Fallback Agreement

The Protocol provides for a mechanism for parties to bilaterally modify their existing derivatives transactions to take into account THE CONDITIONS FOR THE RETURN OF ISDA and provides for a clear transition from USD libor to SOFR when certain objective, easily observable events occur, thus avoiding existing and insufficient rollback mechanisms. The conditions for returning the minutes should correspond to the terms “back”, which were incorporated into the changes to the 2006 definitions, and create a case of uniform return synchronized both in terms of timing and rate on existing and new transactions. The actual replacement mechanics are described below. The goal of the fallback language recommended by the ARRC is to create objective replacement triggers and a clear way to determine the Libor replacement mark and determine the date on which this drop rate will take effect. In order to operationalize the Libor replacement, ARRC defined a series of objective and observable trigger events, a successor (determined by a selection of cascades), a spread adjustment (also determined by a selection of waterfalls) and a mechanism for developing “compliant modifications” that might be administratively necessary in the context of the transition from Libor to SOFR. Financial institutions should identify the product sectors that will be affected by the release of LIBOR and how the old fallback language works in contracts for those products. This is particularly important for contracts expiring after 2021; However, it is worth reviewing all LIBOR-based contracts, as LIBOR may become unreliable or unavailable before it is scheduled to shut down at the end of 2021. For example, LIBOR could deteriorate as its liquidity or benefits to market participants are negatively affected. On that date, the regulatory oversight of the libor administrator could publicly announce that the benchmark is no longer representative of the underlying market. There are many steps that financial institutions should take today to minimize the risks associated with fallback language.

Financial institutions should have a phased transition plan or develop it quickly to deal with the abandonment of LIBOR. This plan is essential to ensure operational readiness and effective risk management, as well as to demonstrate the willingness of regulators, who are focusing more on exiting Libor. With an approach to changing the Fallback language being clearer, financial institutions should communicate with customers and customers to inform them of transition steps and conversion methods. . . .