In further Guidance (03/2021)
on the transition away from the LIBOR reference rate published today, the Swiss Financial Market Supervisory Authority FINMA provides an update on the progress of the transition process. FINMA considers the banks to be essentially on track with the roadmap. At the same time, some product categories are still trailing behind. This is particularly true for syndicated loans. FINMA sets out some best practices for successfully transitioning away from LIBOR. It reiterates its call on the market participants to continue to accord top priority to the necessary preparations.
This year, to allow it to carry out risk-based supervision, FINMA required the top 20 banks and securities firms most impacted by the LIBOR transition in terms of volume to complete a monthly self-assessment. The data submitted up to 31 July 2021 show that the majority of supervised institutions have adhered to the milestones of the roadmap set out in Guidance 10/2020 up to now. For instance, the banks have reduced the number of contracts without robust fallback clauses for the period after the cessation of LIBOR by almost 90% since the beginning of 2020. Nevertheless, such type of contracts with a volume of around CHF 40 billion still remained on the banks’ books at the end of July, the majority of those in Swiss francs. Time is now running out for bringing outstanding negotiations with the counterparties to a successful conclusion as quickly as possible and before end-2021 at the latest.
FINMA sees the greatest need for action in the area of syndicated loans, i.e. loans where at least two lenders work together to provide funds. In this area, the number of contracts without robust fallback clauses has only been reduced by 28% since the start of 2021. FINMA is therefore repeating its appeal to the banks to actively contact the syndicate banks and borrowers in order to amend the relevant credit agreements and achieve legal certainty for the future.
Best practices for LIBOR transition
To counteract inadequate preparations by the financial institutions, FINMA set out clear expectations and concrete milestones in its Guidance 10/2020. FINMA is calling once again on all financial market participants to press ahead with their preparations for the LIBOR transition as a matter of the highest priority. To this end, in its Guidance 03/2021 published today, FINMA has set out best practices to help the institutions overcome the residual risks. FINMA will continue to closely monitor the LIBOR transition. If banks continue to enter into new business transactions referencing LIBOR except in strictly limited and documented exceptional cases, this can be regarded as a violation of the supervisory requirements with regard to adequate risk management. If FINMA discovers that certain institutions are insufficiently prepared for the LIBOR transition, it will take institution-specific measures.