The 2021 ISDA Interest Rate Derivatives Definitions go live - your cheat sheet to the key changes

On 4 October 2021, the 2021 ISDA Interest Rate Derivatives Definition (2021 Definitions) succeeded the 2006 ISDA Interest Rate Derivates Definitions (2006 Definitions) as the market standard definitional book for over-the-counter interest rate derivatives transactions. This article considers the key changes between the 2006 Definitions and the 2021 Definitions, the implications of those changes, and their impacts on market participants.

Why were the 2021 Definitions introduced?

The 2006 Definitions relied on the publication of supplements to the initial definitions as a means of updating its provisions over time, resulting in 86 published supplements. Each of those supplements must be read together, along with the original provisions, to accurately interpret the 2006 Definitions; a cumbersome and time-consuming process.  The aim of the 2021 Definitions is to consolidate the existing provisions of the 2006 Definitions and related supplements into one publication to overcome these issues.

Can I still use the 2006 Definitions?

The 2021 Definitions were originally published in June 2021 to give market participants time to adopt the new provisions between the publication date and the 4 October 2021 implementation date.

Although the 2006 Definitions will continue to be available for use after 4 October 2021, they will no longer be maintained and updated. Market participants have therefore been encouraged by the International Swaps & Derivatives Association, Inc. (ISDA) to adopt the 2021 Definitions as soon as possible.

Where can I access the 2021 Definitions?

The 2021 Definitions will be accessible on the MyLibrary interface on ISDA’s website (Main Book). When an update or amendment to them is implemented, a new version of the Main Book will be published that automatically incorporates the changes into the existing provisions. On MyLibrary, users will be able to plug in their relevant date and be able to easily access the version applicable to that date.

ISDA has also published an array of resources to assist market participants in understanding the 2021 Definitions. This includes an introduction to the 2021 Definitions, a summary of the key differences between the 2006 Definitions and 2021 Definitions and a video on the implementation of the 2021 Definitions.

What are the key updates to the 2021 Definitions?

Much of what worked well under the 2006 Definitions has been retained in the 2021 Definitions, with major updates limited to the provisions summarised in the table below (capitalised words in the table have the same meaning as in the 2006 Definitions or the 2021 Definitions, as applicable).

1. Calculation agent provisions

Calculation agent provisions

The discretion afforded the Calculation Agent under the 2006 Definitions have been replaced by more prescriptive terms dealing with how determinations are made, including the procedure for selecting reference dealers and procuring quotations.

2006 Definitions

2021 Definitions

Specifically sets out a long list of tasks for which the Calculation Agent is responsible.

Provides for a generic statement that the Calculation Agent is responsible for all determinations that are not otherwise required to be made by a party to the relevant transaction or other specified person.

Calculation Agent required to act in good faith and to act in a “commercially reasonable manner ” in their actions.

Calculation Agent required to act in good faith and to use “commercially reasonable procedures to produce a commercially reasonable result ” in their actions.

No express statement regarding fiduciary duty of Calculation Agent.

Include an express statement that, unless otherwise agreed, the Calculation Agent does not act as a fiduciary for, or as an advisor to, either party.

The Calculation Agent is responsible for delivering a notice to the parties on the Calculation Date showing in reasonable detail its calculation of various payment amounts.

Requires the Calculation Agent to notify the parties of any required determination as soon as reasonably practicable after making it.

Both parties can request the Calculation Agent to provide a Calculation Statement in respect of a payment date. The Calculation Statement will notify the party of the amount payable, the party from which it is due and the payment date. The Calculation Statement will also show the calculation made in reasonable detail.

No express limits on disclosure.

The Calculation Agent is not required to disclose (including in any Calculation Statement) proprietary or confidential information, or information which constitutes material non-public information. The Calculation Agent must notify the parties if it withholds any information on these grounds.

Section 4.15 of the 2006 Definitions defines Calculation Date to mean the earliest day on which it is practicable for the Calculation Agent to provide the required notice for the relevant Payment Date or Calculation Period.

The definition for Calculation Date in the 2021 Definitions is similar, except the 2021 Definitions distinguish between different types of calculation (for example, those made in arrears and those made in advance of the start of the relevant period).

No express requirement to provide notices to the Calculation Agent.

The parties are obliged to provide the Calculation Agent with copies of notices they deliver to each other to the extent the Calculation Agent is not a party.

1. Floating Rate Options

Floating Rate Options

2006 Definitions

2021 Definitions

The Floating Rate Options (FROs) sets out the interest rate benchmarks used to determine floating amounts. They were written as blocks of narrative text without a standard format or naming convention. As definitions were added over time, the drafting of these definitions became less uniform which increased complexity.

Aims to address the inconsistencies and complexities from the 2006 Definitions, as follows:

• the FRO definitions have been lifted out of the Main Book and reorganised into a Floating Rate Matrix setting out the key terms for each interest rate benchmark. Terms used in the Floating Rate Matrix are defined in the Main Book;

• FRO names under the 2006 Definitions do not follow any consistent naming convention. The 2021 Definitions introduces a common rule-based naming convention for FROs which combines the currency, the administrator-assigned name and the function (where applicable) in a formulaic pattern.  As a result of these changes, many FROs specified in the 2006 Definitions will have different names under the 2021 Definitions (to the extent they have been carried across); and

• each FRO will also now be determined by reference to data published by a single administrator or central bank specified in the Floating Rate Matrix. As such, there will no longer be several different FROs referencing alternative publication sources (e.g. Reuters or Bloomberg screen pages) for the same rate.

1. Fallbacks

Fallbacks

The recent discontinuation of certain interbank offered rates (IBORs) has created challenges for selecting an alternative fallback rate where an IBOR used to determine a floating rate is no longer available.

2006 Definitions

2021 Definitions

IBOR fallbacks and their related triggers under the 2006 Definitions are largely governed by Supplement 70 (the IBOR Fallbacks Supplement) and other supplements in respect of the risk-free rates (RFRs) that have been identified as IBOR alternatives, including SOFR, SONIA, TONA and AONIA.

The triggers and fallbacks contained in the IBOR Fallbacks Supplement as well as the RFR-related supplements have been carried across to the 2021 Definitions with the following differences:

• differences in terminology (to adapt to the different architecture of the 2021 Definitions, with no intention of having a substantive effect);

• the fallbacks are populated in the new Floating Rate Matrix with each capitalised term defined in operative provisions within the Main Book;

• the creation of new fallbacks for new FROs that were not included in the 2006 Definitions;

• the introduction of a new “Administrator/Benchmark Event” trigger that allows parties to move to an alternative rate if it becomes unlawful to use the underlying benchmark for the FRO; and

• the introduction of temporary non-publication triggers and fallbacks for FROs not covered by the IBOR Fallbacks Supplement, based on equivalent non-publication triggers and fallbacks that apply to IBORs covered by the IBOR Fallbacks Supplement.

The fallback provisions in the 2021 Definitions are categorised into bespoke fallback provisions or generic fallback provisions.

These are primarily based on the IBOR Fallbacks Supplement and are designed with specific FROs in mind. The bespoke fallback provisions may prescribe fallbacks and adjustments which are only appropriate for the relevant FRO.

The generic fallback provisions provide a framework for selecting a fallback rate where a Permanent Cessation Trigger or Administrator/Benchmark Event occurs, but there is no market standard fallback that has been identified and included in the 2021 Definitions.

When identifying and agreeing on an appropriate fallback to allow the relevant transaction to continue in accordance with its terms, the parties must use commercially reasonable efforts and act in good faith.

1. Cash Settlement Provisions

Cash Settlement Provisions

Cash Settlement Methods are used to determine the cash settlement amount payable by one party to another under certain interest rate derivatives transactions when the parties cannot agree on the cash settlement amount by the cut-off time and day. 

The 2021 Definitions include the following two new categories of Cash Settlement Methods to replace the old Cash Price mechanism under the 2006 Definitions:

• Mid-market valuation (MMV ) approaches; and

• Replacement valuation (RV ) approaches.

MMV intends to provide a neutral valuation which does not favour either party. In contrast, RV intends to protect one party from the financial consequences of the termination of the trade.

For both approaches, there are two sub-categories, representing the possible ways in how the valuation can be made:

• Reference Bank quotations; and

• Calculation Agent Determination.

The parameters to be followed by banks and the Calculation Agent under the new methodologies are more prescriptive than under the 2006 Definitions. This will remove much of the discretion (along with the potential for uncertainty, divergent outcomes and disputes) that applied under the old Cash Price methodology.

As a result of these changes, the 2021 Definitions now have seven cash settlement methods. Five of these are variants of the MMV or RV methods described above, and the remaining two methods are legacy methods which are substantially the same as the equivalent methods under the 2006 Definitions.  ISDA has published the following high-level comparison of the cash settlement provisions between the 2021 and 2006 Definitions:

2006 Definitions - Cash Settlement Method

2021 Definitions - Cash Settlement Method

Cash Price

Mid-market Valuation (Indicative Quotations)

Mid-market Valuation (Calculation Agent Determination)

Replacement Value (Firm Quotations)

Replacement Value (Calculation Agent Determination)

Cash Price - Alternate Method

Mid-market Valuation (Indicative Quotations) - Alternate Method

Par Yield Curve - Adjusted

Not included

Par Yield Curve - Unadjusted

Zero Coupon Yield - Adjusted

Not included

Cross Currency Method

Not included

Collateralised Cash Price

1. Days, dates and periods

Days, dates and periods

While the basic framework of how days, dates and periods interact in the 2021 Definitions remains the same, there are important additions and improvements to how days, dates and periods are defined and determined.

2006 Definitions

2021 Definitions

There are separate definitions for Banking Days and Business Days. Banking Days are used to determine the fixing day under FROs and Business Days are used to determine a Payment Date.

Drops the use of Banking Day and instead use Business Day to cover both the fixing day under FROs and to determine a Payment Date.

No separate definition for Currency Business Day but equivalent provisions were included in the definition of Business Day.

Adds the term Currency Business Day. This references the default financial centre of the currency. Currency Business Day is used where a financial centre or a bespoke day calendar is not specified in the 2021 Definitions or in the relevant Confirmation.

No Publication Calendar Day definition.

Introduces the concept of Publication Calendar Day.

Publication Calendar Day can be referenced in FROs when the publication calendar of the relevant benchmark does not align with the calendar of the relevant financial centre or any bespoke Business Day definition.

Period End Dates can be specified as being ‘unadjusted’, but the concept is not captured as a Business Day Convention that can be applied to other dates.

Adds a No Adjustment Business Day Convention that can be applied to any date.

There were circumstances under the 2006 Definitions where if a public holiday or market closure was announced without sufficient notice, the application of the Modified Following or Preceding Business Day Conventions resulted in a payment obligation moving to a date in the past.

Introduces a new definition for an Unscheduled Holiday, being a public holiday or market closure that occurs with less than two Business Days’ notice. Any Cash Settlement Valuation Date, Date for Payment, Period End Date or Termination Date that would otherwise have fallen on such a day will move to the following Business Day.

It has been common practice to set out the Payment Dates in Confirmations and rely on the default position in Section 4.10(a) that, if not otherwise specified, the Period End Dates will be each Payment Date. Instead of separately specifying the Period End Dates. Where the parties have relied on the default position, there is no independent application of a Business Day Convention and the parties cannot elect for Period End Dates to be unadjusted.

Parties have the ability to specify an independent Business Day Convention for Period End Dates.

No IMM Date definitions relating to Australian dollars, Canadian dollars or New Zealand dollars.

Adds three new IMM Date definitions which relate to specific futures contracts denominated in Australian dollars, Canadian dollars and New Zealand dollars.

There is no defined concept for an end-of-month Payment Date/Period End Date convention despite it being used by market infrastructures.

A definition has been added such that if ‘End-of-month’ is specified, it will mean the last calendar day of each month during the term of the transaction.

Under the 2006 Definitions, parties commonly specified Payment Dates and Period End Dates in Confirmations by referring to other dates. For example, the final Payment Date is often specified as the Termination Date.

Adds Adjustment Hierarchy provisions clarifying which Business Day Convention adjustment applies in these scenarios.  An example provided by ISDA is 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. 

1. Calculations of fixed and floating amounts

Calculations of fixed and floating amounts

The determination of Floating Amounts and Fixed Amounts under the 2021 Definitions remains substantially the same. However, there are some important additions and improvements. To improve clarity and facilitate the translation into code, calculations have been set out as formulae where possible rather than using the narrative text applied in the 2006 Definitions. 

2006 Definitions

2021 Definitions

No Calculation/252 Day Count Fraction.

Adds a calculation/252 Day Count Fraction.

Other Day Count Fractions from the 2006 Definitions have been carried over.

The term ‘Discount Rate’ was used for both the Discounting provisions and the Cash Settlement provisions.

For clarity, the term used for the Discounting provisions is renamed to ‘Discounting Rate’.

Certain published and displayed rates were subject to corrections within one hour of the time when the rate is first displayed on the relevant page.

The 2006 Definitions caused issues when the correction window allowed by the relevant administrator is longer than one hour. The 2021 Definitions address this by changing the default correction cut-off to the longer of one hour and the period specified for corrections by the relevant administrator under its methodology.

No Zero Interest Rate Method Excluding Spread.

Adds a new floating negative interest rate method - Zero Interest Rate Method Excluding Spread. Under this, the actual floating rate is floored at zero prior to the addition or subtraction of any Spread that is applicable to the calculation of the Floating Amount.

The interpolation calculation is described in a paragraph of narrative text and does not expressly set out how to determine the number of days in the periods corresponding to the rates for the shorter and the longer tenors.

Sets out the interpolation calculation as a precise formula.

DRM provisions are contained in the ISDA 2013 Discontinued Rates Maturities Protocol.

The DRM Provisions deal with situations where a particular tenor (Designated Maturity) that is specified in the Confirmation for the calculation of a Floating Amount is discontinued or no longer representative but at least one shorter and at least one longer tenor remain available. In this case, the rate will be determined by interpolating between the next shorter and next longer tenors that are available.

Incorporates the material terms of the ISDA 2013 Discontinued Rates Maturities Protocol but simplifies them.

This article was prepared with assistance from Wenzo Mnguni and Shanae Streeter