LIBOR phaseout: impact on Swiss companies

  • Matthias Degen, Partner |

LIBOR phaseout: What is the impact on Swiss companies?

The LIBOR will be replaced by risk-free reference interest rates by 2021. Swiss companies will have to analyze the impact in order to make a successful transition.

The transition from (L)IBOR to new risk-free reference rates is underway. It is expected to be completed by the end of 2021. It is fair to say that different jurisdictions are moving at different speeds towards alternative reference rates. In the USA, trading with the Secured Overnight Financing Rate (SOFR) started in Q2 2018. In the EU, the Euro Short-Term Rate (ESTER) is expected before 2020. And in Switzerland, a further milestone was reached in October 2018 when EUREX launched 3-month Swiss Average Rate Overnight (SARON) futures.

Uncertainties are inherent in any major change. And the speed with which the IBOR market has been upended has been significant. This gives rise to a range of challenges for both markets and industry. As the move away from IBOR continues, the financial industry must deal with a number of critical areas, including:

  • Liquidity: Alternative RFRs (risk-free reference rates) are not yet supported by sufficient liquidity
  • Term Structure: Alternative RFRs currently have no term structure
  • Differences in methodologies: Certain RFRs are secured and others are unsecured. This may create issues for cross-currency swaps, for instance
  • Fallback approaches: These need to be developed to agree on how to treat legacy contracts in the event that IBORs are permanently discontinued.

In addition to industry-wide challenges, individual institutions may also have to grapple with a number of significant implications across their entire value chain. For instance:

  • IBOR is a forward-looking rate with a range of seven maturities; the proposed RFRs are overnight rates
  • IBOR reflects interbank lending and thus factors in bank credit risks; the proposed RFRs are almost risk-free
  • Inconsistencies exist between the RFRs; SARON and SOFR are secured rates, while ESTER, SONIA and TONAR are unsecured rates, for instance.

As you look to your post-IBOR future, it is critical that you begin preparing now. Assess the likely impact on your value chain and to progress your transition plan: LIBOR awareness workshop and impact assessment

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