IBOR Transition Documentation for Swiss Master Agreement for Over-the-Counter (OTC-)Derivatives
The expected end of LIBOR, i.e. end of 2021, is approaching. Alternative rates, so-called risk free rates, have been established for various currencies as new standard market interest; e.g., SARON will replace CHF LIBOR. Open derivative transactions referencing LIBOR that mature after LIBOR’s end (Legacy Transactions) need to be transitioned to risk free rates. Such transition can take place e.g. by early renegotiation of the relevant transaction or by agreeing on robust fallback clauses that facilitate the transition once LIBOR is discontinued. FINMA recommended both approaches in its Guidance 08/2020 on LIBOR replacement for derivatives.
To support and facilitate the transition from LIBOR to risk free rates SBA has developed and published today two documents, the Benchmark Amendment Agreement and the Supplemental Interest Rates, Risk Free Rates and EONIA Definitions (Supplemental Definitions). By signing the Benchmark Amendment Agreement, counterparties incorporate for their open Legacy Transactions under the SMA the international standard fallback clauses of the IBOR Fallbacks Protocol of the International Swaps and Derivatives Association (ISDA).
The same fallback clauses will be incorporated into new LIBOR transactions by referencing the Supplemental Definitions in the respective transactional documentation. In addition, the Supplemental Definitions provide the necessary definitions to be able to enter into transactions referencing EONIA and risk free rates.
Thus, counterparties that enter into the Benchmark Amendment Agreement ensure that their existing LIBOR transactions will be transitioned to risk free rates in accordance with the international standards as well as FINMAs recommendation. The same is ensured for new transactions by referencing the Supplemental Definitions in the respective transaction documentation. The SBA recommends to all market participants to use these new documents going forward.