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FSB Letter To ISDA On Pre-Cessation Triggers

Date 19/11/2019

This letter from the Co-Chairs of the FSB’s Official Sector Steering Group (OSSG) encourages the International Swaps and Derivatives Association (ISDA) to add a “pre-cessation” trigger alongside the cessation trigger as standard language in the definitions for new derivatives and in a single protocol, without embedded optionality, for outstanding derivative contracts referencing key Interbank Offered Rates (IBORs). This would help to reduce systemic risk and market fragmentation by ensuring that as much of the swaps market as possible falls back to alternative rates in a coordinated fashion.

Financial institutions must be prepared for the withdrawal of official sector support for LIBOR at end-2021. In March 2019, the Co-Chairs had written to ISDA encouraging consultation on a pre-cessation trigger that would take effect in the event that the UK Financial Conduct Authority, in its capacity as the regulator of LIBOR, found LIBOR no longer to be capable of being representative, for example because of the departure of panel banks at end-2021. The Co-Chairs consider it important for ISDA to find a way to accommodate the majority view from its consultation and include this trigger in as straight-forward a manner as possible.

In this letter, the FSB asks ISDA to take forward this option and, if necessary to broaden and consolidate the consensus, set it out in a further and hopefully conclusive consultation that also invites respondents to identify any critical flaws, fine-tuning improvements or viable alternatives to such an approach.

The work on derivatives contractual robustness is part of ongoing work to reform financial benchmarks. The FSB and member authorities through the OSSG are working to implement and monitor the recommendations of the 2014 FSB report Reforming Major Interest Rate Benchmarks.

Since July 2016, ISDA has undertaken work, at the request of the OSSG, to strengthen the robustness of derivatives markets to the discontinuation of widely-used interest rate benchmarks. The OSSG engages regularly with ISDA and other stakeholders with a view to their taking action to enhance contractual robustness in derivatives products and cash products, such as loans, mortgages and floating rate notes.