ISDA publishes Benchmarks Supplement

On 19 September 2018, ISDA published the ISDA Benchmarks Supplement, which forms part of ISDA’s ongoing initiatives in relation to regulation and reform of benchmarks.

The Supplement is important for both buy- and sell-side participants in the derivatives market and is also relevant to the securities and loan markets which use derivatives for hedging purposes.

Overview and background

The Supplement helps parties to derivative transactions document their obligations if certain events impact the availability of the benchmarks referenced by those transactions (such as interest rates and indices). This is principally with the intention of facilitating compliance with Article 28(2) of the EU Benchmark Regulation (BMR) which requires that certain supervised entities must have robust written plans setting out the actions they would take if a benchmark materially changed or ceased to be provided. However, the Supplement is deliberately drafted generically and can be used by any transacting parties which need or want to document fall back provisions for these eventualities.

The Supplement is intended to operate with, and be incorporated into the documentation for, transactions which reference any of the following sets of ISDA definitions:

  • 2006 ISDA Definitions
  • 2002 ISDA Equity Derivatives Definitions
  • 1998 FX and Currency Option Definitions
  • 2005 ISDA Commodity Definitions

Trigger events, fallbacks and acknowledgements

The Supplement describes various events which may occur in relation to a benchmark which will trigger application of the fallback provisions. The trigger events are drafted to interact with the relevant type of transaction and applicable ISDA definitions.

As with the trigger events, there are alternative fallback provisions depending on the underlying benchmark and the applicable ISDA definitions. In the absence of an available fallback, the Supplement provides for certain transactions to be subject to early termination.

The Supplement also includes acknowledgements regarding the consequences to a transaction following a change to a benchmark.

Applying the Supplement

Firms that wish to use the Supplement can incorporate it into transactions either on a trade-by-trade basis (ie in the Confirmation), or to all relevant transactions (in the Master Agreement itself). In due course, it may be that ISDA will publish a Protocol to facilitate take-up more broadly across the industry.

Related initiatives

In response to the Financial Stability Board’s initiatives on reforming certain interbank offered rates (IBORs), ISDA is in the process of updating the 2006 ISDA Definitions to incorporate new fallbacks relating to permanent discontinuation of certain IBORs (the IBOR Fallbacks). The Supplement is drafted so that, once the 2006 ISDA Definitions are updated and the IBOR Fallbacks are implemented, those fallbacks will apply in priority to the fallbacks set out in the Supplement.

Documentation and hedging considerations

Benchmark reform has been at the forefront of the minds of most market participants for some time. Having procedures and plans in place for the discontinuation of certain IBORs is of particular importance, as emphasised by the recent “Dear CEO” letter from the UK Prudential Regulation Authority and Financial Conduct Authority to certain banks and insurance companies seeking assurance that firms’ senior managers and boards understand associated risks. This is also an area of developing regulatory guidance (ESMA has on 27 September 2018 released further guidance on BMR (Q&As on the Benchmarks Regulation) which covers Article 28(2), amongst other things).

The Supplement will be an important tool both for the purposes of compliance with Article 28(2) of the BMR but also more generally for the purposes of documenting suitable contingencies for events which may impact the continued availability of benchmarks.

However, parties should consider the detailed terms of the Supplement, in particular if they may be inconsistent with the way in which a benchmark event would be treated under the terms of any instrument that is being hedged. In this regard, in recent months a number of firms have included bespoke fallback provisions in the terms of securities and loans which may now merit further consideration against the terms of the Supplement.

Further information

Should you require further information on the Supplement and its potential application please contact any member of your Simmons & Simmons team.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.