Following the public consultation regarding a fallback rate for CIBOR (a summary of the responses to the public consultation can be found below) the Risk-Free Rate Working Group has conducted further investigations regarding potential fallback rates for cash- and banking products, which are diverse in respect of customer- and product types. International standards are in the same way still fragmented and typically reflect the relevant market size and characteristics. This causes specific issues for cross-currency products, e.g., syndicated loan and multi-currency facilities.
1. The recommended fallback models for CIBOR are now formulated as three complementary and equally valid models (and thereby DESTR is not the “general” fallback), where:
- DESTR-fallback is now specifically recommended for derivatives
- CITA fallback is recommended for mortgage loans and bonds
- A third fallback model is added that may be used for cash and banking products (including syndicated loan and multi-currency facilities) where there is a need for more flexibility to secure the most appropriate fallback rate. In this respect the RFR WG have the following considerations:
- A CITA based fallback is less complex and may be used for retail banking loans and other customer- and banking products, which require a less complicated fallback
- A DESTR based fallback may be more usable for professional customers and towards for example the syndicated loan markets
- For other banking products and product combinations (e.g., loans or bonds hedged with derivatives) it might be relevant with other fallbacks models that adapt to the product and risk profile in the best manner and are agreed upon by the financial institutions and their counterparties.
2. Trigger event no. 5 is changed to be optional and to be agreed among the contract parties. In this way there is consistency with the recommendations made by the WG on Euro Risk-Free Rates.
3. Trigger no. 7 is still optional, but it is mentioned that it could provide a possible discrepancy with international standards for OTC (over the counter) derivatives.
