The Swiss Financial Market Supervisory Authority FINMA published guidance (02/2021) on the derivative trading obligations and the London Inter-bank Offered Rate (LIBOR) replacement. Earlier, in the March 2020 Guidance (01/2020), FINMA had made clear that amendments to the existing derivative contracts solely to address the reference rate reforms would not trigger margin obligations. In this subsequent guidance, FINMA sets out additional clarifications in the course of the changeover to the new reference interest rates at the end of 2021. FINMA states that adjustments to existing derivative contracts solely to address the reference rate reforms are not considered as newly concluded derivative contracts and, therefore, do not trigger either clearing or margin obligations.
However, the following will be considered as adjustments:
- Replacement, extension, or other modification to an existing derivative contract that replaces the operative benchmark rate; replacements can also be made as part of portfolio compression
- Introduction of a fallback clause in relation to the operative benchmark rate for a derivative contract
- Technical adaptations required to implement the aforementioned adjustments
The adjustments may, in particular, modify the maturity or effect a change in the actual notional amount of the existing derivative contract, but they must be necessary for the replacement of the reference rate and abide by the market practices applicable in each case for the new reference rates. This guidance relates solely to the regulatory derivative obligations under the Financial Market Infrastructure Act or FMIA. In providing these clarifications, FINMA is also responding to international developments and contributing to the timely replacement of LIBOR. FINMA appeals to market participants to continue to give top priority to preparations for LIBOR replacement.
Keywords: Europe, Switzerland, Banking, LIBOR, Benchmark Reforms, Financial Market Infrastructures Act, Derivatives, Risk-Free Rates, Fallback Clause, FINMA
Previous ArticleBaFin Provides Operational Relief to Small Institutions in Germany
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.