Conclusions from the public consultation on the Recommendation of the NWG on applying a fallback rate for the WIBOR benchmark in interest rate derivatives

Following a consultation in May 2023 on a proposed „Recommendation regarding the application of a fallback rate for the WIBOR benchmark in interest rate derivatives“, the National Working Group for benchmark reform (NWG) has now published a corresponding consultation conclusion. In the conclusion document, the NWG briefly summarizes the responses it has received to its consultation and describes its way forward in this matter.
#### Background
The Working Group conducted the public consultation with the aim to develop recommendations regarding the replacement of the Warsaw Interbank Offered Rate (WIBOR) benchmark with an alternative benchmark, preferably the Warsaw Interest Rate Overnight (WIRON) index, in WIBOR-based interest rate derivatives in the event of a permanent fallback trigger such as the wind-down of WIBOR (which is expected for the end of 2024). It was part of the preparatory work outlined in the roadmap for the replacement of WIBOR with an adequate alternative risk-free rate.
#### Responses and way forward
The NWG received one response letter from a professional association. According to the Group, the association was concerned about the (in)consistency between the recommendation for interest rate derivatives and the recommendation for floating-rate debt instruments. It noted that discrepancies between the recommendations could lead to differences in cash flows, ineffective hedges, and challenges in hedge accounting.
In response to the comment, the NWG now clarifies that the recommendation for derivatives had a general nature and aligned with the recognized standard for converting derivatives in accordance with the ISDA standard. It further states that the recommendation does not restrict financial market participants from using different methods (and benchmarks) for converting WIBOR-based interest rate derivatives. The NWG further emphasizes that the recommendation for derivatives is not contradictory to the approach taken in the recommendation for bonds. Both recommendations allow for the use of WIRON with a 5-business-day lookback and observation period shift to ensure consistency and effectiveness in converting bonds and hedging instruments.
Therefore, the NWG concludes to adopt the recommendation as proposed.