On June 11, 2021, the International Swaps and Derivatives Association (ISDA) published the 2021 ISDA Interest Rate Derivatives Definitions (the 2021 Definitions), which will go into effect on October 4, 2021. Not only are the 2021 Definitions the first update to ISDA’s standard definitional booklet in 15 years, they also represent a shift in ISDA’s standard practice of supplementing its definitional booklets generally. In contrast to its past practice of publishing supplements to reflect amendments to its definitional booklets, ISDA has published the 2021 Definitions in an exclusively digital format and will likewise update the 2021 Definitions in only digital format. The 2006 ISDA Interest Rate Definitions (the 2006 Definitions), which, until the 2021 Definitions, was the most recent definitional booklet for interest rate derivatives, will not be updated or even maintained after October 1, 2021.
To access the 2021 Definitions, a user will need to navigate ISDA’s new interactive web-based user interface, MyLibrary (isda.org/books/mylibrary/). This new platform includes comparison tools that allow different versions of the 2021 Definitions to be viewed in blackline and side-by-side; hyperlinking of defined terms to their definitions; links to other relevant documents (e.g., definitions, matrices and confirmation templates), videos and other explanatory content; bookmarking; and advanced search facilities. Because the 2021 Definitions utilize matrices in an even more significant way than the 2006 Definitions, the digital format will enable users to access the most up-to-date, as well as prior, versions of both the main definitional booklet and any of such matrices each time one or more of them are updated.
The key changes in the 2021 Definitions
1. Integration of IBOR fallbacks: As a general matter, the 2021 Definitions substantively incorporate the provisions of Supplement 70 to the 2006 Definitions, which deals with the transition of IBOR-based derivatives to those incorporating new risk-free rates. In addition, the 2021 Definitions contain some floating rate options (FROs) that were not included in the 2006 Definitions and have added fallbacks to cover such FROs. The 2021 Definitions include a new trigger, adopted and broadened from the comparable provision in the 2018 ISDA Benchmarks Supplement, that allows parties to move to an alternative rate if either one of them, or the Calculation Agent, is not permitted under applicable law or regulation to use the underlying benchmark for the FRO in question. The expanded use of matrices in the 2021 Definitions will enable users to search for triggers and fallbacks in the case of temporary non-publication, permanent cessation and administrator/benchmark events for the various benchmarks and will be updated as needed to reflect the addition of FROs or changes in fallback mechanics. Generic fallbacks to deal with cases where no market standard fallbacks have otherwise been identified have been included in the 2021 Definitions and closely track the substance of the alternative continuation fallback mechanics contained in the 2018 ISDA Benchmarks Supplement.
2. Floating rate options: The description of FROs in the 2021 Definitions employs a matrix that sets forth the categories, style and, if applicable, calculation method for each FRO. There are two possible categories applicable to each FRO—screen rate and calculated rate—and within each such category there are seven (screen rate) or three (calculated rate) possible styles. The styles for the screen rate category, which are based on a specific source, are term rate, overnight rate, swap rate, published average rate, compounded index, index and other. For the calculated rate, which is based on a Calculation Agent determination, the possible styles are compounded floating rate option, average floating rate option and specified formula. The calculation methods, which are inapplicable for the screen rate category, are overnight index swaps (OIS) compounding (for the compounded floating rate option), overnight averaging (for the average floating rate option) and, for the specified formula, the formula set forth in the floating rate matrix.
In addition, FROs follow a standardized naming convention in the 2021 Definitions that reflects the currency, rate name and, if applicable, calculation methodology for the particular FRO. In contrast to the 2006 Definitions, the 2021 Definitions no longer publish multiple FROs for a single rate, instead defining each FRO by reference to the administrator that produces the underlying benchmark.
3. Cash settlement: Much of the cash settlement methodology with respect to cash-settled swaptions or optional early termination or mandatory early termination of derivative transactions contained in the 2006 Definitions has been preserved in the 2021 Definitions. However, the cash price cash settlement method, which was considered outdated by industry participants following the 2008 financial crisis and related regulatory reforms, has been updated to reduce the discretion exercised by the Calculation Agent, resolve any inconsistency of reference bank determinations and reflect changes in market practice, such as the increased use of collateral and the shift to OIS discounting. Two new cash settlement methodologies—mid-market valuation and replacement value—are reflected in the 2021 Definitions, with each methodology further broken down into indicative (Reference Bank) quotation and Calculation Agent determination subcategories.
4. Calculation Agent: The 2021 Definitions make some adjustments to the duties of the Calculation Agent and the standards that it is required to follow. For example, the 2021 Definitions expressly state that the Calculation Agent is not a fiduciary of either party to a derivative transaction. Unlike in the 2006 Definitions, in which the Calculation Agent is required to act “in a commercially reasonable manner,” the 2021 Definitions provide that the Calculation Agent must use “commercially reasonable procedures to produce a commercially reasonable result.” The 2021 Definitions describe the Calculation Agent’s duties by negative inference: If another party is not designated to perform a task, such task is the responsibility of the Calculation Agent. In contrast, the 2006 Definitions require the Calculation Agent to perform specific duties.
The process of notifying the parties as to calculation determinations has also changed in the 2021 Definitions, with the Calculation Agent responsible for notifying the parties of any required determination as soon as reasonably practicable after making it as opposed to delivering a notice to the parties on a calculation date that shows in reasonable detail its calculation of various payment amounts as per the 2006 Definitions. Under the 2021 Definitions, a party can then follow up with the Calculation Agent by asking for additional detail and, if so requested, a calculation statement.
5. Days and dates: A number of day, date and period definitions and determinations have been updated in the 2021 Definitions. For example, the concept of a “Banking Day” has been eliminated, since experience has shown that it is practically the same as a “Business Day.” The 2021 Definitions add a “Currency Business Day” definition to reflect the default financial center of a particular currency. “Business Day” convention concepts have been expanded to include a “No Adjustment Business Day Convention” to reflect situations in which the parties would agree that no adjustment need be made to account for non-Business Days. The term “Unscheduled Holiday” has also been introduced into the 2021 Definitions to address the effect of unanticipated extensions of holiday periods on payment obligations. The 2021 Definitions also contain relatively minor adjustments to day count fractions and period end dates in certain circumstances and establish an adjustment hierarchy that clarifies which Business Day Convention adjustment applies in certain scenarios, such as where the payment dates are stated to be subject to the Modified Following Business Day Convention, while the Termination Date is said to be unadjusted.
6. Matrices: As noted previously, the 2021 Definitions reflect an expanded use of matrices relative to the 2006 Definitions. Some matrices are new (the floating rate matrix, which is described in greater detail above, as well as the currency/business day matrix), while others (e.g., the settlement matrix, mark-to-market matrix and compounding/averaging matrix) are more robust in the 2021 Definitions than in their 2006 Definition counterparts. The new matrices reflect a move to a graphic depiction of fundamental ISDA concepts as opposed to a narrative description. This new format facilitates electronic processing and makes the matrices easier to update. In addition, since each matrix can be digitally updated separately from the main definitional booklet and other matrices, it can be re-versioned and identified based on a version number and date of publication so that a user can more easily track the updates.
The foregoing is a summary of a number of key changes reflected in the 2021 Definitions, although we note that there are other modifications not described above. Additional information about the 2021 Definitions can be found at isda.org.
