ISDA Bilateral Agreement LIBOR: What You Need to Know

As the financial industry looks to move away from the London Interbank Offered Rate (LIBOR) benchmark, the International Swaps and Derivatives Association (ISDA) has introduced a new protocol for bilateral agreements. In this article, we’ll break down what the ISDA Bilateral Agreement LIBOR is and what it means for the industry.

What is the ISDA Bilateral Agreement LIBOR?

The ISDA Bilateral Agreement LIBOR protocol is a framework designed to facilitate the transition away from LIBOR for parties that have entered into bilateral contracts. Under the protocol, parties to a contract can agree to amend their agreement to allow for a new benchmark to be applied in the event that LIBOR becomes unavailable.

Why is the ISDA Bilateral Agreement LIBOR necessary?

LIBOR has been widely used as a benchmark for various financial products, including derivatives contracts, since the 1980s. However, due to concerns about its reliability and the potential discontinuation of LIBOR after 2021, the industry has been working to identify alternative benchmark rates.

Several alternative rates have been proposed, including the Secured Overnight Financing Rate (SOFR) in the US and the Sterling Overnight Index Average (SONIA) in the UK. However, transitioning from LIBOR to these rates is not a straightforward process, particularly for existing contracts that reference LIBOR.

The ISDA Bilateral Agreement LIBOR protocol aims to address this issue by allowing parties to negotiate and agree on alternative benchmark rates that will apply in the event that LIBOR is no longer available.

What are the implications of the ISDA Bilateral Agreement LIBOR?

The introduction of the ISDA Bilateral Agreement LIBOR protocol provides a framework for parties to address the transition away from LIBOR for their existing contracts. It allows parties to negotiate and agree on alternative benchmark rates and fallback language, which will help ensure that contracts remain valid and enforceable in the event of LIBOR’s discontinuation.

However, the implementation of the protocol will require significant efforts from market participants. Contractual amendments will need to be negotiated and agreed upon by parties, which can take time and resources. In addition, the use of alternative benchmark rates may require changes to underlying systems and processes.

Conclusion

The ISDA Bilateral Agreement LIBOR protocol is an important step towards the transition away from LIBOR. It provides a framework for parties to negotiate and agree on alternative benchmark rates and fallback language, which will help ensure that contracts remain valid and enforceable. However, the implementation of the protocol will require significant efforts from market participants, and it is important for all parties to start preparing for the transition away from LIBOR now.