Answer to 'Consultation on Final Parameters for the Spread and Term Adjustments in Derivatives Fallbacks for Key IBORs' Issued by ISDA

Abstract

This note presents answers to the "Consultation on Final Parameters for the Spread and Term Adjustments in Derivatives Fallbacks for Key IBORs'' issued by ISDA.

The consultation asks many questions related to technical details for the IBOR fallback term. Unfortunately it does not consider the main issue, which is that the proposed base solution of compounded setting in arrear is ill-conceived. It fundamentally changes the meaning of IBOR fixing and the questions and workarounds related to the term are the consequences of this ill-conception. Most of the questions consists of workaround for issues that have been described in detail over the last 18 months.

The spread part also focuses on narrow technical questions on how to compute it. It does not answer the question on how to prevent this computation to harm end users through the implied massive value transfer.

We review the different aspects related to the adjusted RFR and adjusted spread and detail for each of them the problem they introduce, the value transfer resulting and make some suggestion on improvements. We also indicate some potential consultation's manipulation.

Keywords: IBOR Fallback, ISDA Master Agreement, Interest Rate Modelling, Achievability, Value transfer

JEL Classification: G13, G15, G23, K12