On September 19, 2018, ISDA published the ISDA Benchmarks Supplement (the “Supplement”) to enable parties to include fall back provisions in their trades if a benchmark ceases to be provided by the administrator to the benchmark or if a regulator of the administrator, the applicable central bank or applicable resolution authority announces that the administrator shall cease to provide a benchmark  (an “index cessation event”). The Supplement covers the following ISDA definitions booklets:

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

The Supplement also introduces the concept of an “Administrator/Benchmark Event” which applies if a benchmark or an administrator is not approved and therefore cannot be used by the parties in accordance with applicable law.

Upon an Index Cessation Event or Administrator/Benchmark Event the parties to consider one of the following Alternative Continuation Fallbacks:

  • Agreement between the parties;
  • Use of a replacement benchmark nominated by the parties at the time of trading (referred to as a “Alternative Pre-nominated Index”) plus an Adjustment Payment/Adjustment Spread;
  • Use of an “Alternative Post-nominated Index” which is defined as an index, benchmark or other price source nominated by the administrator of the relevant index/benchmark or use of a benchmark nominated by a Relevant Nominating Body [the central bank for the currency in which the Relevant Benchmark is dominated] plus an Adjustment Payment/Adjustment Spread;
  • Use of a replacement benchmark selected by the Calculation Agent plus an Adjustment Payment/Adjustment Spread.

The parties agree “to act in good faith and use commercially reasonable efforts in seeking to apply each applicable Alternative Continuation Fallback . . to allow the Swap Transaction to continue in accordance with its terms as amended in accordance with the relevant Alternative Continuation Fallback.” If more than one Alternative Continuation Fallback is applicable then the hierarchy of fallbacks listed above is used and the first applicable fallback shall apply. If no Alternative Continuation Fallbacks apply then the Supplement provides for a no-fault termination right with respect to the applicable Swap Transaction.

Practical Application of the Alternative Continuation Fallbacks

The way the 2006 ISDA Definitions are structured the parties can agree to a “Priority Fallback”. For example, the parties to a trade can designate a fallback index to apply in the even that a “index cessation event” occurs with respect to the primary index on the trade. In the context of LIBOR the parties could designate the “Secured Overnight Financing Rate” (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities as measured by repurchase agreements between market participants, as the “Priority Fallback”. The Alternative Continuation Fallbacks would then only apply in the event that the Priority Fallback was somehow not applicable (e.g. it was no longer published).

Application of the Supplement

The Supplement does not automatically supplement the terms of an ISDA definitional booklet. Parties will need to expressly incorporate the Supplement to the extent they wish to apply its terms. Such incorporation could be on a trade-by-trade basis or can be at the relationship level through incorporation into the parties’ ISDA Agreement.

Good Day. DR2