POINT OF VIEW | Parker Fitzgerald | IBOR
No summer recess for IBOR pre-cessation

Followers of the IBOR transition will be aware that the Financial Stability Board (FSB) Official Steering Group (OSSG) wrote to ISDA in March, encouraging them to consult on a pre-cessation fallback trigger which would take effect prior to the permanent cessation of an IBOR, were the relevant national competent authority to declare it unrepresentative of the underlying financial reality.

This is critically important because it is arguably far more likely that IBORs will cease to be representative before they disappear altogether (which is the scenario that existing ISDA fallbacks are predicated upon). That consultation is now nearing completion and with the summer season in full swing and with the sheer volume of developments in the IBOR space, many may have failed to fully appreciate the substantial impacts it will have on their firm’s transition to Alternative Reference Rates (ARRs).

The preliminary results of the consultation, published in August, show support for three categories of approach, with no clear majority. In summary, the categories include: a “hard wired” pre-cessation trigger; an optional and flexible pre-cessation trigger; and no trigger at all.

The reason these triggers are so critical (and the reason there is such a spread of feedback) is that they will dictate if, when and how particular derivatives will cease to reference IBORs and begin to reference ARRs. This will have commercial implications – and with an estimated $370 trillion of financial instrument exposure, the impact will be substantial.

Summary feedback from the consultation is expected in September, from which time firms will have a clearer indication of how pre-cessation triggers are likely to work. As a matter of priority, firms should factor that feedback into their transition strategy to ensure appropriate prioritisation of product transitions for which it is riskier to remain at the mercy of a pre-cessation trigger.

In this way, instead of a hindrance, pre-cessation triggers can serve as an accelerator of the transition – by further encouraging proactive transition of products to avoid the uncertainty of the timing of a benchmark becoming ‘unrepresentative’. Finally, firms should also consider the extra work that pre-cessation solutions and protocols will imply to the already extensive documentation and communication workloads and the accompanying conduct risk considerations.

Preliminary results from the consultation can be found on the ISDA website.