• 2021 ISDA IRD Definitions go live on 4 October, ISDA will no longer amend older definitions
• Biggest overhaul since 2006, consolidating all the interim supplements, and in a new online format
• Need to be ready to process new benchmark rate naming standards (e.g. in messages from Central Counterparties (CCPs) relating to LIBOR transition) from 4 Oct
• 2006 Definitions still permitted, and many counterparties will continue to use them in the near term
• Potential for operational disruption if counterparties affirm conflicting definitions and confirmations fail to match
• Most substantive changes are to the cash settlement provisions for e.g. swaptions and early terminations where ‘Cash Price’ was used in the past
• MarkitWire will change the defaults for new trades on their user interface to ISDA 2021 from 27 November

NatWest Markets’ position is to align to the MarkitWire timings and continue to use ISDA 2006 Definitions until the end of November, at which point we expect to switch to ISDA 2021 for many, but are happy to discuss with counterparties what will work for them.

Morpheus might have said it first, but ISDA is certainly embracing the matrix now. Previously the ISDA Definitions were published as a booklet, which were then amended by a huge number of ‘Supplements’ (86 of them at the final count since 2006) as new requirements arose over the subsequent years. That made it difficult to understand what conditions applied to a trade that was executed on a given day.

With the 2021 Definitions, ISDA is making a long overdue consolidation of all this, pulling all the prevailing provisions into a main book and a series of matrices. At the same time the definitions are going digital...rather than a base pdf booklet, they are published to a new online tool called MyLibrary, which will allow users to interactively see which provisions apply on a given date. 

So, no more supplements in the future, instead whenever an update or amendment is needed, they can just be "re-versioned" online.

You can find full details of all the changes together with webinars explaining them on ISDA’s hub page. The best summary is presented in ISDA’s paper Key Changes in the 2021 Interest Rate Derivatives Definitions.

As ISDA acknowledges, much worked well under 2006 definitions and has just been carried forward into the 2021 version. Other parts have been more substantively changed to bring in line with current market practice or to simplify & standardise wording, but will have minimal economic impacts in practice. Then finally there are areas which have changed a lot and “may result in different economic outcomes”.

There is lots of detail in the Key Changes paper above, but two areas we will draw attention to:

• Floating Rate Options (FROs): a naming standard for FROs is being introduced. “FROs” reference the underlying benchmarks, but over time a mish-mash of different naming standards has arisen. With the new definitions they will follow the convention CCY-RATE-[Function]... so “GBP-LIBOR-BBA” becomes “GBP-LIBOR”, “USD-SOFR-COMPOUND” becomes “USD-SOFR-OIS Compound” etc. See the full table here. Although on the face of it a fairly superficial change, market participants do need to be ready to support these new values in messages e.g. from MarkitWire from 4 October if they move to 2021 Definitions.
• Cash Settlement Provisions: this is probably the area of most interest in terms of actual impact. Where a cash settlement amount has to be agreed (e.g. for exercising some swaptions, or for some optional and mandatory early terminations), the 2006 definitions left quite wide discretion on the methodology to be adopted when ‘Cash Price’ was selected. The 2021 definitions will require counterparties to elect which method should be used for cash price settlement, thus it is hoped avoiding subsequent disputes. Details of the approaches available are set out in the Key Changes paper.  

There are many other changes outlined in the paper – to Calculation Agent Provisions, Date & Period Handling, Risk-Free Rate Compounding Conventions, Fallbacks and various other terms, but we will not go into the details of those here.

The two upcoming dates to be aware of:

• 4 Oct: 2021 ISDA Definitions implementation date – from this date market participants can start to use the 2021 ISDA Definitions, and ISDA have stated they will no longer apply any amendments to the old 2006 Definitions
• 27 Nov: MarkitWire change defaults on their user interface to use 2021 Definitions on new trades by default. Between 4 Oct and 27 Nov it will be possible to use 2021 Definitions but you have to actively elect to when booking a trade

The 4 October date is when 2021 Definitions can start to be used, though that is not to say everyone will start using them from them. We expect most market participants will continue to support 2006 Definitions as well, and ISDA has been at pains to explain that they expect there to be a gradual shift to using the new definitions over time. 

There is no hard date published (as yet) on when (if) 2006 Definitions would cease to be permissible in messages, though ISDA did put out a press release this week encouraging people to move as soon as possible.

The clearing houses (with exception of Japan Securities Clearing Corporation (JSCC) who are waiting until 6 Dec) have all stated they will support clearing of swaps under the 2021 definitions from 4 October, however they will also continue to clear swaps under the old definitions as well.  See LCH presentation for an explanation of their approach.

Worth noting however that the various upcoming activities at CCPs for LIBOR transition, starting with the basis swap splitting on weekend 2-3 Oct, will be confirmed only under the new 2021 definitions. So, all market participants involved in those activities must at least support the FRO name changes from 4 Oct in order to participate in these events.

There has been a flurry of questionnaires between buy and sell side firms in the last week or two to try to establish who is doing what when... broadly the two questions asked are 1) When will you be ready to support 2021 definitions? and 2) Will you still support 2006 definitions after 4 October?

There is a danger that there will be some operational upset in the short term – if one side expects to be on 2021 whereas the other is not yet ready there will be confirmation mismatches. Time will tell how much disruption this might cause.

Our position is to remain on 2006 Definitions on 4 October (with the exception of the CCP trades relating to LIBOR transition events), but we expect to move to 2021 Definitions gradually over time based on agreement with counterparties following MarkitWire’s change to defaults at the end of November.