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Eyes on IBOR – Update no. 5: The Protocol

On 9 October 2020, ISDA published the advent of the long-awaited Fallbacks Protocol (“the Protocol”) and updated 2006 Definitions (“the Supplement”). While the official Launch Date is 23 October 2020, early adopters may adhere in advance by application to their ISDA contact. The publication marks the beginning of the largest, single-phase amendment project ever undertaken by derivative market participants.


Supplement– the Supplement sets out amended definitions of floating rates to include fallback risk-free rates, applicable on the occurrence of an “Index Cessation Event”. The updated definitions will form part of all in-scope derivatives traded on or after the Effective Date.

Protocol– the Protocol acts to multilaterally incorporate the Supplement into legacy contracts on the Effective Date (or a subsequent date of adherence)

Covered Rates

The supplement covers the following IBORs:
GBP LIBOR, U.S. Dollar LIBOR, Euro LIBOR , EURIBOR, JPY LIBOR, CHF LIBOR, TIBOR, Euroyen TIBOR, Australian BBSW, Canadian CDOR, Hong Kong HIBOR, Singapore SOR and Thai THBFIX.


  • 9 October 2020– publication of the Protocol and the Supplement
  • 9 October 2020 – 23 October 2020– “escrow” period during which participants may adhere prior to the official adherence date. Participants that adhere in escrow will be visible on the Launch Date. This is a new mechanism intended to give the Protocol a kick start via early adoption. Participants wishing to adhere during this period should apply to ISDA for a private link.
  • 23 October 2020– official “Launch Date”. The Protocol opens for public adherence.
  • 25 January 2021– Effective Date.
  • 25 January 2021– the Protocol remains open for adherence with immediate effect.

The Supplement

Purpose– the current 2006 Definitions provide for the temporary non-publication of a rate, allowing for recourse to the Calculation Agent’s polling of Reference Banks. This mechanism is manifestly unsuitable to address a rate’s permanent cessation. Although primarily dealing with permanent cessation, the Supplement allows for temporary non-publication of the original rate as well as the unavailability of the amended risk-free rate.

Mechanism– the Supplement introduces the concept of an “Index Cessation Event”. The Index Cessation Event triggers fallback provisions on its Effective Date, replacing IBOR rates with specified risk-free rates (“RFRs”).

The Index Cessation Event is one of three statements:

  1. benchmark administrator states that it will no longer provide a rate, and there is no replacement administrator;
  2. A relevant authority states that the administrator will no longer provide a rate, and there is no replacement administrator;
  3. The FCA states that a rate is, and will remain, unrepresentative of its underlying market. This pre-cessation trigger will expressly engage RFR fallback triggers. Given the FCA’s remit, this limb will only apply to the five LIBOR rates (GBP, USD, EUR, JPY and CHF).

The Supplement also provides for:

  1. Temporary non-publication- in the absence of an Index Cessation Event, or prior to its Effective Date, if a rate is unavailable, it will be determined by the Calculation Agent using an officially recommended alternative. Absent such recommendation, rates used by CCPs and futures exchanges will apply.
  2. RFR unavailability– in the event that the RFR, applied by contractual trigger, itself becomes unavailable, a series of further fallbacks apply, each adjusted by the Calculation Agent for term and spread.

Risk-free rates

Industry working groups, according to currency area, have selected rates to act as fallbacks and replacements for the discredited IBOR rates. Although all RFRs are based on observed overnight rates, they are not homogenous e.g. GBP SONIA is an unsecured rate, USD SOFR incorporates secured repo rates. Despite their differences, all RFRs are structurally different from the IBORs they will replace:

  1. IBORs are term rates- 3m, 6m, 1 yr. etc., while all RFRs are overnight rates. For an RFR to act as a fallback to an IBOR, the RFR is compounded in arrears to equal the period of the relevant IBOR, becoming an “adjusted RFR”.
  2. RFRs are backward-looking e.g. yesterday’s overnight rate, while IBORs are forward-looking e.g. a rate for the next 3, 6 months etc. Compounding in arrears dictates that the required data will only be available at the end of the period, leaving no time to make payment. The Supplement therefore moves the Calculation Period two Business Days back. This adjusted period is the “Observation Period”, ending on the “Fallback Observation Day” on which the rate is taken.
  3. As an interbank lending rate, IBORs contain pricing elements to reflect counterparty credit and market liquidity- factors minimised in overnight transactions. To replicate these features in the RFR, a “Spread Adjustment” is calculated using the last five years historical data. On the occurrence of an Index Cessation Event, the Spread Adjustment is added to the triggered RFR.

Rate publication

The Supplement references specific Bloomberg screens which publish daily for each in-scope IBOR:

  • Adjusted RFR,
  • Indicative Spread Adjustment.
  • The fallback rate- adjusted RFR + Spread Adjustment.

On occurrence of an Index Cessation Effective Date and ensuing Fallback Observation Day, the Calculation Agent will observe from Bloomberg the rate for the “Original Fixing Date”, according to the contract’s floating rate tenor. If the Fall Back Observation Day cut-off time precedes publication of the Original Fixing Date rate, the applicable rate defaults to that most recently published. Further details regarding rate calculation, adjustment and publication may be found in Bloomberg’s Rulebook.

The Protocol: In scope documents

ISDA documents that reference:

  • An ISDA definitions booklet
  • Floating rate included in the Supplement
  • “Libor” generally

Non-ISDA documents:

  • GMRA- 1992, 1995, 2000, 2001
  • GMSLA- 2000, 2010, 2018 (Pledge)
  • French FBF Master Agreement
  • Spanish CMOF Master Agreement

Note that the Protocol is confined to OTC products and does not deal with German DRV documentation. Unsurprisingly, ISDA legal opinions as to Protocol efficacy only apply to ISDA documentation.

In-scope Products

As is typical, the Protocol is suited to the mass, multilateral amendment of vanilla derivatives. Bilateral amendment will be required for:

  • Structured products where the derivative is linked to non-derivative product. The use of the Protocol to amend only the derivative portion of such a structure potentially creates legal basis risk.
  • Non-vanilla products. A range of non-linear or more complex products such as: swaptions, caps, floors, range accrual swaps, constant maturity swaps are not suited to the relatively simple fallback rate calculation afforded by the Protocol.

Protocol Adherence

  • The Protocol will be open for adherence from the Launch Date.
  • Adherence is by the normal mechanism of signing and uploading a letter to the Protocol site.
  • Agreement to amend will be effective as of the date the second counterparty signs. The amendment will be effective as of the Protocol Effective Date- 25 January 2021.
  • Following the Protocol Effective Date, parties may revoke adherence. Such adherence will not affect amendments made prior to the date of revocation.
  • The Protocol contains provisions to allow an asset/investment manager to adhere on a client’s behalf. Adherence by agent can be in respect of some or all principals.

Bilateral Templates

For those products unsuited to the Protocol and/or for those counterparties unwilling to use it, ISDA has published a set of bilateral templates to either bilaterally incorporate the Protocol in full, or to amend its incorporation in the following ways:

  • Amend the scope by product inclusion.
  • Amend the scope by product exclusion.
  • Include otherwise excluded transactions dependent on matching bespoke provisions e.g. bond fallbacks in a structured product must mirror its hedging derivative.
  • Disapplication of the Libor pre-cessation trigger.


Publication of the Fallback Protocol was initially scheduled for late Spring 2020. Consultation over the inclusion of a pre-cessation trigger and consequent delay, was followed by a reference to the US DoJ on anti-competitive grounds, over the non-identity of proposed fallbacks and the IBORS they will replace. Publication signals the end of the “phony war”, market participants are now able to pull the trigger on their amendment plans. On paper, IBOR amendment looks like an ideal candidate for the protocol mechanism- high volume and relatively simple- it would be surprising if adherence rates don’t break all previous records.

However, this is a low bar to jump, no protocol to date has exceeded 50% adherence. Alongside the many products not covered by the Protocol, not least loans and bonds, market participants should be prepared for a high degree of bilateral amendment in respect of derivatives. Given the likely volume, end 2021 does not seem that far away.

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