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).
Related Links
Keywords: Europe, Switzerland, Banking, Solvency Risk, Systemic Risk, Counterparty Credit Risk, Large Exposures, Credit Risk, Basel, SNB
Previous Article
OJK Issues Regulatory Updates for Financial Sector EntitiesRelated Articles
EBA Launches Stress Tests for Banks, Issues Other Updates
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
