FINMA published a timetable for the replacement of London Inter-bank Offered Rate (LIBOR). The FINMA timetable is based on the roadmap FSB had published in October 2020. FINMA recommends that the concerned supervised institutions should comply with the milestones it has set, to prepare themselves before LIBOR in various currencies ceases by the end of 2021. Thus, there remains only a short period of time until the proposed discontinuation of many LIBOR rates and their replacement by alternative reference rates such as SARON.
FINMA still considers the end of LIBOR as one of the principal operational risks facing its supervised institutions. Therefore, FINMA recommends that the supervised institutions should follow the following transition roadmap to be fully prepared for a discontinuation of LIBOR in CHF, EUR, GBP, JPY, and USD by the end of 2021:
- By January 25, 2021, the affected supervised institutions should have signed the ISDA 2020 IBOR Fallbacks Protocol.
- By January 31, 2021, there should be no new transactions based on CHF or EUR LIBOR that mature after the end of 2021 and do not contain robust fallback clauses across all product types. Where possible, the same objective should also be aimed at for new transactions based on GBP, JPY, or USD LIBOR. Also, the affected supervised institutions should be in a position to grant loans that are not based on CHF, EUR, GBP, JPY, or USD LIBOR.
- By March 31, 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 to reduce this volume of tough legacy contracts to a minimum by the end of 2021.
- By June 30, 2021, the affected supervised institutions should have implemented the system and process changes necessary to enable transition to alternative reference rates and the application of fallback rates. By implementing these plans 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 to a minimum is achievable.
- By December 31, 2021, all relevant systems and processes should already be able to function without reliance on LIBOR. Also, all new transactions with variable interest in CHF, EUR, GBP, JPY, and USD should be based on alternative reference rates.
Keywords: Europe, Switzerland, Banking, LIBOR Transition, Alternative Reference Rates, Benchmark Reforms, Roadmap, FINMA
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