ISDA spread adjustment

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Interest rates - reference rates - LIBOR transition - Financial Conduct Authority - fallback - pricing - credit risk.

LIBOR will cease to be calculated and published at the end of 2021.

The ISDA spread adjustment relates to the proposed calculation of a relevant fallback interest rate on a synthetic basis ("synthetic LIBOR").

The adjustment is added to the synthetic LIBOR rate, to reflect the additional credit risk in IBOR rates.

ISDA spread adjustment is now fixed for EUR, GBP, CHF, USD & JPY
"This spread adjustment is an important part of the overall fallback rate, and reflects a portion of the structural differences between interbank offered rates (IBORs) and the RFRs used as a basis for the fallbacks – IBORs incorporate a credit risk premium and other factors, while RFRs are risk free or nearly risk free...
This spread has now been fixed for all euro, sterling, Swiss franc, US dollar and yen LIBOR tenors, giving firms more information about the exact fallback rate that will be used in the event they don’t complete their transition efforts before cessation or non-representativeness occurs."
ISDA - LIBOR Cessation and the Impact on Fallbacks

The ISDA spread adjustment is an example of a credit adjustment spread.

See also

External link

ISDA - LIBOR Cessation and the Impact on Fallbacks