June 10, 2022

ARRC Offers Additional Guidance on Fallbacks for USD LIBOR ICE Swap Rates

Nick Allen Commentary by Nick Allen

The Alternative Reference Rates Committee ("ARRC") issued guidance on the transition away from using USD LIBOR ICE swap rates ("ISR") to alternative reference rates.

The ARRC assessed the impact of the discontinuation of USD LIBOR on the ISR (formerly known as "ISDAFIX" and sometimes referred to as the "CMS" or "constant-maturity swap rates"). The ISR represent the mid-market fixed rates for fixed/float interest rate swaps; currently, the most commonly used rate determined by reference to three-month USD LIBOR. The ARRC determined that, as was the case with the GBP LIBOR ISR, the lack of availability in USD LIBOR swap data will lead to the LIBOR ISR ceasing to be published after June 30, 2023.

The ARRC previously released a recommended fallback formula, which was incorporated into the 2021 ISDA Interest Rate Derivatives Definitions and the 2006 ISDA Definitions (via Supplement 88), that, at a high level, referenced the SOFR-based ISR plus the ISDA fallback spread adjustment for three-month USD LIBOR, along with other technical adjustments, but legacy contracts are unaltered by those definitional updates.

Accordingly, the ARRC developed a set of recommendations that will help counterparties take proactive steps to address the end of the USD LIBOR ISR. It noted, however, that its recommendations may not harmonize with federal LIBOR legislation. The recommendations include encouraging market participants to:

  • identify their contracts linked to USD LIBOR ISR and the fallback provisions they contain (particularly the secondary fallback given the likelihood that a dealer poll will fall due to USD LIBOR's discontinuance);
  • take proactive steps to pre-emptively address the impact resulting from the discontinuation of USD LIBOR on its legacy positions and convert those positions to the SOFR or SOFR ISR equivalent (which can be done, e.g., via the ISDA bilateral amendment template); and
  • consider buying back debt instruments with problematic fallback provisions.

Commentary

While prolonged ISR non-publication led many users of USD LIBOR-based ISRs to adopt a calculation agent discretionary fallback, many legacy USD LIBOR-based ISR agreements likely still contain fallback provisions requiring a dealer poll and/or use of the last published rate. Because remediation of any affected legacy agreements must be done bilaterally on a case-by-case basis, users of these rates need to be proactive in identifying their exposure and assessing remediation options well in advance of June 2023.

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