Answer to 'Supplemental Consultation on Spread and Term Adjustments, Including Final Parameters Thereof, for Fallbacks in Derivatives Referencing EUR LIBOR and EURIBOR, As Well as Other Less Widely Used IBORs' Issued by ISDA

Abstract

This note is an answer to the consultation published by ISDA regarding the amendment of documentation to implement fallbacks in derivatives referencing EUR-LIBOR and EUR-EURIBOR.

The consultation is based on question similar to the previous consultations. The answers we provided to those consultation and the quantitative literature related to the same subject can be used to understand why the proposed solutions are not acceptable.

To those generic answer, there are two EUR specific issues that should be emphasised. The first one is positive and is the existence of two benchmarks (EUR-LIBOR and EUR-EURIBOR) with one of them expected to outlast the other by several years. The surviving benchmark should be used as the first step of the fallback for the other benchmark. The second issue is negative and is due to the fact that the planned fallback benchmark, ESTR, has been published only since 1 October 2019. Data preceding that date are for some part not intended for use as benchmark by the administrator and regulator and for the older part not regulation compliant. The only ESTR data acceptable is the one officially published as a benchmark, i.e. data for dates after 1 October 2019.

We suggest once more to ISDA to fundamentally review the decision to base the fallback on the compounding setting in arrears and historical mean approaches.

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

JEL Classification: G13, G15, G23, K12