ISDA prepares end users, dealers for discontinuation of various LIBORs.
ISDA has issued a guidance note addressing the issue of derivatives contracts based on LIBOR rates that the British Bankers’ Association plans to phase out. The Wheatley Review last year recommended that less popular LIBORs be phased out so attention could be focused better on the ones of most importance to the market.
ISDA formed a working group to make recommendations and, in late March, it said the market consensus is to deal separately with cases where a rate is being eliminated, but the currency group will remain, from those where all the LIBORs under a specific currency are being eliminated. The two options for counterparties are straightforward, although ISDA does not endorse either one:
- Agree to use a substitute rate in lieu of the discontinued rate; or
- Terminate affected trades.
ISDA and the BBA have published a model “Bilateral Amendment Letter” that counterparties can use to switch to a different benchmark rate, although they can choose not to use the model. It is available here.
As the following schedule shows, the curtain will drop on the major currency LIBORs slated to be eliminated in May.
Rate Discontinuation Schedule
Source: ISDA