Earlier this summer, ISDA published the 2021 ISDA Interest Rate Derivatives Definitions (the “2021 Definitions”) to update and replace the 2006 ISDA Definitions (the “2006 Definitions”), which are used as a framework and standardized set of terms for the documentation of privately negotiated interest rate and currency derivative transactions. The 2021 Definitions include a number of substantive updates, reflecting the transition from paper to electronic confirmations, Dodd-Frank Act regulatory reforms, and the increased use of collateralization and central clearing that have all occurred since the 2006 Definitions were first published.
Up to now, the 2006 Definitions and predecessor versions have been updated via supplement (most recently including the IBOR Fallbacks Supplement) in order to keep pace with market developments. At present, there are 75 supplements to the 2006 Definitions, meaning that market participants would need to read the original published booklet (now in PDF form) and then parse through all 75 supplements in order to determine which terms are relevant to a given transaction. In order to address this cumbersome process, the 2021 Definitions were published as a single consolidated structure, in an electronic format, which will be restated in its entirety whenever an update is needed (obviating the need for any supplements). Certain default elections and definitions are also included in separate matrices in order to improve visibility and stabilization. The 2021 Definitions are accessible online, including on mobile devices, and are included in the ISDA Online Library subscription or with a single-user annual license.
ISDA has published a number of helpful resources to help market participants understand the 2021 Definitions, how they differ from the 2006 Definitions, and how they are being implemented. An introduction to the 2021 Definitions is available in text form here and in video form here. A summary of the key differences between the 2006 Definitions and 2021 Definitions is available here. A video on the implementation of the 2021 Definitions is also available here.
Importantly, the 2006 Definitions will no longer be updated by ISDA. And while there is presently a significant amount of overlap between the 2006 Definitions and 2021 Definitions, there are certain variations between the two that may lead to different economic outcomes for the same transaction. Going forward, when an update is needed to reflect a market development or regulatory reform, only the 2021 Definitions will be revised, meaning that the 2006 Definitions will grow more and more stale with time. For that reason, market participants should plan to adopt the 2021 Definitions as soon as they are implemented (over the weekend of October 2-3, 2021).
For our derivatives clients, we will be updating all ISDA Schedule templates, effective immediately. ISDA document sets that are executed between now and October 4 will include terms stating that the 2006 Definitions will apply up until the 2021 Definitions go into effect, at which point the 2021 Definitions will take over and the 2006 Definitions will no longer be applicable. Beginning on October 4, new ISDA document sets will simply incorporate the 2021 Definitions (and there will no longer be any references to the 2006 Definitions).
For already-executed ISDA document sets, the 2006 Definitions will continue to apply unless proactive steps are taken. Market participants have three options to address the shift away from the 2006 Definitions:
- Amend existing ISDA Schedules to state that the 2021 Definitions apply, in which case all transactions under any such ISDA document sets will incorporate the 2021 Definitions.
- Add terms to any new Confirmations stating that the 2021 Definitions apply, in which case that particular transaction will incorporate the 2021 Definitions.
- Leave all existing ISDA Schedules as is, in which case the 2006 Definitions will continue to apply for all existing transactions under any such ISDA document sets.
As noted above, there is some risk in keeping the 2006 Definitions in place after the 2021 Definitions go into effect. The 2006 Definitions will no longer be updated, meaning that the risk of materially different economic outcomes for a given transaction will only increase with time, depending on which version of the ISDA Definitions is used. In addition, for cleared transactions, certain derivatives exchanges and clearinghouses will no longer accept trades that reference the 2006 Definitions. In back-to-back trades, assuming that dealer banks will incorporate the 2021 Definitions in their derivatives transactions, middle market participants will also want to reference the 2021 Definitions in their downstream customer trades in order to ensure that they have perfectly matched books.
ISDA currently has a working group in place to determine whether a protocol is necessary to amend existing derivatives transactions that incorporate the 2006 Definitions. At this time, there is no protocol in place, and no directive from ISDA or otherwise to address these terms. Our expectation is that existing trades will continue to reference the 2006 Definitions until they mature, but market participants should be aware of the risk that this entails. We will revisit the amendment concept as needed in the future, if any significant market developments would render reliance on the 2006 Definitions impracticable or inadvisable.
Questions? Please reach out to Alec Fraser or Cheryl Isaac to discuss the 2021 ISDA Interest Rate Derivatives Definitions and their impact on existing and future interest rate derivative transactions.