|Strategy & Sales|
Market Structure / Regulation,
21 October 2020 17:28
Head of Market Structure & Regulatory Customer Engagement
+44 20 7085 1271
NWM Regulatory Impact
+44 20 76789596
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With the ISDA Protocol path now set many are turning their attention to how the non linear market will cope with compounded SONIA + a spread fallback, and the future prospects in an RFR market.
Produced by Phil Lloyd
The ISDA protocol is a convenient, low cost mechanism to update large volumes of bilateral documentation. However it does have the disadvantage of treating all products the same way. The treatment of non-linear products specifically deserves a closer look.
In this note we quickly review the main non-linear products and outline what we think still needs to happen to ensure a vibrant and liquid market in the new reference rates. The Sterling RFR Non Linear Task Force is also wrestling with these points at the moment, and we are hopeful that they will publish some recommendations soon that the market can coalesce around.
The way the fallback protocol works is that once you adhere, you adhere for all legacy trades that reference an IBOR in a range of documents. If your counterparty also adheres, then the new fallback language is applied to all transactions between the two of you.
There is no opt-out for particular products or specific transactions. ISDA envisages that counterparties will subsequently enter into bilateral amendment agreements to exempt certain trades or products, or override their treatment with better alternative(s).
Caps / Floors
Range accruals … in arrears / in advance
ICE Swap Rate
To read a more in depth study of some of the issues raised here please see the paper Interest Rates Benchmark Reform and Options Markets by our Head of Quantitative Analytics, Vladimir Piterbarg (free to access but requires registration).
The non-linear taskforce is working hard to find that 'straight' path forward but pressure is mounting with the market looking to sign up over the next few months to a protocol that doesn't carve out such products.
In the meantime, all eyes are on the ISDA website to see the pace of adoption of the protocol once it is launched on Friday 23 October.
Phil Lloyd, NWM Sales
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