2021 ISDA interest rate derivatives definitions
Key takeaways
- The ISDA Fallbacks Supplement identified several RFRs as suitable alternatives to LIBOR that do not have tenors and are calculated using a historical method.
- As market participants transition from LIBOR to the applicable RFR, different conventions have developed in the cash markets to provide market participants with greater payment visibility prior to the end of the interest period.
- ISDA’s modifications to their Definitions would allow market participants to better align their derivatives with the conventions employed in their cash products.
ISDA’s Benchmark Reform Working Group is in the process of updating the 2006 ISDA Definitions (the Definitions) to include a modular approach towards term rate calculations. The supplemental language and updated Confirmation templates are intended to allow parties to make elections to better align their derivatives with calculation conventions existing in the cash market.
A number of currency-specific Risk-Free Rates (RFRs) have been identified as suitable alternatives to LIBORs under the ISDA Fallbacks Supplement (here). RFRs are overnight rates, do not have tenors and are calculated using a backward-looking, or historical, method. As market participants have begun transitioning from LIBOR to the applicable RFR, different conventions have developed in the cash markets to provide market participants with greater payment visibility prior to the end of the interest period. These conventions include longer lookback periods, observation shifts, and lockout methods. Whereas ISDA’s standard methodology is fixed at a two-day lookback period. Once finalized, ISDA’s modifications to their Definitions would allow market participants to better align their derivatives with the conventions employed in their cash products. Additionally, ISDA is also considering a mechanism to allow market participants to achieve an “in advance” rate similar to existing LIBOR-based products, which would result in the payment being known at the beginning of a given interest rate period.
Updates to the 2021 Definitions remain under consultation with an anticipated launch date of May 17, 2021 and an effective date of October 4, 2021.
About the author
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Katie Russell
ISDA Advisory
Real Estate | Kennett Square, PA
Katie is a member of the ISDA Advisory team for Chatham’s Regulatory Compliance Advisory practice, providing reviews and negotiation services across corporate, private equity and real estate sectors.
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