ISDA releases report explaining final results of LIBOR consultation on pre-cessation fallbacks: the nuance behind the consensus

We commented last month on the announcement from the International Swaps and Derivatives Association (ISDA), confirming the preliminary results of its re-consultation on the implementation of pre-cessation fallbacks for derivatives referenced to LIBOR: ISDA pre-cessation fallback consensus: will this reduce legacy LIBOR risk in the derivatives market?

ISDA has now published a report summarising the responses received from the industry to the consultation, and it makes for very interesting reading.

The report explains that 91% of respondents were in favour of combining pre-cessation and permanent cessation fallbacks without optionality or flexibility, in the amended 2006 ISDA Definitions for LIBOR and a single protocol. A common reason given by market participants was the need to achieve consistency across asset classes (generally between cash and derivative markets) and between cleared and non-cleared derivative markets.

However, although the scale of consensus may at first appear overwhelming, a more detailed reading of the report reveals how delicate that consensus might be. For example, several market participants who were in favour of the pre-cessation trigger indicated that their response was conditional on achieving actual consistency; and some who were not in favour of including the pre-cessation trigger also cited consistency as their main reason (e.g. being more preferable for there to be consistency within an asset class, i.e. non-cleared derivatives, than between asset classes).

It is unsurprising that the desire for consistency from the market is the driving force behind industry views on pre-cessation triggers. Indeed, we have discussed in our previous blog posts that basis risk creating mismatches between different parts of a party's portfolio, and the impact of a single fallback with no optionality on protocol adherence, were likely to be key factors for market participants.

The upshot is that many respondents who would agree on the importance of consistency as a high level principle have still answered differently in response to the consultation, in part because of slightly different perspectives on how the ISDA consultation fits in with wider industry efforts (which are ongoing). Despite this fact, ISDA has confirmed that it expects to move forward on the basis of both permanent and pre-cessation triggers in the amended definitions and a single protocol. Attention will no doubt turn to the impact of this result on the efforts in other markets, and whether some measure of consistency with the derivative markets can be achieved.