If you trade interest rate derivatives, it is virtually certain that your trade confirmations incorporate the 2006 ISDA Definitions (the 2006 Definitions). You may have not noticed it but your trade confirmations on the first page usually incorporate by reference definitional booklets published by the derivatives trade association, the International Swaps and Derivatives Association Inc., commonly known as ISDA. This booklet, while definitional, can have a significant impact on material terms of your derivatives, even though it may only be referenced once or twice in the derivatives documentation you sign.
As market practice and regulation have developed over the past 15 years, the 2006 Definitions have been supplemented more than 70 times, including recently in Supplement number 70 which provided fallback rates in connection with the transition from LIBOR to risk-free reference rates, (such as USD LIBOR to SOFR or GBP LIBOR to SONIA).
ISDA has just finalised the 2021 ISDA Interest Rate Derivatives Definitions (the 2021 Definitions), which will replace the 2006 Definitions. The 2021 Definitions consolidate the various supplements and make other changes to the 2006 Definitions. These changes reflect industry input and are designed to more accurately reflect current interest rate derivatives markets. This short animation video from ISDA explains why the new definitions are being introduced.
Who should keep reading?
If you have outstanding interest rate derivative transactions or intend to enter into interest rate derivatives, the 2021 Definitions are relevant to you. In addition, as described below, the 2021 Definitions will be important with respect to the transition from LIBOR for new agreements (as described in more detail here). Finally, it is possible that legacy agreements may be amended to incorporate the 2021 Definitions.
How will the 2021 Definitions be accessed?
The 2021 Definitions will be published on a new online interactive platform, instead of the traditional paper and pdf format, which will include comparison and versioning tools together with hyperlinks. When the main book is updated, it will be updated in its entirety as a new version on the platform, doing away with the need for Supplements going forward.
This new online interactive platform is expected to be launched around 4 June 2021.
When will the 2021 Definitions be effective?
Although the 2021 Definitions have been finalised and will shortly be launched on the new web-based platform, the implementation date of the 2021 Definitions is 4 October 2021.
The lag between publication date and implementation date is intentional. It is designed to give market participants time to ready their operational systems for the 2021 Definitions. Clearing houses and electronic trading venues are also expected to be ready to implement the 2021 Definitions on 4 October 2021.
Whither the 2006 ISDA Definitions?
The 2006 Definitions are not going away. However, ISDA will no longer update them. As a result, ISDA is encouraging market participants to adopt the 2021 Definitions. Many major clearinghouses are expected to continue to clear trades that reference the 2006 Definitions, though they will effectively be cleared subject to the 2021 Definitions. Certain trading venues may require the 2021 Definitions for on-venue trades.
ISDA is discussing whether it will produce a protocol to facilitate standard amendments to legacy transactions to reference the 2021 Definitions instead of the 2006 ISDA definitions. As of now, no decision on any such protocol has been made.
What are the key updates to the 2021 Definitions?
The 2021 Definitions comprise: (i) the Main Book and (ii) several matrices, including a new Floating Rate matrix.
Most notably, the 2021 Definitions include the following updates:
Revised cash settlement methodologies to reflect current market conventions.
Floating Rate Options will be published in a matrix, alphabetized with standard naming conventions.
Floating Rate Options without specific fallbacks (i.e., Floating Rate Options other than IBORs covered in Supplement 70 to the 2006 ISDA Definitions or recently published risk-free rates) will be given a generic framework designed to enable parties to identify a fallback rate and any adjustment.
Certain payment and calculation provisions will be updated with new business day calendars and conventions and, where possible, calculation inputs (i.e., day-count fraction and interpolation) will be expressed as formulae rather than narrative.
Calculation agent provisions will (a) apply the same standard of good faith using commercially reasonable procedures as in the 2002 ISDA Master Agreement’s close-out provisions and (b) have a dispute resolution framework.
Are the 2021 Definitions related to the ISDA 2020 IBOR Fallbacks Protocol?
The ISDA 2020 IBOR Fallbacks Protocol (the IBOR Protocol) enables parties to amend legacy trades that were entered into before the 2006 ISDA Definitions had robust fallbacks. The IBOR Protocol amends relevant contracts entered into between two IBOR Protocol adherents before the later of (i) 25 January 2021 and (ii) the date on which the later of the two parties adheres to the protocol.
As of 25 January 2021, robust fallbacks were added to the 2006 Definitions in the publication of Supplement number 70 to the 2006 ISDA Definitions. Supplement number 70 provided fallback rates for several interbank lending rates, including USD LIBOR, GBP LIBOR, and other LIBOR settings. Interest rate derivative transactions entered into on or after 25 January 2021 that reference the 2006 ISDA Definitions, as well as interest rate derivative transactions that will incorporate the 2021 Definitions on or after 4 October 2021, will include such robust fallbacks. The 2021 Definitions incorporate all of the new robust fallbacks that were contained in the IBOR Protocol and Supplement 70 to the 2006 Definition, so any trades incorporating the 2021 Definitions will have these robust fallbacks.
Where can I find more information?
ISDA has published an Introduction to the 2021 Definitions summarizing the material changes from the 2006 Definitions.
 Prior 25 January 2021 (publication and effectiveness of Supplement number 70), the 2006 Definitions had a fallback to a dealer poll that was not robust in the context of permanent cessation or non-representativeness of LIBOR or other interbank lending rates as benchmark rates. Please find more information on the IBOR Protocol here and our previous alert here: Are we there yet? Looking ahead now that ISDA’s IBOR fallbacks supplement and protocol have gone live