ISDA has played the central role in developing the framework to end LIBOR. A long and transparent process has resulted in a seemingly simple approach. The benchmark shall be replaced by an Adjusted Reference Rate (ARR) plus a fixed Spread Adjustment. Usually, the ARR is the compounded risk-free rate (RFR).The Spread Adjustment reflects a compensation for risk premiums embedded in LIBOR compared to a risk-free rate. ".
The Spread Adjustment is fixed by ISDA and Bloomberg on the day the cessation is triggered by either the benchmark administrator or another competent authority. The fixing of the Spread Adjustment relies on past fixings only. No market data or other forward-looking information is used in the determination. The detailed rule book on how Spread Adjustments will be calculated using the ISDA fallback approach has been published on April 22.
Market participants with LIBOR exposure maturing after 2021, are all exposed to the fixing of the Spread Adjustment. COVID-19 triggered market uncertainty has caused a sharp increase in the risk premiums embedded in LIBOR. Banks now have following challenge: what is the right transition approach and how to advise clients on it during the course of the transition?
In this #CapTalk our experts will share their experience and participants will have the opportunity to engage actively and ask their questions directly to our LPA colleagues.