Following years of consultations, ISDA published its long-awaited IBOR Fallbacks Supplement to the 2006 ISDA Definitions (the Supplement) and Protocol on October 23, 2020. The Supplement and Protocol provide a standardized and efficient means of transitioning derivatives contracts currently referencing IBORs to risk-free rates (more information on which can be found in our earlier blog post).

Market participants are reminded that the Supplement and Protocol will become effective on January 25, 2021 (the Protocol Effective Date). At present over 4,800 parties have adhered to the Protocol.

How do the Protocol and Supplement work?

New trades: The Supplement amends the 2006 ISDA Definitions by, among other things, including fallbacks to the risk-free rates in the relevant IBOR definitions. The new fallbacks will apply to all new trades entered into on or after the Protocol Effective Date which reference the 2006 ISDA Definitions. Following the Protocol Effective Date, the relevant contracts will continue to reference the relevant IBOR until an Index Cessation Event occurs, at which point the contract will fall back to the relevant risk-free rate.

Legacy trades: The Protocol allows adhering parties to incorporate the amendments introduced by the Supplement into their legacy trades with other parties that have adhered to the Protocol. The Additional Documents Annex to the Protocol enables parties to also amend additional agreements (other than ISDA Master Agreements) that reference IBORs, such as GMRA and GMSLAs, in this way.

Parties can adhere to the protocol through the ISDA portal. Primary Members of ISDA will be charged an adherence fee of $500, while non-Primary Members will not be charged if they adhere prior to the Protocol Effective Date. After the Protocol Effective Date, all adhering parties will be charged $500. Parties will be able to continue to adhere to the Protocol for the foreseeable future after the Protocol Effective Date.

Going Forward

With just under two weeks until the go-live date of the Protocol, market participants are reminded to carefully consider their outstanding IBOR exposures and consider whether blanket adherence to the Protocol is appropriate, or whether they should bilaterally amend certain trades. Even when parties do choose to adhere to the Protocol, ISDA has been keen to communicate that parties should view it as an “airbag” that should only be used if necessary, with active transition continuing to be recommended as the primary course of action.