New interest rate definitions see rapid adoption

Isda AGM: Trade body’s general counsel warns swaps users not to rely on 2006 rulebook

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The non-cleared swap market has rapidly adopted a new rulebook for interest rate derivatives, with nearly 60% of trades now covered by the updated standards. 

The International Swaps and Derivatives Association released the 2021 version of its interest rate derivatives definitions in October last year. The updated rulebook, which underpins trading in the instruments, supersedes the 2006 version.  

Following the release of the revised definitions, firms trading non-cleared interest rate swaps were required to amend their documentation to point to the new rulebook. According to data from Osttra’s MarketWire platform, nearly 60% of non-cleared trades are now covered by the 2021 definitions – up from around 15% in November. 

The data was presented at Isda’s annual general meeting (AGM) in Madrid on May 11.  

Central counterparties adopted the 2021 definitions in the fourth quarter of last year, which means all cleared trades – new and legacy – are also covered by the updated standards. 

Katherine Tew Darras, Isda’s general counsel, said on a panel at the AGM that the 2021 definitions have already been updated twice since launch. These updates were implemented electronically, with the definitions re-published in full on a web-based user interface instead of via supplements. The 2006 definitions, however, will no longer be updated, creating legal risks for those firms that continue to rely on them. 

“The 2006 definitions are stale at this point – users should be aware of that,” said Darras. “We will not be making future amends to the 2006 definitions. So, if you are still using them you may be negligent in doing so.”

The 2021 definitions provide updates to the rulebook governing interest rate derivatives trading to reflect modern market practices.  

One key change relates to the way cash settlement amounts are calculated upon an early termination or swaptions exercise. Typically, a calculation agent determines the settlement value based on market quotations, but it was unclear whether those quotes should include counterparty-specific collateral, credit and funding charges. This question – the source of much debate during the drafting process – has been settled in the 2021 definitions, which have been updated to allow quotes to reflect these parameters. 

Changes were also made to the definitions relating to floating rate options to make them more standardised and easier to read, while benchmark administrators are now considered the defining characteristic of a reference rate instead of its publication source.  

Other changes included the introduction of new business day calendars and conventions. The 2021 definitions also clarify that calculation agents should use good faith when making determinations, and provide more information to parties when requested. 

The latest rulebook also sets out a generic framework to allow parties to identify fallbacks for benchmarks that do not have a clear one in place.  

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