IBOR transition - Sterling and US Dollar LIBOR ICE Swap Rates
26 July 2021
On 23 July 2021, ISDA announced the results of its recent consultation on the implementation of fallbacks for the Sterling LIBOR ICE Swap Rate and the US Dollar LIBOR ICE Swap Rate. In the announcement, ISDA confirmed that, sufficient agreement having been obtained, it would proceed with publication of the fallback provisions set out in the draft amendments attached to the consultation by way of two new Supplements to the 2006 ISDA Definitions.
Fallbacks for Sterling LIBOR ICE Swap Rate
The first Supplement, which is expected to be published in the coming weeks, will implement the fallback provisions proposed for the Sterling LIBOR ICE Swap Rate by the Working Group on Sterling Risk-Free References Rates in its February 2021 paper. The fallbacks for the Sterling LIBOR ICE Swap Rate will be based on ICE Benchmark Administration's (IBA) newly launched GBP SONIA ICE Swap Rate, plus (i) the applicable ISDA spread adjustment published by Bloomberg and (ii) adjustments to account for structural differences between the two swap rates.
Fallbacks for US Dollar LIBOR ICE Swap Rate
The second Supplement, which is not expected to be published until a SOFR swap rate is available for use in financial instruments, will implement the fallback provisions proposed for the US Dollar LIBOR ICE Swap Rate by the Alternative Reference Rates Committee (ARRC) in its March 2021 paper. The fallbacks for the US Dollar LIBOR ICE Swap Rate will be similarly structured to that of the Sterling LIBOR ICE Swap Rate, but will be based on IBA's forthcoming SOFR Swap Rate, once it is available for use in financial instruments.
The new fallbacks in both cases will be triggered by actual cessation of the applicable underlying LIBOR rate. If the applicable fallback rate is not available for some reason, the fallback rate will be calculated by the Calculation Agent in line with the fallback rate methodology, which will be set out in the applicable Supplement.
The new fallbacks will also be incorporated into a new version of the 2021 ISDA Interest Rate Derivatives Definitions.
ISDA has also confirmed that it intends to publish template language for use by market participants when incorporating the new fallback provisions into legacy derivative transactions referencing the Sterling and US Dollar ICE Swap Rates.
The ISDA consultation follows a consultation launched in May 2021 by IBA, which proposed the discontinuation of the Sterling LIBOR ICE Swap Rate after the end of this year, given the imminent discontinuation of its underlying rate, Sterling LIBOR. Given that US Dollar LIBOR's discontinuation is not expected until mid-2023, IBA is expected to consult on the future discontinuation of the US Dollar LIBOR ICE Swap Rate in due course.
Authors: Mike Logie and Kirsty McAllister-Jones
