The International Swaps and Derivatives Associations (ISDA) recently published the ISDA IBOR Fallbacks Protocol. The ISDA IBOR Fallbacks Protocol is a way for parties to efficiently and electronically amend, with their adhering counterparties, specific master agreements and transaction confirmations by incorporating the new fallbacks (replacement benchmarks). In addition, the IBOR Fallbacks Supplement to the 2006 ISDA Definitions has also been published.

The Alternative Reference Rates Committee (ARRC) and the Working Group on Sterling Risk Free Reference Ratesannounced in early October their encouragement to adhere to the ISDA IBOR 2020 Fallbacks Protocol and IBOR Fallbacks Supplement which focuses on strengthening existing and new derivatives contracts with durable fallback language.

In support of MUFG's comprehensive LIBOR Transition Strategy, MUFG Securities EMEA plc; MUFG Securities (Europe) N.V.; and MUFG Bank,ltd, has adhered to the ISDA IBOR Fallbacks Protocol, and we encourage clients to reach out to their advisers to discuss whether the ISDA IBOR Fallbacks Protocol may be part of an appropriate solution for them.

By adhering to the protocol, market participants agree that their legacy derivative contracts with other adherents will include the amended floating rate option for the relevant IBOR and will therefore include the fallback. The ISDA IBOR Fallbacks Protocol and Definitions takes into account the following:

  • facilitate inclusion of the new fallbacks in existing non-cleared IBOR derivatives transactions between counterparties that both adhere to the protocol
  • include fallbacks that would apply upon the permanent discontinuation of LIBOR and other key IBORs and upon a 'non-representative' determination for LIBOR
  • amend certain floating rate options to include fallbacks that would apply when certain LIBORs are permanently discontinued.
  • include the amended floating rate option (ie, the floating rate option with the fallback) upon the effectiveness of the Supplement for the relevant IBOR transactions incorporating any relevant ISDA definitional booklets that are entered into on or after the date of the supplement
  • any transactions entered into prior to the date of the Supplement (so-called legacy derivatives contracts) will continue to be based on the 2006 ISDA Definitions as they existed before they were amended pursuant to the Supplement, and therefore will not include the amended floating rate option with the fallback.
  • facilitate multilateral amendments to include the amended floating rate options, and therefore the fallbacks, in legacy derivatives contracts.
  • as always, any such protocol will be completely voluntary and will amend contracts only between two adhering parties

Fallbacks are not intended to be a primary means of moving from IBORs to RFRs. Once the fallbacks are in place, it is recommended that market participants focus on voluntary transition before the cessation of any key IBOR. Moving away from key IBORs voluntarily by amending or closing out contracts that reference those rates allows counterparties to tailor their strategies to their specific portfolios, and could allow firms to negotiate terms that avoid the adjustment mechanisms for fallbacks.

What happens next?

MUFG will monitor the list of adhering parties on the ISDA IBOR Fallbacks Protocol website (to the extent parties choose to adhere) and will commence discussions with clients regarding early transition options available including the ISDA IBOR Fallbacks Protocol, prior to the cessation of any key IBOR; to agree the most appropriate approach, taking into account specific product, transaction, timing and Master Agreement considerations.

For further information on the ISDA IBOR Fallbacks Protocol:

If you have any questions or require further information please contact the IBOR EMEA Transition Programme at either ibor@uk.mufg.jp (MUFG Bank) or ibor@mufgsecurities.com (MUFG Securities).