The International Swaps and Derivatives Association has published a letter in which it responds to the Financial Stability Board's November 15, 2019 letter on pre-cessation triggers. The co-Chairs of the FSB's Official Sector Steering Group requested ISDA to include a "pre-cessation trigger" alongside the cessation trigger in its standard language in derivatives contracts, via either definitions for new contracts or in a single protocol (without embedded optionality) for outstanding contracts. The pre-cessation trigger would cause a LIBOR-based contract to fall back to an alternative reference rate in the event that the U.K. Financial Conduct Authority, as the regulator of LIBOR, deemed that LIBOR was no longer representative.

ISDA confirms its continued commitment to implementing a fallback solution should one of the IBORs cease, including permanent cessation fallbacks. However, ISDA considers that before it can effectively engage with the industry on this issue, that clarification is needed on certain issues. According to ISDA, clarification on the following issues would assist the industry to assess the implications of a non-representative LIBOR statement:

1. A statement by the FCA and the ICE Benchmark Administration (as LIBOR administrator) confirming that the "reasonable period" during which a "non-representative" LIBOR would be published after the FCA announced that LIBOR is no longer representative would be minimal.
2. Confirmations from CCPs clearing LIBOR derivatives or their supervisors that rule changes have been implemented, or existing discretionary powers will be used, to ensure that, following a non-representative LIBOR statement by the FCA, the CCP would amend its cleared derivatives so that the derivatives referred to the alternative reference rate instead of to LIBOR.

ISDA states that it will re-consult industry on the appropriate pre-cessation triggers once the clarifications are provided.

View ISDA's letter.

View details of the FSB's letter to ISDA.

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