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    EC Consults on Designation of Replacement Rate for CHF LIBOR

    March 23, 2021

    EC is consulting on the possible designation of a statutory replacement rate for the Swiss Franc London Inter-bank Offered Rate (CHF LIBOR) benchmark in mortgage credit agreements. As the CHF LIBOR benchmark will cease to be published in December 2021, EC is consulting market participants to assess whether there is a need to designate a successor to LIBOR CHF in retail mortgages and in small business loans. The aim is to gather the views of a wide range of market players, particularly consumers and consumer associations, on the appropriate replacement rate for CHF LIBOR. The comment period for this consultation ends on May 18, 2021.

    The present consultation is aimed to assess the suitability of designating a statutory replacement for certain settings of CHF LIBOR to products such as savings accounts, mortgages and loans, including consumer credit agreements and small business loans, concluded prior to the entry into application of the EU Benchmarks Regulation, on January 01, 2018, and governed by the laws of one of the EU member states. In designating a replacement for a benchmark, pursuant to Article 23b(8) of the EU Benchmarks Regulation, EC is required to consult the market and to take into account the recommendations on the replacement rate; on the corresponding conforming changes; and on the spread adjustment made by the central bank responsible for the currency area in which the relevant benchmark is being wound down, or by the alternative reference rate working group operating under the auspices of the public authorities or the central bank (in this case the Swiss Central Bank and the Swiss National Working Group on Swiss Franc Reference Rates (Swiss NWG).

    As stated in the 2020 progress report of FSB on reforming major interest rate benchmarks, in October 2017, the Swiss NWG recommended the Swiss Average Rate Overnight (SARON) as the alternative for CHF LIBOR. Such a rate should then be used as a fallback for references to CHF LIBOR in legacy contracts. SARON is an overnight benchmark administered by Swiss Exchange Financial Information AG (SIX) in Switzerland and already endorsed for use in EU and, therefore, listed in the ESMA register. As indicated in the 2020 progress report of FSB, after extensive market consultation, ISDA proposed, for the adjustment spread, a historical median approach over a five-year lookback period. The Swiss recommendation, as included in the FSB progress report, further clarified that fallback language proposed for mortgages can also be used for bilateral loans to corporates or small and medium enterprises. SIX, the administrator of SARON, launched the SARON Compound Rates in March 2020. The SARON Compound Rates are standardized term rates published each business day—for example, the “SARON 3 months Compound Rate.” Furthermore, SIX launched, in September, a free-to-use web-based calculator, which can be used by retail clients to verify the compounded SARON charged by the lender. The present consultation constitutes a procedural requirement for EC before adopting an implementing act to designate such a replacement pursuant to Article 23b, paragraph 8, of the Benchmark Regulation, as recently amended. 

    EC recently proposed changes to EU rules on financial benchmarks, which empower it to designate a replacement benchmark when an index is to be deleted. The aim is to avoid any disruption to the economy or damage to the financial stability of EU. Benchmarks, such as CHF LIBOR, are an integral part of financial markets: these indices are used to value financial instruments and contracts (including household mortgages) or to measure the performance of a fund investment.


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    Comment Due Date: May 18, 2021

    Keywords: Europe, EU, Banking, Interest Rate Benchmarks, Benchmarks Regulation, SARON, Swiss NWG, Fallback Provisions, CHF LIBOR, LIBOR, EC

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