20-8 International Swaps & Derivatives Association, Inc. (“ISDA”)

U.S. DEPARTMENT OF JUSTICE
Antitrust Division
MAKAN DELRAHIM
Assistant Attorney General
Main Ju stice Building
950 Pennsy
lvania Avenue, N.W.
Washington, D.C. 20530-0001
(202) 514-2401 / (202) 616-2645 (Fax)
October 1, 2020
Abram
J. Ellis
Simpson Thacher & Bartlett LLP
900 G Street,
NW
Washington, DC 20001
Re: International Swaps and Derivatives Association Business Review
Request
Dear Mr. Ellis:
This letter responds to your request, made on behalf
of the International Swaps and
Derivatives Association, Inc. ("ISDA''), for the issuance
of a business review letter from
the Department
of Justice pursuant to the Department of Justice's Business Review
Procedure,
28 C.F.R. § 50.6. Specifically, you have requested a statement of the
Department's present enforcement intentions with respect
to ISDA's proposal to amend its
standardized documentation to account for the potential discontinuation
of ce1iain
interbank offered rates ( collectively
referred to as "IBO Rs").
1
Based on the information
and representations you provided, after a thorough review, and for the reasons explained
below, the Department does not presently intend to challenge
ISDA's proposed
amendments to its standardized documentation. In accordance with the Department's usual
practice, however, the Department reserves the right to challenge the proposed
amendments to
ISDA's standardized documentation in the future if the proposed
amendments are determined
to be anticompetitive in purpose or effect.
1
See Letter from Abram J. Ellis, Esq., Simpson Thacher & Bartlett, to Makan Delrahim, Assistant Att'y
Gen., Antitrust Div., U.S. Dep't of Justice (June 4, 2019) [hereinafter June 2019 Letter]; see also Letter
from Abram
J. Ellis, Esq., Simpson Thacher & Bartlett, to Makan Delrahim, Assistant Att'y Gen., Antitrust
Div
., U.S. Dep' t of Justice (Oct. 23, 2019) [hereinafter October 2019 Letter]; Letter from Abram J. Ellis,
Esq
., Simpson Thacher & Battlett, to Makan Delrahim, Assistant Att'y Gen., Antitrust Div., U.S. Dep't of
Justice (July 10, 2020) [hereinafter July 2020 Letter]; Letter from Abram J. Ellis, Esq., Simpson Thacher &
Bartlett, to Makan Delrahim, Assistant
Att'y Gen., Antitrust Div., U.S. Dep' t of Justice (July I0, 2020);
and Letter from Abram J. Ellis, Esq., Simpson Thacher & Bartlett, to Makan Delrahim, Assistant Att' y
Gen., Antitrust Div., U.S.
Dep't of Justice (Sept. 22, 2020).

Abram J. Ellis, Esq.
October
1, 2020
Page2
I. Background
The facts set out this letter regarding ISDA, the process ISDA used to produce its proposal,
and proposal itself are based
on ISDA's representations to the Department.
A. ISDA Background
ISDA is an international trade association representing participants in the derivatives
industry.
2
Today, ISDA has over 900 member institutions from 71 countries.
3
These
members comprise a broad range
of derivatives market participants, including
corporations, investment managers, government and supranational entities, insurance
companies, energy and commodities firms, and international and regional banks. In
addition,
ISDA members include exchanges, intermediaries, clearing houses, and
repositories, as well as law firms, accounting firms, and other service providers.
ISDA publishes model documents that its members can use for their swaps, forwards, and
other derivatives contracts. These documents include the ISDA Master Agreement, a model
contract that can be used
by parties to govern over-the-counter derivatives transactions,
and the 2006 ISDA Definitions, which include standardized definitions for interest rate and
currency derivatives contracts. These contracts can reference various rates, including the
London Inter-Bank Offered Rate ("LIBOR") and other interbank offered rates ("IBORs").
ISDA's documents also include mechanisms that allow it to publish supplements and
protocols to update, add,
or adjust the definitions as circumstances warrant.
4
B. IBOR Background
IBO
Rs are used as reference rates in a wide variety of financial instruments in addition to
derivatives contracts, including business loans, securitizations, and consumer loans such
as mortgages and credit cards. Using these rates reduces the complexity
of financial
instruments and facilitates their standardization. Generally,
IBORs are meant to reflect the
cost at which certain banks can
borrow on an unsecured basis for a given period of time.
Administrators publish the different IBORs, obtaining quotes from
"panel" banks to
calculate the rates. U.S. dollar ("USD")
LIBOR is the most commonly used IBOR in the
United States and the world, with approximately $200 trillion in financial contracts in the
2
For purposes of this letter, ISDA is defined to include ISDA, its Board, its Board Committees, and any
Board or Board committee member acting
in that capacity.
3
See June 2019 Letter at 3.
4
See id. at 4.

Abram J. Ellis, Esq.
October
1, 2020
Page 3
derivatives and cash markets referencing the rate.
5
USD LIBOR, along with other LIBOR
rates,
is regulated by the United Kingdom's Financial Conduct Authority ("FCA").
6
C. IBOR Reforms
ISDA's proposed amendments are part of a larger effort to identify and implement
alternatives to IBO Rs. After the financial crisis of 2008, U.S. and international regulators
uncovered manipulation
of different IBORs. Banks manipulated their rate submissions in
an attempt to project financial soundness during the financial crisis and to benefit their
trading positions. These manipulation cases, along with declining activity in the interbank
lending markets underlying banks' rate submissions to IBOR administrators, unde1mined
confidence in the reliability and robustness
of the current IBOR system.
The Financial Stability Board ("FSB") was tasked by the
G20to review major interest rate
benchmarks and ensure that these types
of benchmarks are robust and used appropriately,
and different working groups were created to identify, and develop
if necessary, alternative
or "fallback" rates to be used if existing IBO Rs are discontinued.
7
In the United States, the
responsible working group is the Alternative Reference Rates Committee ("ARRC").
8
In 2016, the FSB asked ISDA to develop fall back arrangements for derivatives contracts
in the event that an IBOR referenced in a derivatives contract is permanently discontinued,
which prompted ISDA's work on developing fallback rates and procedures.
9
The prospect
of an IBOR becoming permanently discontinued became more likely when the FCA
announced in 2017 that it could not guarantee that LIBOR rates would be available after
2021,
10
and reiterated this deadline earlier this year.
11
D. Development of ISDA's Proposal
ISDA conducted six public consultations between July 2018 and February 2020 to educate
the public and market participants about the proposed amendments to ISDA's standard
documentation,
to solicit feedback on how the fallback rates should be structured and
5
See Alt. Reference Rates Comm., Frequently Asked Questions (July 16, 2020) at 2,
https:/ / www.newyorkfed.org/medialibrary/Microsites/arrc/files/ ARRC-faq.pdf [hereinafter
ARRC FAQs] .
6
LIBOR rates are calculated for the U.S. dollar, British pound sterling, Swiss Franc, Japanese Yen, and
Euro. For each currency, rates are calculated for seven maturities ranging from overnight to twelve months.
Id.
7
Fin. Stability Bd., Reforming Major Interest Rate Benchmarks (July 22, 2014), https://www.fsb.org/wp­
content/uploads/r_ 140722.
pdf [hereinafter FSB Report] .
8
The ARRC is chattered and administered by the Board of Governors of the Federal Reserve System in
cooperation with the Federal Reserve Bank
of New York. See ARRC FAQs at 1.
9
See June 2019 Letter at 6.
10
Andrew Bailey, The Future of LIBOR, July 27, 2017, https://www.fca.org.uk/news/speeches/the-future­
of-libor.
11
Edward Latter, LIBOR Transition -The Critical Tasks Ahead of Us in the Second Halfof2020 (July 14,
202 0) , https :/ /www.fca.org. uk/news/ speeches/libor-trans ition-critical-tasks-ahead-us-second-half-202
0.

Abram J. Ellis, Esq.
October
1, 2020
Page 4
calculated, and whether to include a "pre-cessation trigger" for certain rates.
12
The
consultations were announced
on ISDA's website, and responses were open to the public.
Based on the feedback received from these consultations and discussions with regulators
and other stakeholders, ISDA prepared the proposal that is the subject
of this letter.
13
II. ISDA's Proposal
ISDA proposes to issue (1) a supplement that amends the 2006 ISDA Definitions to
incorporate designated fallback rates for certain IBORs (the "Proposed Supplement"), and
(2) a protocol that ISDA members can use to apply these designated fallback rates to legacy
contracts (the "Proposed Protocol").
ISDA's proposal is designed to replace the current
fallback mechanisms in the 2006 ISDA Definitions with new fallback rates and details
about when those new fallback rates will take effect.
If an IBOR is not available, the current procedure in the 2006 ISDA Definitions is for the
derivative contract's calculation agent to calculate an
ad hoc fallback rate by obtaining
quotations from dealers in the relevant interbank market.
14
This solution is not practical,
however,
if an IBOR is permanently discontinued or if there are an insufficient number of
banks willing or able to provide quotations for an ad hoc fallback rate.
15
To take into
account these scenarios,
ISDA's model documents need to be amended to incorporate new
fall back rates and calculation methods so that market participants can,
if they so choose,
refer to these new rates in derivatives contracts going forward and efficiently amend legacy
contracts to incorporate the new rates when needed.
ISDA's Proposed Supplement and the Proposed Protocol redefine certain IBORs that can
serve as "rate options" by adding provisions that incorporate the proposed fallback rates
and terms necessary to implement them.
16
Transactions that use the 2006 ISDA Definitions
and are entered into after the Proposed Supplement's effective date will include the
Proposed Supplement's definitions for ce1iain IBORs, which include the proposed fall back
rates.
These fallback rates are based on replacing a given IBOR with an adjusted "risk-free rate"
("RFR"). RFRs are interest rates where there is zero or nearly zero risk
of default or loss.
As
part of the FSB 's work in transitioning the financial community away from using
IBORs, public-private working groups reviewed IBORs related to their relevant
12
See July 2020 Letter at 3-5.
13
The Department does not express any position regarding the consultation process ISDA used to receive
input in drafting its proposal.
14
See June 2019 Letter at 5.
15
See id.
16
Specifically, the Proposed Supplement's new definitions that incorporate fallback rates are to certain
terms defined in Section
7.1 of the 2006 ISDA Definitions. See June 2019 Letter at 10; ISDA, Amendments
to the 2006 ISDA Definitions to include new IBOR fallbacks, Supplement number [70} to the 2006 ISDA
Definitions (pre-publication version) at I [hereinafter Proposed Supplement].

Abram J. Ellis, Esq.
October
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Page 5
jurisdictions and recommended the RFR that should serve
as replacements.
17
ISDA
selected the RFRs recommended by the working groups to serve as the basis for the
proposal's fallback rates.
18
Since the RFRs selected by ISDA are overnight, risk-free rates, the RFRs need two
different types
of adjustments to function as fallbacks for their corresponding IBORs: (1)
a "te1m" adjustment that accounts for the different maturities used for IBOR rates (e.g.,
three months or twelve months); and (2) a "spread" adjustment that accounts for the risk
premium reflected in IBORs but not RFRs. The fallback rates in the Proposed Supplement
incorporate these adjustments, as calculated by ISDA's designated calculation and
distribution vendor for the fallback rates.
19
Derivatives contracts already in place will be able to incorporate the proposed fallback
rates through ISDA' s Proposed Protocol.
If all of the parties to a particular contract are
signatories to the Proposed Protocol, then the contract will incorporate the new fallback
rates.
20
By using the Proposed Protocol, there is no need to go back and individually re­
negotiate contracts to incorporate the new fallback rates, unless the parties
to the contract
wish to negotiate and use a different rate. The Proposed Protocol
is voluntary and "without
prejudice
to any amendment modification or waiver in respect of a Protocol Covered
Document
[i.e., individual derivatives contract] that the parties may otherwise effect in
accordance with the terms
of that [contract]. "
21
The fallback rates in the Proposed Supplement and Proposed Protocol come into effect
when an IBOR's administrator or the administrator's regulator announces that the
administrator has ceased providing, or will cease providing, the rate and that there is no
successor administrator.
22
There is also a "pre-cessation trigger" in the Proposed
Supplement and Proposed Protocol for the LIBOR rates, which are currently regulated by
the FCA. The trigger implements the appropriate fall back rate
if there is a statement by the
rate's regulator that the rate is no longer "representative
of the underlying market and
economic reality that such [rate]
is intended to measure and that representativeness will not
be restored.
"23 This could happen if, for example, the number of panel banks submitting
rates used
to calculate a particular LIBOR rate shrinks significantly.
24
17
For a list of the public-private working groups with whom ISDA has consulted to identify the appropriate
risk-free-rates,
see June 2019 Letter at 7, Table 1. The Department does not take any position regarding the
process the working groups used
to select their recommended RFRs.
18
June 2019 Letter at 7. The Department does not take any position regarding the process ISDA used to
select these RFRs.
19
The Department does not take any position regarding the process ISDA used to select its calculation and
distribution vendor, Bloomberg Index Services Limited.
20
See ISDA, ISDA 2020 IBOR Fallbacks Protocol (pre-publication version) at 2 [hereinafter Proposed
Protocol].
21
Id. at 2.
22
See Proposed Supplement at 90; Proposed Protocol at 50.
23 Id.
24
See October 2019 Letter at 6.

Abram J. Ellis, Esq.
October
1, 2020
Page 6
ISDA has represented that market participants are not required to use the Proposed
Supplement' s fallback rates or the Proposed Protocol, and
may use different fallback rates
if they think that the current fallback procedure or an alternative fallback rate is more
appropriate for a particular contract.
25
III. Analysis
The first step in the Department's analysis is to decide whether ISDA's proposal should be
evaluated under the
per se rule or the rule ofreason.
26
The Department reviews agreements
among competitors, like
ISDA's proposal to adopt the Proposed Supplement and Proposed
Protocol, under the
per se rule only if the agreements are of a type "that would always or
almost always tend to restrict competition and decrease output."
27
The types of changes to
model documents that are the subject
of ISDA's proposal are not the type of agreements
that the Department has historically viewed as always or almost always likely to raise price
or reduce output, so evaluating ISDA's proposal under the per se rule is inappropriate.
28
The Department analyzes agreements that fall outside of the per se rule under the rule of
reason, and believes that the rule of reason analysis is appropriate for ISDA's proposal.
A. Potential Anticompetitive Effects
of ISDA's Proposal
The
Department's analysis begins by assessing whether the conduct under review has the
potential to harm competition. For example,
ISDA's proposed fallback rates for IBORs
could result in one group of derivatives users benefiting at the expense of another. Based
on
ISDA's representations and the Department's investigation, however, anticompetitive
effects arising from
ISDA' s Proposed Supplement and Proposed Protocol do not appear to
be likely.
Members of an association that help develop a product standard "implicitly [may enter
into] an agreement
not to manufacture, distribute, or purchase certain types of products"
that fall outside that standard.
29
Here, the Department does not believe that ISDA's
proposal indicates an agreement among its members to limit their choice of fall back rates
to only the proposed fallback rates in the Proposed Supplement and Proposed Protocol.
If
a user of ISDA's model documents does not wish to use the proposed fallback rates,
nothing
in the Proposed Supplement or Proposed Protocol prevents the user from entering
25
See id at 4.
26
Notwithstanding the involvement of government officials at different points in ISDA' s preparation of its
Proposed Supplement and Proposed Protocol, this letter's analysis does not rely on an application of
antitrust immunity to ISDA based on a claim that ISDA's proposal was done at the federal government's
direction. See Letter from Makan Delrahim, Assistant Att' y Gen
., U.S. Dep't of Justice, to Lori A.
Schechter, McKesson Corp., at 7 (April 4, 2020), https://www.justice.gov/atr/page/file/ 1266511/download.
27
Broadcast Music, Inc. v. Columbia Broadcasting Sys., 441 U.S. I, 19-20 (1979); see also U.S. Dep' t of
Justice and Fed. Trade Comm'n, Antitrust Guidelines for Collaborations Among Competitors§§ 1.2, 3.2
(2000), https://www.justice.gov/atr/page/ file/ 1098461/download.
28
See Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 886-887 (2007).
29
Allied Tube & Conduit Co1p. v. Indian Head, Inc., 486 U.S. 492, 500 (1988).

Abram J. Ellis, Esq.
October
1, 2020
Page 7
into a derivatives contract ( or amending one currently in place) that uses an alternative rate,
including rates not included in the 2006 ISDA Definitions.
30
Choosing a particular rate as the basis for an IBOR's fallback rate could have the potential
for anticompetitive effects by preventing other rates from being used instead.
31
Here, the
Department has no reason to believe that anticompetitive effects are likely to arise from
ISDA' s proposal to use the RFRs it has chosen to use as the starting point for its proposed
fall back rates. The RFRs were chosen by public-private working groups tasked by the FSB
to identify suitable RFRs to replace their corresponding IBORs.
32
For this reason, the
Department does not believe that using these RFRs is likely to have anticompetitive effects.
The Department also does not believe that the adjustments to these RFRs are likely to have
anticompetitive effects. One reason for this belief is the breadth
of support ISDA received
for the proposed adjustments during its consultation process soliciting input from the
industry regarding possible adjustment approaches.
33
In addition, the fallback rates defined
in the Proposed Supplement and Proposed Protocol are non-exclusive and voluntary, so
if
users of ISDA's model documents would rather use an alternative fallback rate, they are
free to
do so.
With respect to ISDA's Proposed Protocol, the Department does not consider the Proposed
Protocol likely to have anticompetitive effects. The Proposed Protocol is voluntary;
if
holders of derivatives contracts wish to use different fall back procedures than those in the
Proposed Protocol, they can decide not to sign the Proposed Protocol and to individually
amend their contracts instead. In addition, the Proposed Protocol permits users to further
amend derivatives contracts covered by the Proposed Protocol. As a result,
if a firm has a
number
of derivatives contracts that use IBORs, that firm may use the Proposed Protocol
and still retain the option to negotiate different fallback rates for specific contracts. For
these reasons, the Department has no current reason to believe that the Proposed Protocol
is likely to have anticompetitive effects.
With respect to ISDA's decision to include a pre-cessation trigger for the LIBOR rates, the
Department does not see the potential for anticompetitive harm arising from this aspect
of
ISDA's Proposed Supplement and Proposed Protocol. The pre-cessation trigger is
structured as a default provision, so
if parties to a particular derivatives contract wish to
use a different type
of pre-cessation trigger, or not use one at all, they are free to do so.
30
See June 2019 Letter at 3.
3 1
See, e.g., U.S. Dep' t of Justice & Fed. Trade Comm'n, Antitrust Guidelines for the Licensing of
Intellectual Property§ 4.1. 2 (Jan. 12, 2017) ("Such restraints may anticompetitively foreclose access to , or
increase competitors' costs
of obtaining, important inputs, or facilitate coordination to raise price or reduce
output.").
32
See FSB Report at 59. The Department does not take any position regarding the process used to select the
RFRs by the public-private working groups.
33
The Department does not take any position regarding the methodology underlying the spread and term
adjustments
in the Proposed Supplement and Proposed Protocol or the consultation process ISDA used to
obtain feedback regarding these adjustments.

Abram J. Ellis, Esq.
October 1, 2020
Page 8
B. Procompetitive Benefits of ISDA's Proposal
The Department also considered the procompetitive aspects
of ISDA's proposal. The
Department believes that ISDA's proposal
is likely to have substantial procompetitive
benefits and that these benefits outweigh the possible anticompetitive effects.
The Department first notes that there are benefits from increasing the efficiency and
certainty in calculating the value
of fallback rates should an IBOR be discontinued. As
noted above, the current 2006 ISDA Definitions have a cumbersome, contract-by-contract
process that must be used
if an IBOR is unavailable.
34
By establishing a standard and
widely available rate that can serve
as the fallback for an IBOR in case the rate is
discontinued (or found unrepresentative), time and
effo11 needed to obtain quotes and
calculate rates on a contract-by-contract basis can be avoided. Similarly, the Proposed
Protocol allows users
of derivatives contracts to save time and effort by easily
incorporating the proposed fall back rates into existing derivatives contracts without having
to individually re-negotiate the contracts.
In addition, the proposed fallback rates in ISDA's proposal increase the predictability and
ce1tainty
of rate calculations for derivatives contracts that use the Proposed Supplement's
definitions going forward and contracts currently in place that are amended via the
Proposed Protocol. The added
certainty provided by the Proposed Supplement and
Proposed Protocol should substantially reduce the number
of disputes surrounding the
calculation
of fall back rates should their IBO Rs be discontinued.
Basing the designated fallback rates on the RFRs identified by public-private working
groups
is likely to have procompetitive benefits. Since firms often use derivatives contracts
to hedge loans and other obligations, and working groups like the ARRC have developed
fallback language to incorporate these RFRs into non-derivative products, using the same
RFRs for ISDA's proposed fall back rates lowers the risk
of mismatched hedges and helps
improve the stability
of the financial system.
35
The pre-cessation triggers included in the Proposed Supplement and Proposed Protocol are
also likely
to have procompetitive effects. The triggers are intended to address a scenario
where an IBOR
is considered no longer representative, but is still in effect. Including such
a trigger will help ensure a more predictable transition process from IBO Rs to the proposed
fallback rates, including a consistent transition process
as between derivatives contracts
using ISDA' s model definitions and other products that reference the same IBORs and use
a similar pre-cessation trigger.
More generally, ISDA's proposal, made in cooperation with government regulators and
industry participants, has the potential to benefit the financial services industry by helping
34
See note 15 and accompanying text, supra.
35
See Alt. Reference Rates Comm., Second Rep ort (March 2018) at 25-26, 28,
https
://www .newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ ARRC-Second-report.

Abram J. Ellis, Esq.
October 1, 2020
P age 9
foster a smooth transition away from IBORs to other reference rates.
By working with
regulators and public-private working groups like the ARRC, ISDA' s use
of working
group-endorsed RFRs as the basis for its fallback rates encourages standardization and
adoption
of those RFRs for other uses, such as for business and consumer loans.
36
In
addition,
ISDA's proposal to adopt certain adjustments to RFRs for its proposed fallback
rates has encouraged others to adopt similar adjustments for their fall back rates, facilitating
standardization
of contract language across financial products.
37
IV. Conclusion
Based on our investigation and ISDA' s representations regarding its proposal to amend its
standardized documentation to include the Proposed Supplement and Proposed Protocol,
the Department has concluded that
ISDA's proposal is unlikely to produce anticompetitive
effects, and
ISDA's proposal has the potential to offer substantial benefits to the financial
services industry. Accordingly, the Department has no present intention to challenge
ISDA' s proposal to amend its standardized documentation.
This letter expresses the Department's s current enforcement intention and is predicated
on
the accuracy of the information and assertions that you have presented to us, as well as the
additional qualifications set forth in this letter. In accordance with our
normal practices,
the Department reserves the right to bring an enforcement action
in the future if the actual
operation
of the proposed conduct proves to be anticompetitive in purpose or effect.
This statement is made
in accordance with the Department's Business Review Procedure,
28 C.F .
R. § 50.6. Pursuant to its terms your business review request and this letter will be
made publicly available immediately, and any supporting data you submitted will be made
publicly available within 30 days
of the date of this letter, unless you request that part of
the material be withheld in accordance with paragraph 10( c) of the Business Review
Procedure.
Sincerely,
Makan Delrahim
36
See, e.g., ARRC FAQs at 6 (describing SOFR as "suitable to be used across a broad range of financial
products, including but not limited to, derivatives (listed, cleared, and bilateral-OTC), and many variable
rate cash products that have historically referenced LIBOR").
3 7
See, e.g. , Alt. Reference Rates Comm., ARRC Announces Further Details Regarding its
Recommendation
of Spread Adjustments for Cash Products (June 30, 2020),
https:/ /www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ ARRC _ Recommendation_Spread_Ad
j ustments_Cash_Products_Press_Release.pdf.