Saturday, 18 January 2020

Answer to ISDA consultation on EUR-LIBOR and EUR-EURIBOR fallback

ISDA consultation regarding EUR-LIBOR and EURIBOR fallback closes in a couple of days. As for the previous consultation, we have provided a detailed answer. The text of our answer can be found on SSRN: Answer to ``Supplemental Consultation on Spread and Term Adjustments, including Final Parameters thereof, for Fallbacks in Derivatives Referencing EUR LIBOR and EURIBOR, as well as other less widely used IBORs'' issued by ISDA


The consultation is based on question similar to the previous consultations. The answers we provided to those consultation and the quantitative literature related to the same subject can be used to understand why the proposed solutions are not acceptable.

To those generic answer, there are two EUR specific issues that should be emphasised. The first one is positive and is the existence of two benchmarks (EUR-LIBOR and EUR-EURIBOR) with one of them expected to outlast the other by several years. The surviving benchmark should be used as the first step of the fallback for the other benchmark. The second issue is negative and is due to the fact that the planned fallback benchmark, ESTR, has been published only since 1 October 2019. Data preceding that date are for some part not intended for use as benchmark by the administrator and regulator and for the older part not regulation compliant. The only ESTR data acceptable is the one officially published as a benchmark, i.e. data for dates after 1 October 2019.

We suggest once more to ISDA to fundamentally review the decision to base the fallback on the compounding setting in arrears and historical mean approaches.

The answer should be read in conjunction with our previous answer and publication, including a couple of paper in peer reviewed journals.

Answer to``Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW'' issued by ISDA. October 2018.
Available at

LIBOR Fallback transformers! 
Market Infrastructure blog, muRisQ Advisory, October 2018.
Available at

A Quant Perspective on IBOR Fallback consultation results.
Market infrastructure analysis, muRisQ Advisory, January 2019.
Available at

Answer to ``Supplemental Consultation on Spread and Term Adjustments for Fallbacks in Derivatives Referencing USD LIBOR, CDOR and HIBOR and Certain Aspects of Fallbacks for Derivatives Referencing SOR'' issued by ISDA. July 2019.
Available at

Answer to ``Consultation on Final Parameters for the Spread and Term Adjustments in Derivatives Fallbacks for Key IBORs'' issued by ISDA. October 2019.
Available at

LIBOR fallback and quantitative finance. Risks, 7(88), August 2019. Open Access article available at

LIBOR: Don't fallback, step forward. Wilmott Magazine, November 2019.

Fallback protocol signature: a cautionary tale. Risk.Net, January 2020, to appear.

The figure is extracted from the post related to the "EURIBOR: The market does not believe in ISDA fallback in the next 10 years!"

Figure 3: Time series of EURIBOR and (pre-)ESTR compounded with 6-month underlying period.