Learn all about the IBOR benchmarks transition in video!

Since 2012, regulations have started to emerge in order to restore confidence in the reliability and robustness of indices used as benchmarks. In the European Union, the European Benchmark Regulation published in 2016 announced that all London Interbank Offered Rates (LIBOR) were to be progressively phased out.

LIBOR was the most widely used benchmark for interest rates until recently, but it will progressively disappear from 31 December, 2021 (for all tenors of GBP, CHF & JPY as well as for USD 1 week & 2 month tenors) and it is scheduled to finally disappear on 30 June, 2023 (for the other USD tenors).

The move away from the LIBOR to Risk Free Rates (RFR) is undoubtedlyone of the most significant challenges that financial market participants have faced in many years.

Alternative rates to replace LIBOR have been developed in recent years and correspond to overnight RFRs (SONIA for GBP, SARON for CHF, TONA for JPY and SOFR for USD), derived from genuine transactions to ensure a higher level of robustness.

Overnight RFRs have been used to build backward looking rates. In addition, to ease the transition, RFR-based forward looking rates have emerged (Term SOFR, TORF and Term SONIA).

New contracts have been progressively switched to these new rates, with the prohibition on the use of USD LIBOR in new contracts starting from 1 January 2022 (with some exemptions, mainly on derivatives).

The ISDA association which supports the derivatives market, provided a widely adopted framework, which removes most of the legal risk embedded in the LIBOR transition for derivatives. This framework consists of a supplement and a protocol which allows the incorporation of fallbacks into legacy deals, creating a safety net for those transactions which were not actively transitioned to RFR ahead of the LIBOR cessation.
Since this framework aims to address all derivatives, it is based on a sophisticated mechanism, the implementation of which may raise some operational complexity.

If you still have questions about ISDA fallbacks and the impact on your derivatives, watch this video!