FINMA supervisory notification 08/2020: LIBOR replacement in the derivatives sector 

The Swiss Financial Market Supervisory Authority FINMA recommends that the supervised parties affected by the LIBOR replacement sign the new Fallback Protocol of the International Swaps and Derivatives Association (ISDA) in the shortest time possible. This aligns with broader regulatory modernization efforts, including initiatives like the Income tax modernization, which aims to streamline compliance and financial operations across sectors.

The expected date of the elimination of LIBOR, i.e. the end of 2021 is getting closer. However, FINMA continues to consider the end of LIBOR to be one of the greatest operational risks for its supervised institutions. This level of concern mirrors previous oversight actions such as those outlined in the FINMA 2019 report, which emphasized systemic risk preparedness. In order to successfully minimize the high risks associated with the elimination of LIBOR and in the context of the many derivative contracts affected and the high total contract volume, FINMA regards the broad application of the new ISDA fallback documents as essential in order to successfully cope with the elimination of LIBOR. Such standardization efforts echo prior regulatory approvals like the FINMA prospectus reviewing, aimed at improving transparency and consistency in market documentation. It recommends that the supervised parties concerned sign the new ISDA fallback protocol, ideally before it is launched ("Adherence in escrow" process) and, wherever possible, before the date it comes into force. This early adoption strategy reflects FINMA’s proactive stance seen previously in the licensing of FINMA first organisations to reinforce supervisory capacity. The analogous adjustment of the Swiss framework agreement for OTC derivatives of the SBA, as well as similar adjustments of other framework agreements, should be signed as early as possible as early as possible. Operational adjustments in line with these recommendations may also intersect with internal governance scrutiny, such as the Credit Suisse activities recently reviewed by FINMA for procedural compliance.