You should assess how IBORs are used in all your financial products and services with HSBC and any other counterparty as well as which of them would be covered by the IBOR Fallbacks Protocol. You should consult with your professional advisers on these changes as they can have economic and other impacts, including giving rise to potential mismatches between loans and derivatives or affecting any hedge accounting treatment applicable to those products.
By way of illustration, here are some implications of adhering to the IBOR Fallbacks Protocol:
- Mismatches may arise if a derivative transaction is used to hedge a product (e.g. a loan or a bond) which does not itself deal with the discontinuation of the relevant IBOR and the non-representativeness of LIBOR in the same way as the derivative transaction or at all (e.g. there are different trigger events or fallbacks).
- The new contractual fallback provisions may impact the commercial effect of non-linear interest rate derivative transactions (e.g. in-arrears swaps, certain cross-currency swap products, interest rate caps and floors and range accrual products).
- Adherence to the IBOR Fallbacks Protocol has the effect of an amendment to an existing ISDA Master Agreement or other covered agreement. You must ensure that you have obtained any required consent, approval, agreement, authorisation or other required action before signing up to or adopting the terms of the IBOR Fallbacks Protocol.
This article is a non-exhaustive summary for your information only and does not constitute any form of advice or recommendation.
We encourage you to read ISDA’s documents, together with the accompanying explanatory information on the ISDA website that will help you to familiarise yourself with the operation of the IBOR Fallbacks Supplement and the IBOR Fallbacks Protocol. You should also to seek guidance from your professional advisors on the possible implications of the changes outlined in this article for your business including financial, legal, accounting and tax impacts.