Switzerland’s FINMA warns of risks stemming from transitioning away from LIBOR

Maria Nikolova

Inadequate preparation for the replacement of LIBOR interest rates, including Swiss franc LIBOR, represents a key risk, according to the Swiss regulator.

The Swiss Financial Market Supervisory Authority (FINMA) has earlier today published its Risk Monitor. The report provides an overview of what FINMA believes are the most important risks currently facing supervised institutions and describes the resulting focus of its supervisory activity. Among the main risks, according to the regulator, are those related to the discontinuation of LIBOR.

LIBOR benchmark interest rates continue to be widely used in financial instruments, FINMA notes. Inadequate preparation for the replacement of LIBOR interest rates (envisaged by the end of 2021), including Swiss franc LIBOR, hence represents a key risk.

FINMA has identified three specific risks in connection with the replacement of LIBOR interest rates: legal risk, valuation risk and risks in connection with operational readiness.

  • The legal risks arise in particular from adjustments that may be needed to any agreements or contracts based on LIBOR interest rates which expire after the date on which these rates are replaced, as well as from potential legal disputes with clients that may ensue as a result.
  • Valuation risks stem from the changeover from LIBOR interest rates to alternative interest rates and the associated yield curves combined with the high volumes in the derivatives and credit area.
  • Operational readiness is a further important issue. Put otherwise, systems and processes must be able to deal with the entire end-to-end value chain for all products that rely on alternative benchmark interest rates.

The consequences of LIBOR replacement without proper preparation in the marketplace could be far-reaching. Discussions with banks and auditors have shown that the discontinuation of LIBOR will have major impact on supervised institutions due to the high transaction volumes involved and the wide-ranging technical interlinkages.

Moreover, analysis based on institutions’ FINMA-mandated self-assessments show that the majority of banks are still well behind schedule in their efforts to prepare for the replacement of LIBOR. Last but not least, despite some progress, there has been limited adoption of alternative benchmark interest rates so far.

The smooth shift away from LIBOR remains among the key priorities for UK regulators too. In a recent speech, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the UK Financial Conduct Authority (FCA), outlined the next steps in transitioning away from LIBOR.

At this stage, Mr Latter admitted, the FCA does not know precisely how the LIBOR ‘end-game’ will play out. It may be that for all 35 LIBOR currency-tenor pairs a final cessation date can be announced comfortably in advance, and transition away from each of these rates can be substantially completed in an orderly manner before then.

The FCA has warned that firms must not assume LIBOR will continue beyond end-2021 even if transition is not substantially complete.

Read this next

Retail FX

Banxso announces 8.7% interest rate on deposits in South Africa

“With Banxso, they can enjoy the benefits of both worlds – earning competitive interest and having the freedom to trade, all within the same platform.”

Industry News

FINRA to publish transaction details in U.S. Treasury securities

“Consistent with our longstanding practice, FINRA is introducing greater transparency in a calibrated and careful manner, benefiting liquidity and resilience in this critical market while also mitigating potential information leakage concerns.”

Institutional FX

OpenYield launches “cheap and easy” fixed income trading for brokers

“We’re on a mission to make bonds cheap and easy to trade, and are excited about the opportunity to build generational capital markets infrastructure.”

Digital Assets

Sumsub and Mercuryo publish a guide for VASPs: “Mastering Travel Rule Compliance”

“At Sumsub, we’ve concentrated our efforts on filling the gap in understanding the complexity of Travel Rule regulation and helping organizations find the best solution to stay safe and compliant while minimizing costs and avoiding potential risks of non-compliance. This guide we created with Mercuryo, our trusted partner, is the ultimate navigation tool all VASPs can consult.”

Digital Assets

Bitget Wallet Leads with Record Swap Volume & New Crypto Innovations

This week, Bitget Wallet achieved a milestone by surpassing Metamask with a record 388,757 Swap order transactions, securing the global lead. The significant 7-day trading volume, almost 68,000 more than its rival, underscores its liquidity and user trust. This robust activity signals Bitget Wallet’s prominent role and reliability in the dynamic crypto market.

Digital Assets

Embarking on a Digital Currency Journey

Imagine you’ve stumbled upon a treasure map, leading you to untold riches hidden in the vastness of the internet. Instead of gold coins and jewel-encrusted goblets, this treasure comes in the form of digital currencies, the modern-day loot coveted by many.

Reviews

Traders Union Experts Share The Trading Analyst Review For 2024

Navigating options trading in rapidly shifting markets poses a considerable challenge. This is where options trading alert services become invaluable. They aid traders in keeping abreast of evolving opportunities and market trends. In this assessment, Traders Union experts scrutinize The Trading Analyst alert service to ascertain its efficacy. 

Digital Assets

BlockDAG’s Presale Achieves $9.9M: Aiming For A 5000-Fold ROI As Cardano’s Price Rises And Fantom Launches Sonic

Explore Cardano’s surge, Sonic’s efficiency, and why BlockDAG’s growth makes it the top crypto choice. A deep dive into the future of blockchain investments.

Digital Assets

US, UK probe $20 billion Tether transfers tied to Russian exchange.

U.S. and UK authorities are investigating the movement of $20 billion in the USD-pegged stablecoin tether (USDT) through Moscow-based exchange Garantex.

<