The International Swaps and Derivatives Association has taken the next step in the transition from IBORs (interbank offer rates) to alternative reference rates, announcing that it will launch its IBOR fallback protocol on October 23. Local regulators are urging Australian institutions to adhere to the protocol.
IBOR fallbacks are replacement rates that would apply to trades referencing a particular benchmark, which take effect if the benchmark becomes unavailable while market participants have exposure to that rate.
IBORs are being phased out in global financial markets. Australia’s IBOR, the bank bill swap rate, will continue to be available into 2021 and beyond when most other IBORs are expected to be phased out.
However, it will eventually be replaced by the AUD overnight index average (AONIA), which is the published screen rate for the Reserve Bank cash rate (displayed on the Refinitiv screen RBA30 page “or on any successor screen pages”).
AONIA has been the officially sanctioned alternative reference rate for Australian dollar-based transactions since June 2018, when ASIC declared that BBSW and AONIA were “significant financial benchmarks”.
In some markets participants are expected to stop quoting IBOR rates by the end of next year, even though transactions will still reference them.
In such cases the ISDA fallback will take effect. ISDA said these will be “adjusted versions of risk-free rates identified by working groups in each jurisdiction”.
The fallback rate in Australia will be an adjusted version of AONIA. The adjustments are to ensure contracts negotiated to reference IBOR “continue to meet the original objectives of the counterparties to the maximum extent possible”.
The ISDA protocol will enable market participants to opt to incorporate the fallback into their legacy trades.
ASIC said in a statement that adherence to the ISDA fallback protocol was an important step towards the orderly transition of alternative reference rates.
“It is critical to the mitigation of both individual entity risks and systemic risks associated with the discontinuation of LIBOR,” ASIC said.