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ISDA summarized preliminary responses to a July 2018 consultation related to new benchmark fallbacks for derivative contracts that cite various interbank offered rates ("IBORs"). As previously covered, the consultation set forth alternatives for adjusted risk-free rates ("RFRs") and spread adjustments that would apply in the event an IBOR is permanently discontinued.
ISDA received 152 responses to the consultation, representing a wide cross-section of market participants. According to ISDA:
- the "overwhelming majority" of respondents preferred the "compounded setting in arrears rate" for the adjusted RFR;
- a "significant majority" favored the "historical mean/median approach" for the spread adjustment;
- of those who chose the "forward approach" as their first preference for the spread adjustment, more than half specified that the "historical mean/median approach" was their second choice;
- the majority of respondents preferred to utilize the same adjusted RFR and spread adjustment across all benchmarks covered by the consultation; and
- from a qualitative vantage point, respondents discussed the numerous disadvantages of the "forward approach," and the fewer disadvantages of the "historical mean/median approach."
ISDA noted that, although U.S. dollar LIBOR was not within scope of the consultation, preliminary feedback from respondents indicated that the compounded setting in arrears rate, as well as the historical mean/median approach to the spread adjustment, also may be suitable for U.S. dollar LIBOR and other benchmarks.
The final decision of the ISDA Board Benchmark Committee regarding the approach to the adjusted RFR and spread adjustment is expected by the end of December 2018. ISDA also said that it will publish for review and comment the approach it develops for implementing the adjusted RFR, as well as the spread adjustment in its 2006 ISDA Definitions.
Finally, ISDA stated that it "continues to analyze responses to the specific questions about the historical mean/median approach (e.g., the appropriate length of the look-back period, whether the calculation should be based on a mean or median, and the implications for various types of transactions)" and welcomes suggestions from respondents about potential variations on that approach to "assess what additional feedback may be necessary."
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