In a letter to the International Swaps and Derivatives Association (ISDA) on 20 January 2020, the Financial Conduct Authority (FCA) confirmed the possibility that LIBOR may continue to be published for a short period after regulators have announced that it is no longer representative of an underlying market (a non-representative LIBOR). The European Benchmarks Regulation could prohibit EU-supervised firms from entering into new derivatives transactions referencing such a non-representative LIBOR. As a result, the FCA encouraged ISDA to provide the derivatives market with the ability to insert triggers into their derivatives contracts to allow fallbacks to risk-free rates if such a regulatory announcement is made prior to the cessation of LIBOR (a pre-cessation trigger).
Following the above comments by the FCA, ISDA announced on 5 February 2020 that it intends to launch a re-consultation on how to implement pre-cessation triggers because it failed to achieve consensus from market participants in its previous consultation. The new consultation is expected to be published by the end of February and will require market participants to indicate whether the 2006 ISDA Definitions (the mechanism by which fallbacks will be included in new derivatives transactions) should be amended to include fallbacks that would apply to derivatives following the permanent cessation of LIBOR or a “non-representative” pre-cessation event, whichever occurs first.
If ISDA receives sufficient support for this approach:
- the 2006 ISDA Definitions will be amended to include both pre-cessation triggers and permanent cessation triggers; and
- a single protocol will be launched to allow participants to include both pre-cessation and permanent cessation triggers within their legacy derivatives trades.
However, if there is insufficient support, the 2006 ISDA Definitions and the protocol mentioned above will allow participants to opt-in to pre-cessation triggers in new derivative trades and legacy derivatives, respectively.
ISDA’s proposed schedule for the consultation, protocol and amendments to the 2006 ISDA Definitions is as follows:
| Re-consultation on pre-cessation triggers | Late February 2020 |
| Deadline for consultation responses | Late March 2020 |
| Publication of consultation results and announcement of next steps for implementing permanent and pre-cessation triggers | Late April – early May 2020 |
| Publication of amendments to the 2006 ISDA Definitions and the related protocol | TBD |
Watch for further McGuireWoods client alerts as ISDA launches the re-consultation on pre-cessation triggers and the results thereof. For more information, please contact the McGuireWoods London debt finance team.