IBOR transition and OTC derivatives transaction reporting

This information sets out ASIC’s views on the requirements for OTC derivative transactions reporting under the ASIC Derivative Transaction Rules (Reporting) 2022 (ASIC Rules) in respect to the steps taken by counterparties to OTC derivative transactions to provide for and/or implement IBOR¹ transitions.

This guidance is not exhaustive and should be considered in light of the particular circumstances of each entity.

In summary, it is ASIC’s view that:

amending existing IBOR-referenced contracts to include reference to fallback rates or adhering to the 2020 IBOR Fallbacks Protocol (PDF 669 KB) does not, of itself, trigger any reporting requirement under the ASIC Rules;
the replacement of an IBOR with a fallback rate or alternative reference rate as a reference rate in a contract will trigger a requirement to report changed and/or new OTC derivative transaction information or OTC derivative position information. This replacement may occur according to the terms of the contract upon the cessation of an IBOR or prior to this time by agreement between the contract’s counterparties²;
floating rate index names should be reported as a Floating Rate Option referred to in the 2021 ISDA Interest Rates Derivatives Definitions;
all other relevant new and/or changed information is required to be reported, including a new or changed ‘Unique product identifier’; and
the new or changed information must be reported on a T+1 basis, in accordance with 2.2.3 of the ASIC Rules.

Scenarios not requiring trade reporting

Amending the terms of existing IBOR-referenced contracts to include reference to fallback rates or adhering to the 2020 IBOR Fallbacks Protocol to allow for the continuation of the performance of the contract if there is a future cessation of an IBOR does not, of itself, trigger any reporting requirement under the ASIC Rules.

In this scenario, no change has yet occurred to either the current OTC derivative transaction information or OTC derivative position information that is required to be reported under the ASIC Rules.

For example, there is no change to ‘Floating rate index name (leg 1)’, ‘Floating rate index name (leg 2), ‘Floating rate reset frequency’, ‘Floating rate payment frequency’, ‘Rate reset frequency’, ‘Settlement rate of index’ or ‘Basis’.

However, if the counterparties to such a contract decide to execute the change in contract terms by terminating the existing contract and entering into a new contract with any new terms – such as a new ‘Unique transaction identifier’ and new ‘Execution timestamp’ – then this should be reported as the termination of the existing OTC derivative arrangement and the entry into a new OTC derivative arrangement.

Scenarios requiring trade reporting

ASIC notes from a public letter provided by the US CFTC³ a number of scenarios presented by and/or discussed with the industry Alternative Reference Rates Committee as being likely methods used by market participants to effect a replacement of an IBOR as a reference rate in a contract. These scenarios are⁴:

1. Single trade conversion for equivalent risk

Converting an IBOR referenced in an OTC derivative to an applicable alternative reference rate with a revised spread, an additional spread, or a change to the fixed rate, to achieve equivalent risk.

2. Single trade conversion with payment

Converting an IBOR referenced in an OTC derivative to an alternative reference rate plus a payment to achieve equivalent risk rather than a change to the ongoing spread or fixed rate.

3. Single trade conversion (with or without payment) for non-equivalent risk

Converting an IBOR referenced in an OTC derivative to an alternative reference rate, with a change in risk of a hedge (e.g. cash position) for all, or part, of difference.

4. Bilateral one-for-one OTC derivative portfolio conversion

Converting multiple OTC derivatives referencing an IBOR on a one-for-one basis to OTC derivatives referencing an alternative reference rate using similar variations on the resulting OTC derivatives as described in 1–3 above, which would not be the same across the portfolio of OTC derivatives (e.g. a spread may only need to be changed on one trade).

5. Bilateral OTC derivative portfolio conversion with compression

Converting multiple OTC derivatives referencing an IBOR to a portfolio of OTC derivatives with equivalent risk referencing an alternative reference rate plus a spread (or to an alternative reference rate plus a payment for the basis) resulting in fewer outstanding OTC derivatives between the two counterparties.

6. Bilateral conversion of an OTC derivatives portfolio involving multiple counterparties

Converting multiple OTC derivatives referencing an IBOR with more than one counterparty to OTC derivatives referencing an alternative reference rate with one or more of those counterparties (with or without foregoing adjustments).

7. Basis Swap Method conversion

Converting OTC derivative portfolios referencing IBORs to an alternative reference rate by means of one or more new basis swaps that would swap the entire IBOR basis of a portfolio with an alternative reference rate basis without amending any of the OTC derivatives referencing IBORs.

As with the CFTC, ASIC recognises that counterparties employing one or more of these conversion methods may do so by:

amendment of an existing contract;
entry into new contract(s) to replace existing contract(s) immediately upon the latter’s termination (i.e. “tear-ups”); or
as new basis swaps not involving the termination of existing contract(s).

8. Fallback triggering conversion

For the avoidance of doubt, trade reporting is required where a fallback rate or alternative reference rate automatically becomes the reference rate upon cessation of an IBOR, according to the terms of a fallback protocol or arrangement.

In relation to the above conversion method scenarios, it is ASIC’s view that:

an amendment to an existing contract modifying previously reported OTC derivative transaction information or OTC derivative position information triggers the requirement under the ASIC Rules to report that amendment as a Reportable Transaction or Reportable Position – that is a modification to an arrangement that is an OTC derivative under 2.2.1 of the ASIC Rules;
a termination of an existing contract triggers the requirement under the ASIC Rules to report that termination as a Reportable Transaction – that is a termination of an arrangement that is an OTC derivative under 2.2.1 of the ASIC Rules; and
an entry into a new contract triggers the requirement under the ASIC Rules to report that new contract as a Reportable Transaction – that is the entry into an arrangement that is an OTC derivative under 2.2.1 of the ASIC Rules.

Rule 2.2.3 of the ASIC Rules requires such modification, termination or entry into reports to be made no later than the end of the next Business Day after the requirement to report the information or change arises.

Conversion methods used by market participants may not be limited to the conversion methods above. Where a market participant uses a different conversion method, the same principles apply that a termination or modification of an existing contract or the entry into of a new contract will trigger a reporting requirement under 2.2.1 of the ASIC Rules.

OTC derivative information to be reported

The changed and/or new OTC derivative information to be reported includes all relevant information. This includes that:

the name of the floating rate index should be reported as a Floating Rate Option referred to in the 2021 ISDA Interest Rates Derivatives Definitions – i.e. for reporting as ‘Floating rate index name (leg 1)’, ‘Floating rate index name (leg 2) and/or ‘Settlement rate or index’, as applicable;
where the type of product changes and a different ‘Unique product identifier’ more accurately identifies the product, that different ‘Unique product identifier’ should be reported – e.g. as an OIS product instead of an IRSwap product; and
all other relevant information is required to be reported, such as ‘Floating rate reset frequency’, ‘Rate reset frequency’, ‘Floating rate payment frequency’ and/or ‘Basis’, as applicable.

¹ IBOR is used as a collective term for any London Inter-Bank Offered Rate (LIBOR) or other floating interest rate reference rates, including BBSW.

² Once a replacement of an IBOR by a fallback rate or alternative reference rate is triggered, from the economic perspective the derivative is based on the new replacement rate – thus the counterparty should report the modification (and update the relevant fields) even if the reference to an IBOR is maintained in the legal contract.

³ CFTC Letter No. 20-23 No-action August 31, 2020

⁴ These descriptions of the scenarios follow the US CFTC text (pages 6 and 7 of CFTC LETTER No. 20-23) but with the following adaptations for Australian jurisdiction:

use of the term of ‘OTC derivative’ in lieu of the US ‘swap’;
applicability to all counterparties and not just US ‘swap dealers’; and
removal of the distinctions between cleared and uncleared OTC derivatives.

ASIC