FINMA publishes updated guidance on LIBOR transition

Abstract

Today, the Swiss Financial Market Supervisory Authority FINMA (FINMA) published its new guidance (FINMA Guidance 03/2021) on the transition from the London Interbank Offered Rate (LIBOR) to the Alternative Reference Rates (ARRs).

In today’s Guidance 03/2021 on LIBOR transition, FINMA highlighted the following points:

  • A number of tools exist for managing the LIBOR transition.
  • The majority of supervised institutions have adhered to the milestones set-out in FINMA’s roadmap published in December 2020. However, LIBOR-based contracts without robust fallback clauses with a volume of around CHF 40 billion still remain outstanding.
  • There is a specific lack of transition in the context of syndicated loans. FINMA supports the recommendations of the National Working Group on Swiss Franc Reference Rates (NWG), including the switch from CHF LIBOR to SARON, and the use of the Rate Switch Amendment Agreement published by the NWG and expects them to be implemented as a matter of urgency.
  • Where the publication of a synthetic LIBOR is expected, this will only apply to contracts that are impossible or impractical to modify on time («tough legacy»).
  • For USD LIBOR where the short (interim) continuation of LIBOR beyond 2021 has been announced, FINMA reiterated that (i) the global strategy is to stop issuing new USD LIBOR contracts by end-2021 at the latest, and (ii) FINMA’s milestone «new contracts in general based on ARR» also applies to USD. Supervised institutions should refrain from entering into new contracts linked to USD LIBOR apart from strictly limited, justified and documented exceptions.
  • All financial market participants must press ahead with their preparations for transitioning from LIBOR as a matter of the highest priority.

FINMA pointed out that it will consider the disregard of the required cessation of new LIBOR-based business transactions (except in strictly limited, justified and documented exceptional cases) in the second half of 2021 as a violation of the supervisory requirements with regard to adequate risk management. Where necessary, it will take institution-specific measures to mitigate the risks of inadequate preparation for the LIBOR transition.

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