The Bank of England (the Bank), has signed up to the International Swaps and Derivatives Association’s (ISDA) ‘IBOR Fallbacks Protocol’ (the Protocol)

Consistent with its leading role in supporting transition away from LIBOR by the end of 2021, the Bank of England (the Bank), has signed up to the International Swaps and Derivatives Association’s (ISDA) ‘IBOR Fallbacks Protocol’ (the Protocol) in respect of its own activities as a market participant. ISDA launched the Protocol today and confirmation that the Bank has signed up is available on ISDA’s website. This will apply both to transactions the Bank undertakes on its own behalf, and those it enters into as agent for HM Treasury and other entities.

ISDA’s Protocol provides an efficient mechanism for market participants to amend existing derivative contracts based on LIBOR and a range of other benchmarks to include fallback language. This new fallback language has been developed by ISDA at the request of the Financial Stability Board (FSB), working with a wide range of market participants and international authorities, and the FSB has strongly encouraged its widespread adoption. As the FSB has observed, any market participants who choose not to do so for some or all of their relevant trades will need to take robust alternative steps, such as closing out these positions or appropriate bilateral amendments, to avoid the risk of disruption.

Andrew Hauser, Executive Director for Markets at the Bank of England, said “signing up to the Protocol marks a key milestone in the transition away from LIBOR. The Bank welcomes the depth of support for this Protocol, demonstrated by the extent of early adoption, and the leadership shown by those institutions that have signed up early. Firms cannot rely on LIBOR being published after the end of 2021. Widespread adoption of the Protocol across the full range of market participants is a key step in mitigating these risks.”

Background

1. The fallback language produced by ISDA covers interest rate benchmarks, including LIBOR, across ten global currencies. Further information on the Protocol can be found on ISDA’s website.

2. Supporting the transition away from LIBOR is a key priority for the Bank. LIBOR rates are among the most widely used benchmarks in global financial markets, determining interest rates for an estimated total of around US$400 trillion of financial contracts, but are expected to be discontinued after the end of 2021.A recent Bank Overground post describes how market volatility related to Covid-19 has highlighted the long-standing weaknesses of these benchmarks.

3. The Bank undertakes transactions in derivative markets as part of its responsibilities in financial markets, including management of the UK’s foreign currency reserves. These transactions span a range of major global currencies, creating exposures to a number of important interest rate benchmarks covered by ISDA’s Protocol.

4. Adherence to the Protocol forms an important part of the Bank’s risk management of exposures to these benchmarks, ensuring that affected contracts make clear what would happen in the event that the relevant benchmark becomes unavailable or no longer adequately meets its intended purpose.

5. The Protocol will apply both to transactions the Bank undertakes on its own behalf, and those it enters into as agent. In particular, this includes the Bank’s management of the UK’s official foreign currency reserves on behalf of the Government.