On October 23, 2020, ISDA launched its protocol to introduce robust fallback language for interest rate swaps.  This is a key step in the broader effort to transition financial markets away from interbank offered rates (IBORs)—and in particular the London Interbank Offered Rate (LIBOR)—to relevant alternative reference rates.  There is broad recognition that adherence to the protocol by all market participants with open positions in interest rate swaps referencing various IBORs is critical to strengthening the integrity of the derivatives markets and the stability of the global financial system.

There is no guarantee that LIBOR or any other IBOR will be available after 2021.  Therefore, market participants with exposures to interest rate swaps referencing LIBOR do not have an option about whether to adhere to the protocol or otherwise amend their swaps.  Yet many of those market participants have not acted.

As of November 17, 2020, ISDA reported that 800 legal entities globally had adopted the protocol, falling under approximately 400 corporate groups.[1]  This includes most of the largest banks and swap dealers.  But “it takes two to tango,” as they say, and that is most certainly the case with each and every swap.  Unless both counterparties to a swap have adopted the protocol, that swap cannot fallback to a non-LIBOR rate when LIBOR ceases.  Based on our analysis, there are approximately 2,400 corporate groups with open interest rate swap exposures referencing LIBOR that have not yet adopted the protocol or otherwise made amendments to the relevant contracts.  These include large numbers of asset managers and non-financial corporate entities.

If a swap counterparty fails to adopt the ISDA protocol by January 25, 2021, it risks being locked out of the interest rate swap markets.  Banks and dealers will be reluctant to enter into swaps with those counterparties because they would not be able to hedge the LIBOR exposure.  Regulated entities worldwide will face pressure from their relevant authorities if they continue to have exposures with counterparties who have not yet adhered to the protocol or amended their contracts through an alternate bilateral process.

The CFTC has worked closely with the Alternative Reference Rates Committee and other market participants to remove any potential regulatory hurdles to adoption of the new ISDA fallback language.  The CFTC has cleared the path; now it is time for market participants to act.