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".


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