Switzerland’s FINMA urges supervised institutions to address challenges of LIBOR replacement

Maria Nikolova

FINMA has identified three main risk areas related to LIBOR replacement – legal risks, valuation risks and risks in relation to operational readiness.

Development of Financial Passport across all sectors

The Swiss Financial Market Supervisory Authority (FINMA) has earlier today published guidance detailing the risks of a potential replacement of LIBOR.

The Swiss regulator reminds the public that the UK’s Financial Conduct Authority (FCA) has announced that it no longer intends to support the LIBOR benchmark interest rate from 2021 onwards. Alternative reference rates are therefore currently being discussed around the world – including in Switzerland. As alternatives to LIBOR, reference interest rates are currently being discussed around the world at national level.

In Switzerland too, a substantial contract volume – mainly comprised of mortgages and derivative contracts – is tied to LIBOR. The National Working Group on Swiss Franc Reference Rates (NWG) is the key forum for considering proposals to reform reference interest rates and replace LIBOR. The NWG has already established an important basis for replacing the Swiss franc LIBOR with the introduction of the Swiss Average Rate Overnight (SARON).

However, there are uncertainties and risks in Switzerland in connection with a potential replacement of LIBOR. FINMA has identified three main risk areas, in connection with the possible replacement of LIBOR. These are legal risks, valuation risks and risks in relation to operational readiness. Regarding legal risks, FINMA says that there are numerous contracts for financial products that reference LIBOR have a final maturity date after 2021. Amending these contracts to include practicable fallback clauses could help minimise potential legal risks. Active management of exposures in the context of LIBOR-based contracts and preparing for a transition to contracts based on alternative reference rates are important steps. But a transition of this kind requires that the alternative reference rates are based on a sufficient trading volume.

FINMA advises that, in order to ensure a seamless transition to equivalent products which are based on alternative reference rates, the supervised institutions should adopt a clear communication strategy towards their customers and counterparties. This will provide transparency and help reduce the likelihood of legal conflicts.

FINMA also notes that the high amount of receivables and payables in the area of derivatives and lending contracts that reference LIBOR result in valuation and basis risks. The alternative reference rates proposed in the context of national efforts are based solely on overnight rates, for example.

It is not currently possible to reliably predict the impact of LIBOR replacement on the valuation of LIBOR-based contracts and on corresponding hedge transactions. However, a quantitative analysis will reduce this uncertainty.

Another key factor in a possible replacement of LIBOR is ensuring from an operational point of view that products that are based on new reference rates can be used in practice. A timely assessment of operational readiness will help achieve a smoother transition to alternative reference rates. In this context, proper valuation, pricing and adequate risk management with regard to alternative reference rates are seen as key.

FINMA recommends that the supervised institutions address the challenges of a potential replacement of LIBOR in due course.

FINMA will pursue its supervisory activities in two ways. It will discuss the issue of the risks posed by a potential replacement of LIBOR in general with the supervised institutions and continue to support the NWG in its work. Also, from January 2019 onwards, FINMA will also contact supervised institutions that are particularly affected individually and in a risk-oriented manner. In particular, it will review the adequacy with which risks associated with a possible replacement of LIBOR are identified, limited and monitored.

In addition, FINMA will address the potential replacement of LIBOR within the Swiss Solvency Test (SST).

Read this next

Metaverse Gaming NFT

Orbs Ecosystem Developers Launch TON Access To The Public

The TON Access service provides reliable and decentralized RPC nodes to decentralized applications (dApps).

Digital Assets

Bybit celebrates listing of Arbitrum (ARB) token with $400K prize pool

“At Bybit, we recognize our responsibility to provide forward-thinking opportunities for our users and lead the way in supporting the proliferation of cryptocurrency and blockchain technology.”

Digital Assets

StormGain launches StormGain DEX, a non-custodial alternative to its centralized exchange

StormGain DEX becomes accessible once a user connects their own non-custodial wallet and trades directly, with all orders settled on-chain.

Retail FX

OANDA launches CFDs on UK and US stocks for retail clients in emerging markets

“Interest in CFDs has been surging globally as they offer traders and investors the opportunity to profit from price changes without owning the underlying assets. CFDs give exposure to markets that are trending downward as well as upward, allowing traders to take positions even when volatility is high.”

Institutional FX

Bitpanda’s stocks, commodities, crypto now available to banks partnered with Visa

“We are excited to welcome Bitpanda to Visa’s Fintech Partner Connect Program. The partnership will assist banks to integrate an asset trading platform for crypto and other assets within their banking app.”

Industry News

Exchanges agree on global framework for designating stocks and shares as green

“Investors should be able to have greater visibility of issuers who have green activities in a way that is rigorous and that counters greenwashing. Exchanges strive to bring clarity, consistency, and rigor to the concept of green and to counter greenwashing.”

Institutional FX

90% UK participants worry of trade failures, penalties, inefficiencies arising from US move to T+1

“By embracing automation and digital transformation, firms can enhance their middle- and back-office systems and gain a competitive edge”, said Brian Collings, CEO, Torstone Technology.

Industry News

Lindsay Lohan, Jake Paul, Soulja Boy, Kendra Lust, Ne-Yo, Akon charged by SEC in crypto fraud case

“Sun paid celebrities with millions of social media followers to tout the unregistered offerings, while specifically directing that they not disclose their compensation. This is the very conduct that the federal securities laws were designed to protect against regardless of the labels Sun and others used.”

Institutional FX

State Street to acquire CF Global Trading to enhance global outsourced trading service

“Our team has worked with our clients for 20+ years to develop a global, multi asset class execution platform with a focus on accessing liquidity, improving workflows and reducing costs.”