FINMA Issues Supervisory Guidance on LIBOR Transition
The Swiss Financial Market Supervisory Authority (FINMA) issued a supervisory guidance (03/2021) on replacement of the reference interest rate LIBOR. FINMA points out a number of tried and tested approaches to successfully deal with the LIBOR replacement and reinforces that market participants should continue to give the necessary preparations the highest priority. FINMA considers the banks to be largely on track with the roadmap for 2021, but sees the need to catch up in the area of syndicated loans, wherein at least two credit institutions jointly grant a loan. In this area, the proportion of contracts without robust fallback clauses has only been reduced by 28% since the beginning of 2021. Thus, FINMA is reiterating its call to banks to actively approach the syndicate banks and borrowers to adapt the corresponding loan agreements and thus have legal certainty for the future.
The milestones of the roadmap set out in Guidance 10/2021 for 2021 remain relevant for all supervised institutions with outstanding LIBOR-linked contracts. Nevertheless, FINMA has set out the following practices that have proved beneficial in preparing for a successful transition from LIBOR:
- Central project management with rigorous involvement and responsibility of the divisions
- Establishment of approved and detailed plans with regular reporting for winding down legacy contracts without robust fallback clauses
- Active contact with all counterparties of LIBOR contracts (in particular, not waiting for others to take the initiative) to amend the contracts and, where there is no active restructuring of the contracts to the alternative reference rate, legal assessment of the robustness of the fallback clauses in the event of the permanent cessation of LIBOR
- Development of detailed inventory of contracts updated with the status of the negotiations with the counterparties
- Instituting mandatory training for all client advisers on the LIBOR transition and new products in the alternative reference rate
- Development of approved guidelines for stopping LIBOR-based new business transactions and implementing corresponding pre-trade preventive checks
FINMA will continue to monitor the LIBOR transition after 2021. Even if the majority of supervised institutions have adhered to the milestones satisfactorily up to now, further tough legacy contracts should be expected to materialize after end-2021. FINMA will continue to monitor the further winding down of the tough legacy contract volume and potential legal risks for the most impacted banks and securities firms. Post 2021, it will also continue to monitor adherence to the relevant milestones set out in Guidance 10/2020. This means not entering into any new business transactions linked to the LIBOR rates for which new business transactions would still be possible from a technical point of view, but should be avoided from a risk management perspective; this also means observing the regulatory guidelines and expectations of various supervisory authorities (such as the FINMA, the Financial Conduct Authority/Prudential Regulation Authority of UK, the Federal Reserve Bank) and international bodies (Basel Committee on Banking Supervision and the Financial Stability Board).
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Keywords: Europe, Switzerland, Banking, Solvency Risk, Systemic Risk, Counterparty Credit Risk, Large Exposures, Credit Risk, Basel, SNB
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