IBOR Fallback Rate Adjustments Rule Book


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IBOR Fallback Rate Adjustments Rule Book

BISL

IBOR FALLBACK RATE ADJUSTMENTS RULE BOOK

Background

Inter-bank Offered Rates (“IBORs”), a series of interest rate benchmarks, are undergoing a period of change as regulators and industry groups have recommended that firms transition away from the London Inter-bank Offered Rate (“LIBOR”) and other IBORs and prepare to replace them with alternative, overnight Risk Free Rates (“RFRs”). These RFRs, including SOFR (USD), €STR (EUR) and SONIA (GBP), are typically administered and published by major central banks worldwide.

Transitioning to the RFRs will be a demanding and complex process for the industry as RFRs are structurally different from IBORs. They are overnight rates and exhibit different liquidity characteristics and supply/demand issues than IBORs.

To address the risk that one or more IBORs are discontinued while market participants continue to have exposure to that rate, counterparties are encouraged to agree to contractual fallback provisions that would provide for adjusted versions of the RFRs as replacement rates.

Due to the fundamental differences in the nature of IBORs and the RFRs, key adjustments are necessary if RFR fallbacks are to take effect in contracts that were originally negotiated to reference the IBORs. The International Swaps and Derivatives Association, Inc. (“ISDA”) ran public consultations (“ISDA Consultations”) to finalize the adjustment methodologies for derivatives contracts and subsequently issued a tender invitation for a vendor to perform and distribute these necessary adjustments.

More information about the ISDA Consultations can be found here.

Bloomberg Index Services Limited (“BISL” and, collectively with its affiliates, “Bloomberg”) was selected as the vendor to calculate and distribute these RFR adjustments (each a “Rate Adjustment” and, collectively, the “Rate Adjustments”), including the Adjusted Reference Rate, the Spread Adjustment and the resulting Fallback Rate (as such terms are defined below).

This rule book (“Rule Book”) sets out the formulae, definitions, rules and conventions that BISL will implement to calculate the Rate Adjustments in line with the ISDA Consultations referenced above. Without limiting the detail set forth in the formulae, definitions, rules and conventions outlined below, the key adjustments that the ISDA Consultations arrived at and which this Rule Book seeks to implement are the following:

(i)

to account for the fact that IBORs have a term structure (e.g., 1-month, 2-month, etc.) whereas

RFRs are overnight rates, the RFRs will be compounded in arrears over a period similar to the

applicable IBOR tenor (e.g., 30 days for 1-month, 60 days for 2-month, etc.). These

compounded RFRs are each generally referred to as the “Adjusted Reference Rate”;

(ii)

to account for the (nearly) risk-free nature of the RFRs v. the liquidity characteristics and

supply/demand factors affecting IBORs, a spread adjustment will be calculated for each

RFR/IBOR pair (per tenor) using a five year historical median calculation. These calculations

are each generally referred to as the “Spread Adjustment”; and

(iii) adding (i) and (ii) together on a per RFR, per tenor basis for the resulting “Fallback Rate”.

BISL is authorised and regulated by the Financial Conduct Authority. However, users should note that the IBOR transition is to RFRs produced by central banks. The adjustment calculations described in this Rule Book aim to facilitate this transition and the adoption of these RFRs but the Rate Adjustments are not themselves separate benchmarks for purposes of the EU benchmark regulation (or similar applicable frameworks) (“BMR”).

Users should be aware that prior to the Spread Adjustment becoming fixed upon a “Spread Adjustment Fixing Date” (as defined and determined below), neither the Spread Adjustment nor the Fallback Rate should be used as a primary reference rate within a financial instrument or financial contract (or other ‘use’ as defined in the BMR) other than as a contractual fallback. Use of Bloomberg’s calculations to the contrary is expressly prohibited.
Please see the Frequently Asked Questions document on Bloomberg.com/LIBOR for further information.
Publication Date: 22nd April 2020
Last Updated: 8th October 2020
THIS DOCUMENT IS PROPRIETARY TO ISDA, BLOOMBERG AND THEIR RESPECTIVE AFFILIATES.
YOU ARE REFERRED TO THE IMPORTANT DISCLAIMERS AND DISCLOSURES IN THIS DOCUMENT.

Table of Contents

Section 1. Section 2. Section 3. Section 4. Section 5. Section 6. Section 7. Appendix A

Introduction Overview of the Rate Adjustments Definitions Rate Adjustment Calculations General Rules Backtest Assumptions Licensing, Trademark and Important Disclaimer Information Rate Adjustment Information

Section 1. Introduction
Unless otherwise specified or defined, all capitalized terms referred to in this Rule Book are defined in Section 3 (“Definitions”). This Rule Book has been made available by the Adjustment Services Vendor and sets out the rules applicable to the Rate Adjustments. This version of the Rule Book is provided as of the date specified on the cover of this Rule Book (the “Publication Date”). Upon each update to this Rule Book, the most recent version shall be deemed to supersede the preceding version from the date of such update such that, in the event of any conflict between an earlier version of the Rule Book and the most recent version, the most recent version shall prevail. The Adjustment Services Vendor will use reasonable efforts to provide notice of such updates. The Adjustment Services Vendor shall provide additional information about any such updates upon written request. All determinations and calculations made by the Adjustment Services Vendor will (in the absence of manifest error) be final, conclusive and binding. The information contained in this Rule Book includes the formulae and material rules and risks relating to the Rate Adjustments. This information is subject to change.
Section 2. Overview of the Rate Adjustments
2.1 Determination of the Rate Adjustments The Rate Adjustments are calculated by the Adjustment Services Vendor and are based on the value of each of the relevant Underlying Rates as determined in accordance with Section 4 (“Rate Adjustment Calculations”) for each Rate Record Day. The determination of dates used in the calculation is based on the relevant calendars and exchange schedules available at the time of such determination. On any day where a Rate Adjustment is not calculated, no Rate Adjustment shall be published in respect of such day, subject to the provisions set out below. Certain provisions in this Rule Book are expressed in both formulaic and descriptive terms. In the event of conflict between a descriptive term and a formula, the formula shall govern.
2.2 Determination of the value of each Underlying Rate The Rate Adjustments have been established and designed only for the purpose of seeking to achieve the objectives stated in the Background Section. They have not been designed to reflect the performance of the wider financial markets. The Rate Adjustment shall be a function of the value of the relevant Underlying Rates. In the absence of a Market Disruption Event or Fallback Adjustment Event, the Rate Adjustment shall be calculated in accordance with the formulae (including in circumstances where the market for an Underlying Rate is illiquid or fragmented). This Section 2 (“Overview of the Rate Adjustments”) only provides a summary of the Rate Adjustments and is subject to, and qualified by, the remainder of this Rule Book.

Section 3. Definitions

“€STR”, or “EuroSTR”, means the euro short-term rate provided by the European Central Bank (ECB), as administrator of the benchmark, (or any successor administrator);

“Accrual End Date” means, with respect to an IBOR, its Reference Rate, Tenor and a Rate Record Day,

(i)

if such Tenor is ‘Overnight’ or ‘Spot Next’, the Following Convention Date with respect to

such Reference Rate and the Calendar Day immediately succeeding the Accrual Start

Date; or

(ii)

if such Tenor is ‘1 Week’ or ‘2 Weeks’, the Following Convention Date with respect to such

Reference Rate and the Calendar Day that is 7 (seven) or 14 (fourteen) Calendar Days

immediately succeeding the Accrual Start Date, respectively; or

(iii) if such Tenor is ‘1 Month’, ‘2 Months’, ‘3 Months’, ‘4 Months’, ‘5 Months’, ‘6 Months’ or ‘12

Months’, the Modified Following Convention Date with respect to such Reference Rate and

the Calendar Day that is 1 (one), 2 (two), 3 (three), 4 (four), 5 (five), 6 (six) or 12 (twelve)

months immediately succeeding the Accrual Start Date, respectively. For the avoidance of

doubt, if the day of the month of the Accrual Start Date is not present in the month that is 1

(one), 2 (two), 3 (three), 4 (four), 5 (five), 6 (six) or 12 (twelve) months immediately

succeeding such Accrual Start Date, then the Accrual End Date shall be the Modified

Following Convention Date with respect to such Reference Rate and the last Calendar Day

of the month that is 1 (one), 2 (two), 3 (three), 4 (four), 5 (five), 6 (six) or 12 (twelve) months

immediately succeeding the month of the Accrual Start Date, respectively;

“Accrual Spot Date” means, with respect to an IBOR, its Reference Rate, Tenor and a Rate Record Day, the Reference Rate Business Day that is the Reference Spot Lag number of Reference Rate Business Days immediately following such Rate Record Day. For the avoidance of doubt, if the Reference Spot Lag is 0 (zero) and such Rate Record Day is not also a Reference Rate Business Day, then the Accrual Spot Date is the Reference Rate Business Day immediately following such Rate Record Day;

“Accrual Start Date” means, with respect to an IBOR, its Reference Rate, Tenor and a Rate Record Day, the Reference Rate Business Day that is the Offset Lag number of Reference Rate Business Days immediately prior to the Accrual Spot Date;

“Adjusted Reference Rate” means, with respect to an IBOR, Tenor and Rate Record Day, the rate calculated in accordance with the methodology described in Section 4.2 (“Calculation of Adjusted Reference Rate”);

“Adjusted Reference Rate Base Date” means, with respect to an IBOR and Tenor, the date listed under column ‘Adjusted Reference Rate Base Date’ in Table 1 (“Fallback Rate Information”) in Appendix A;

“Adjustment Services Vendor”, or “Vendor” means Bloomberg Index Services Limited;

“Affiliate” means in relation to any entity, any other entity directly or indirectly controlling, controlled by, or under common control with, such entity;

“BBSW” means the Australian Dollar rate for prime bank eligible securities, known as the Bank Bill

Swap Rate, provided by the IBOR Administrator;

“Bloomberg Page” means, with respect to a Bloomberg ticker, the page on the Bloomberg Terminal® generated by entering such ticker + ;

“Bloomberg Website” means the following: https://www.bloomberg.com/professional/solution/libor-transition/ or any successor thereto;

“Business Day” means each IBOR Business Day and each Reference Rate Business Day;

“Calendar Day” means all days, including weekends and holidays;

“CDOR” means the Canadian Dollar rate for banker’s acceptance borrowings, known as the Canadian Dollar Offered Rate, provided by the IBOR Administrator;

“CORRA” means the Canadian Overnight Repo Rate Average provided by Refinitiv Benchmark Services (UK) Limited (RBSL), as administrator of the benchmark, or any successor administrator;

“Data Source” means

(i)

with respect to a Reference Rate and its Reference Rate Bloomberg Ticker, the Bloomberg

Page; or

(ii)

with respect to an IBOR and its IBOR Bloomberg Ticker, the Bloomberg Page;

“Day Count” means

(i)

with respect to a Reference Rate, the number of days listed under column ‘Day Count’ in

Table 4 (“Reference Rate Information”) in Appendix A; or

(ii)

with respect to an IBOR, the number of days listed under column ‘Day Count’ in Table 2

(“IBOR Information”) in Appendix A;

“EONIA” means the Euro Overnight Index Average currently provided by the European Money Markets Institute (EMMI) as administrator of the benchmark;

“EURIBOR” means the Euro wholesale funding rate, known as the Euro Interbank Offered Rate, provided by the IBOR Administrator;

“Euro LIBOR” means the Euro wholesale funding rate, known as the Euro London Interbank Offered Rate, provided by the IBOR Administrator;

“Euroyen TIBOR” means the prevailing market rate for prime bank transactions in the Japan offshore market, known as the Euroyen Tokyo Interbank Offered Rate, provided by the IBOR Administrator;

“Fallback Adjustment Event” means, with respect to a Rate Adjustment, the administrator of the relevant Reference Rate permanently discontinues the Reference Rate;

“Fallback Rate” means, with respect to an IBOR, Tenor and Rate Record Day, the rate calculated in accordance with the methodology described in Section 4.1 (“Calculation of Fallback Rate”);

“Fallback Rate Base Date” means, with respect to an IBOR and Tenor, the date listed under column ‘Fallback Rate Base Date’ in Table 1 (“Fallback Rate Information”) in Appendix A;

“Following Convention Date” means,

(i)

with respect to a date and a Reference Rate, such date if it is a Reference Rate Business

Day, otherwise the immediately succeeding Reference Rate Business Day; or

(ii)

with respect to a date, an IBOR and Tenor, such date if it is an IBOR Business Day,

otherwise the immediately succeeding IBOR Business Day;

“Force Majeure Event” means an event or circumstance (including, without limitation, a systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labour disruption or any similar intervening circumstance) that is beyond the reasonable control of the Adjustment Services Vendor and that the Adjustment Services Vendor determines affects a Rate Adjustment, any Underlying Rate or the methodology on which the relevant Rate Adjustment is based or the Adjustment Services Vendor’s ability to calculate and publish the relevant Rate Adjustment;

“HIBOR” means the rate of interest offered on Hong Kong Dollar loans by banks in the interbank market, known as the Hong Kong Interbank Offered Rate, provided by the IBOR Administrator;

“HONIA” means the Hong Kong Dollar Overnight Index Average provided by the Treasury Markets Association (TMA), as administrator of the benchmark, or any successor administrator;

“IBOR” means each Interbank Offered Rate (IBOR) listed under column ‘IBOR’ in Table 1 (“Fallback Rate Information”) in Appendix A;

“IBOR Administrator” means, with respect to an IBOR, the administrator of the benchmark listed under column ‘IBOR Administrator’ in Table 2 (“IBOR Information”) in Appendix A (or any successor administrator thereto);

“IBOR Bloomberg Ticker” means, with respect to an IBOR and Tenor, the ticker listed under column ‘Bloomberg Ticker’ in Table 3 (“IBOR Tenor Information”) in Appendix A;

“IBOR Business Day” means, with respect to an IBOR and Tenor, the days defined under column ‘Business Days’ in Table 2 (“IBOR Information”) in Appendix A;

“IBOR Cessation Trigger Date” means, with respect to an IBOR and with respect to the defined terms used in this Rule Book, the date on which there is:

(i)

a public statement or publication of information by or on behalf of the IBOR Administrator

announcing that it has ceased or will cease to provide the IBOR permanently or

indefinitely, provided that, at the time of the statement or publication, there is no

successor administrator that will continue to provide the IBOR; or

(ii)

a public statement or publication of information by the regulatory supervisor for the IBOR

Administrator, the central bank for the currency of the IBOR, an insolvency official with

jurisdiction over the administrator for the IBOR, a resolution authority with jurisdiction over

the administrator for the IBOR or a court or an entity with similar insolvency or resolution

authority over the administrator for the IBOR, which states that the IBOR Administrator has

ceased or will cease to provide the IBOR permanently or indefinitely, provided that, at the

time of the statement or publication, there is no successor administrator that will continue

to provide the IBOR; or

(iii) if the IBOR is Sterling LIBOR, Swiss Franc LIBOR, U.S. Dollar LIBOR, Euro LIBOR or Yen

LIBOR only, a public statement or publication of information by the regulatory supervisor

for the IBOR Administrator of such IBOR announcing that (a) the regulatory supervisor has

determined that such IBOR is no longer, or as of a specified future date will no longer be,

representative of the underlying market and economic reality that such IBOR is intended

to measure and that representativeness will not be restored and (b) it is being made in the

awareness that the statement or publication will engage certain contractual triggers for

fallbacks activated by pre-cessation announcements by such supervisor (howsoever

described) in contracts;

“IBOR Maturity Date” means, with respect to an IBOR, Tenor and Median Period Day,

(i)

if such Tenor is ‘Overnight’ or ‘Spot Next’, the Following Convention Date with respect to

such IBOR, Tenor and the Calendar Day immediately succeeding the IBOR Value Date; or

(ii)

if such Tenor is ‘1 Week’ or ‘2 Weeks’, the Following Convention Date with respect to such

IBOR, Tenor and the day that is 7 (seven) or 14 (fourteen) Calendar Days immediately

succeeding the IBOR Value Date, respectively; or

(iii) if such Tenor is ‘1 Month’, ‘2 Months’, ‘3 Months’, ‘4 Months’, ‘5 Months’, ‘6 Months’ or ’12

Months’, the Modified Following Convention Date with respect to such IBOR, Tenor and

the Calendar Day that is 1 (one), 2 (two), 3 (three), 4 (four), 5 (five), 6 (six) or 12 (twelve)

months immediately succeeding the IBOR Value Date, respectively. For the avoidance of

doubt, if the day of the month of the IBOR Value Date is not present in the month that is 1

(one), 2 (two), 3 (three), 4 (four), 5 (five), 6 (six) or 12 (twelve) months immediately

succeeding such IBOR Value Date, then the IBOR Maturity Date shall be the Modified

Following Convention Date with respect to such IBOR, Tenor and the last Calendar Day of

the month that is 1 (one), 2 (two), 3 (three), 4 (four), 5 (five), 6 (six) or 12 (twelve) months

immediately succeeding the month of the IBOR Value Date, respectively;

“IBOR Value Date” means, with respect to an IBOR, Tenor and an IBOR Business Day, the IBOR Business Day that is the IBOR Value Lag number of IBOR Business Days immediately following such IBOR Business Day;

“IBOR Value Lag” means, with respect to an IBOR and Tenor, 0 (zero) if the Tenor is Overnight, otherwise the number listed under column ‘Value Lag’ in Table 2 (“IBOR Information”) in Appendix A;

“Live Tenor” means, with respect to an IBOR and a date, the set of Tenors for which such date is prior to the Tenor Cessation Trigger Date;

“Lower Interpolation Tenor” means, with respect to an IBOR, a Tenor and a Median Period Day, the longest Live Tenor that is shorter than such Tenor;

“Market Disruption Event” means, with respect to a Rate Adjustment, the occurrence of one or more of the following events:

(i)

the occurrence of an event that makes it impossible or not reasonably practicable for the

Adjustment Services Vendor to obtain the value of any Underlying Rate, or any other price

or necessary information for purposes of calculating the Rate Adjustment;

(ii)

a temporary failure by the administrator or other source of an Underlying Rate to

announce or publish the level or value of such Underlying Rate on a day on which the level

or value of such Underlying Rate was scheduled to be announced or published;

(iii) a Force Majeure Event;

“Median Period” means, with respect to an IBOR, Tenor and Rate Record Day, the set of days occurring in the period from and including the Median Period Start Date to and including the Median Period End Date that are Median Period Days for which the Accrual End Date of the Adjusted Reference Rate for each day is at least 2 (two) Reference Rate Business Days earlier than such Rate Record Day;

“Median Period Days” means, with respect to an IBOR and Tenor, days that are both IBOR Business Days and Rate Record Days;

“Median Period End Date” means, with respect to an IBOR, Tenor and Rate Record Day, the day occurring 2 (two) Reference Rate Business Days immediately prior to the date that is the Tenor period immediately prior to the Rate Record Day;

“Median Period Start Date” means, with respect to a Median Period End Date, the Calendar Day occurring 5 (five) years prior to such Median Period End Date. For the avoidance of doubt, if such Median Period End Date is the 29th (twenty ninth) of February and the year occurring 5 (five) years prior to such Median Period End Date is not a leap year, then the Median Period Start Date means the Calendar Day occurring 5 (five) years prior to the Calendar Day immediately preceding such Median Period End Date;

“Modified Following Convention Date” means,

(i)

with respect to a date and a Reference Rate, such date if it is a Reference Rate Business

Day, otherwise the immediately succeeding Reference Rate Business Day if it falls in the

same month as such date, otherwise the immediately preceding Reference Rate Business

Day; or

(ii)

with respect to a date, an IBOR and Tenor, such date if it is an IBOR Business Day,

otherwise the immediately succeeding IBOR Business Day if it falls in the same month as

such date, otherwise the immediately preceding IBOR Business Day;

“Offset Lag” means 2 (two);

“Product” has the meaning given to it in the ‘Important Disclaimer Information’ section;

“Product Investor” has the meaning given to it in the ‘Important Disclaimer Information’ section;

“Rate Adjustment” has the meaning given to it in the ‘Background’ section;

“Rate Adjustment Commencement Date” means, with respect to an IBOR and Tenor, the date listed under column ‘Commencement Date’ in Table 1 (“Fallback Rate Information”) in Appendix A;

“Rate Record Day” means each day of the week other than Saturday or Sunday;

“RBA Cash Rate” means the Reserve Bank of Australia cash rate provided by the Reserve Bank of Australia, as administrator of the benchmark, or any successor administrator;

“Reference Rate” means, with respect to an IBOR, the rate listed under column ‘Reference Rate’ in Table 1 (“Fallback Rate Information”) in Appendix A;

“Reference Rate Bloomberg Ticker” means, with respect to a Reference Rate, the ticker listed under column ‘Bloomberg Ticker’ in Table 4 (“Reference Rate Information”) in Appendix A;

“Reference Rate Business Day” means, with respect to a Reference Rate, the days defined under column ‘Business Days’ in Table 4 (“Reference Rate Information”) in Appendix A;

“Reference Spot Lag” means, with respect to a Reference Rate and Tenor, 0 (zero) if the Tenor is Overnight, otherwise the number listed under column ‘Spot Lag’ in Table 4 (“Reference Rate Information”) in Appendix A;

“Rounding Precision” means, with respect to a Reference Rate, the percentage specified under column ‘Rounding Precision’ in Table 4 (“Reference Rate Information”) in Appendix A;

“SOFR” means the daily Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York, as administrator of the benchmark (or any successor administrator);

“SARON” means the Swiss Average Rate Overnight rate provided by SIX Financial Information AG (SIX), as administrator of the benchmark or any successor administrator;

“SONIA” means the daily Sterling Overnight Index Average rate as provided by the administrator, or any successor administrator, of the benchmark to and published by authorized distributors;

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IBOR Fallback Rate Adjustments Rule Book