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IBOR Transition Documentation for Swiss Master Agreement for Over-the-Counter (OTC-)Derivatives

IBOR Transition Documentation for Swiss Master Agreement for Over-the-Counter (OTC-)Derivatives

The Swiss Banking Association (SBA) published new documentation for the Swiss Master Agreement for OTC Derivatives (SMA) that will facilitate the IBOR transition and enable trading of derivatives referencing Euro OverNight Index Average (EONIA) and so called risk free rates such as SARON.

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.

The documents are available free of charge following the link below. Language versions in German, French and Italian as well as a FAQ will be available soon.