared derivatives and mandatory variation margin July 2017: The future of LIBOR -- actually it...
Read more

Rigged: part 1 - Will there be a part 2?

Image
I have been reading book “Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial” (Andy Verity, Flint, June 2023) for some time. It was published several month ago, but I just finished it. To my defence, I have to say that I don’t feel comfortable reading fiction where the “bad guys” are systematically winning by cheating. The book is the story of the miscarriage of justice done in the LIBOR manipulation story. The book content did not surprise me. For anybody having worked on a (swap) trading desk, it is clear that what was described by the accusation was impossible. It is not possible for some middle level trader to create a multi-year, multi-desk, multi-bank international conspiracy over open lines, broker lines, on open offices etc. without all around them, including compliance and senior management to be fully aware of what is going on. Moreover the regulators cannot be ignorant of the situation, except pleading complete in...
Read more

Treasury / Swap spreads are negative. And what?

In recent weeks there were several news articles related to the negative treasury/Swap spread. This is in particular the case of a Bloomberg article and a Zero Hedge blog . Some of the “information” in those notes are Swap rates are what companies, investors and traders pay to exchange fixed interest payments for floating ones. That rate falling below Treasury yields […]  is illogical in the eyes of most market observers, because it theoretically signals that traders view the credit of banks as superior to that of the U.S. government. It’s hard to overstate how illogical it is when swap spreads are inverted. That’s because it suggests that governments are less creditworthy than the very financial institutions they bailed out during the credit crisis just seven years ago. Let’s be clear, to me, those claims are purely wrong , nothing is “ illogical ” in negative swap spread. But why do I rant about that in the “multi-curve framework” blog? Because it is exactly the same that ...
Read more