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
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