Friday, 15 May 2020

muRisQ quoted in ISDA consultation summary

The Summary of Responses to the ISDA 2020 Consultation on How to Implement Pre- Cessation Fallbacks in Derivatives has been published yesterday 14 May 2020. There were 142 respondent. muRisQ is among the four Professional Services/Trade Association to have answered and the only respondent from Belgium.

Like in previous consultation summaries of responses, muRisQ responses are largely quoted in the document. A first version of the answer appeared on Marc's blog:  Pre-cessation it will be :(

One of the summary sections provide an highlight of the reason behind our negative answer to the pre-cessation question:
51.In contrast, a European professional services firm emphasized that “[i]n the current master agreements, the only event that leads to a fallback is the non-publication of the rate, there is no notion  of  announcement  date  and  even  less  pre-cessation  trigger.  A  pre-cessation  trigger  forces  extra  complexity  and  increases  the  fragmentation  of  the  market.  Legacy  trades  only  have  non-publication  as  a  trigger,  adding  a  pre-cessation  trigger  create  a  discrepancy  between  the  trades  under the new definitions and the legacy trades. The discrepancy would make it more complex to hedge the legacy book. A new fragmentation of the market will be created.” This entity noted, “To achieve the required exposure on new trades, the fallback has to be trigger as late as possible. Any pre-cessation trigger is a negation of the trade existence itself. The LIBOR fixing, even if not perfect or deemed not representative by a third party – e.g.,  a regulator – is better than a fixing based on a RFR plus a spread which is not credit and liquidity dependent. Fallback should be a last resort mechanism  and  used  only  in  last  resort.  The  pre-cessation  event  is  not  an  event  requiring  last  resort. The estimation by a single entity, even a regulator, without review and recourse mechanism in place, regarding a major interest rate standard that has been working for more than 30 years and is still working, should not be consider as a case of last resort.”

Don't fallback, step forward!

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