On 7 August 2019, the LMA published a note about “Revised Replacement of Screen Rate Clause and considerations in respect of credit adjustment spreads” which cautioned that the ISDA consultation outcome might not be the right one for the loan market – which, unlike the derivatives market, wants a forward-looking term rate to replace the IBORs. The reasons are technical, and to quote:
“the historical mean/median approach is more appropriate for measurement of a value at a single point in time based on historical average, and so would not necessarily represent present value on a forward-looking basis. Whilst this might be appropriate for fallbacks triggered on cessation of LIBOR, it might not be considered appropriate for either active transition to RFRs, or for fallbacks triggered, prior to the cessation of LIBOR… It might be the case that loan market participants might prefer to use either the forward market or another methodology to calculate the credit adjustment spread in the context of voluntary transition to RFRs or for fallbacks applying prior to the cessation of LIBOR. Use of the forward market, for example, is an approach that has been seen in the SONIA market already (SONIA being the chosen RFR in the sterling market), which has an existing derivatives market (compared to other RFRs). In particular, the Associated British Ports consent solicitation*… used an adjustment spread based on the forward market”.