Swiss national working group recommends SARON as alternative to Swiss franc LIBOR

Maria Nikolova

SNB said that the national working group on CHF reference rates has backed SARON as the alternative to Swiss franc LIBOR at the meeting on October 5, 2017.

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The worldwide trend of looking for alternatives to LIBOR gathers pace, with the Swiss National Bank (SNB) providing a brief update on its efforts in this respect. The Bank said that at the meeting on October 5, 2017, the national working group on Swiss franc (CHF) reference rates (NWG) recommended SARON as the alternative to the Swiss franc LIBOR.

The choice of SARON, a benchmark for the Swiss franc repo market launched in 2009, was indicated in last month’s speech of Dewet Moser, Alternate Member of the Governing Board of the Swiss National Bank. Mr Moser noted the LIBOR manipulations that came to light in 2012 and the series of reforms triggered by UK regulators in response. He also stressed that as a result of of the financial crisis, turnover in unsecured money market, the calculation basis for the LIBOR, had declined dramatically, and has not recovered since. In July this year, the UK regulator announced that it would only support LIBOR until the end of 2021.

Given the heavy dependence of markets on LIBOR, the shift to another reference rate will be quite a challenge, Mr Moser explained. However, central banks are capable of controlling the level of short-term interest rates in a variety of ways. Thus, the SNB can ensure that a discontinuation of the Libor would affect neither its monetary policy stance nor its ability to ensure price stability.

In September this year, Guy Debelle, Deputy governor at the Reserve Bank of Australia, urged market participants to consider what the end of LIBOR might mean for any contracts they have that reference to it. In particular, he asked market participants to consider whether risk-free benchmarks are more appropriate rates for their financial contracts than credit-based benchmarks such as LIBOR and BBSW.

The Bank of England has earlier this year announced that the Working Group on Sterling Risk-Free Reference, a group the Bank set up in 2015 to assist it in developing sterling RFRs, had chosen the Sterling Overnight Index Average (SONIA) as its preferred near risk-free interest rate benchmark for use in sterling derivatives and relevant financial contracts. The Bank is currently seeking to promote SONIA’s use as an alternative to sterling LIBOR.

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