Risk.net reported on Monday that ISDA will consult next month on three possible fallback options that would apply when LIBOR was phased out. All take the overnight risk free rate for the relevant currency and then add on a spread for the difference in risk between risk-free and prime banks. One applies the spread prevailing the day before the trigger date, and the second takes an historical mean. Both of these then calculate the rate at the end of the period based on overnight compounding. What about corporate borrowers who want to know (as they do at the moment) at the beginning of the period what they are going to pay at the end of the period? This is the rationale for the third option, which is based on the forward IBOR-RFR spread for the relevant currency. Presumably, reference to the chosen option could be incorporated in new deals, and legacy deals could be amended (in the case of market swaps, presumably via a protocol), but in any event some market participants will want to start using the new rate once it is known pre-emptively, even before the death knell is rung.
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