Swiss FINMA publishes LIBOR transition roadmap
Switzerland’s Financial Market Supervisory Authority (FINMA) today published a transition roadmap for LIBOR. The regulator recommends that the affected supervised institutions follow this map in order to be prepared for a discontinuation of LIBOR in various currencies.
- By 25 January 2021, the affected supervised institutions should have signed the ISDA 2020 IBOR Fallbacks Protocol.
- By 31 January 2021, there should be no new transactions based on CHF or EUR LIBOR that mature after end-2021 and do not contain robust fallback clauses. Where possible, the same objective should also be aimed at for new transactions based on GBP, JPY or USD LIBOR.
Lenders should be in a position to grant loans that are not based on CHF, EUR, GBP, JPY or USD LIBOR. This can be achieved by giving borrowers the possibility to choose another rate (fixed interest and/or an ARR such as SARON).
- By 31 March 2021, based on a full evaluation of their inventory of existing CHF and EUR LIBOR contracts, the affected supervised institutions should have determined which contracts and what volume are potentially “tough legacy” as they mature after 2021 and do not contain robust fallback clauses. They should have formulated detailed project plans with steps to be taken and progress monitoring in order to reduce this volume of “tough legacy” contracts to a minimum by end-2021.
To achieve this it is recommended that at least initial contact is made with the counterparties of potential “tough legacy” contracts by 31 March 2021 at the latest, so that the process of renegotiation or inserting robust fallback clauses can be launched. This applies for all product types, i.e. not just loans and derivatives. Other solutions (such as a premature termination or sale) are also possible in order to reduce the volume.
This objective also applies for the 1W and 2M tenors of the USD LIBOR as well as those tenors of the GBP and JPY LIBOR for which the FCA has indicated that there will be no synthetic continuation.
In relation to the remaining tenors of LIBOR in GBP, JPY and USD, the affected supervised institutions should nevertheless consider agreeing with their counterparties on a conversion of those contracts to ARRs.
- By 30 June 2021, the affected supervised institutions should have implemented the system and process changes necessary to enable transition to ARR and the application of fallback rates. By implementing the plans set out above for the reduction of “tough legacy” and in particular by considering the progress of negotiations already conducted with the counterparties or other solutions that are already in place, it should be clear whether the objective of reducing the volume of “tough legacy” contracts in CHF and EUR LIBOR and the discontinued GBP and JPY LIBOR tenors, as well as the 1W and 2M tenors of USD LIBOR, to a minimum is achievable.
For all contracts for which no solution is forthcoming, a risk assessment should be available per contract or product and specific measures should be taken to mitigate these risks. Particularly relevant questions include how likely a legal dispute is, how the case might play out in court, and what consequences there are for the bank’s internal valuation of contracts.
- By 31 December 2021, all relevant systems and processes should already be able to function without reliance on LIBOR. All new transactions with variable interest in CHF, EUR, GBP, JPY and USD13 should be based on ARR.
FINMA will continue to closely monitor the development of the contract volume linked to LIBOR in 2021. In particular, the progress made by the most affected supervised institutions towards minimising the impact of LIBOR replacement will be assessed.
Let’s recall that, on 18 November 20201 the ICE Benchmark Administration (IBA) as the administrator of LIBOR announced it will consult on its intention to cease the publication of LIBOR in Swiss francs (CHF), euros (EUR), British pounds (GBP) and Japanese yen (JPY) at end-2021.
Regarding the USD LIBOR, on 30 November, 2020 IBA announced that it will consult on its intention to cease the publication of the 1-week (1W) and 2-month (2M) tenors at end-2021 and of the remaining USD LIBOR tenors at the end of June 2023.