Further details on derivative trading obligations in the course of the LIBOR transition
On 5 July 2021, the Swiss Financial Market Supervisory Authority (FINMA) published a guidance with further clarifications on the replacement of the LIBOR reference rate that will occur by the end of this year. The guidance covers the conditions under which amendments to existing derivative contracts qualify as legacy contracts and are, therefore, exempt from triggering central clearing or bilateral margin obligations.
In a first guidance dated 20 March 2020 (Guidance 01/2020) FINMA outlined that amendments in response to the reference rate reforms should not be subject to clearing obligations even if fallback clauses are introduced. In the course of the ongoing LIBOR transition, however, it has become apparent that further clarifications are required.
The newly published FINMA Guidance 02/2021 highlights the amendments to existing derivative contracts that do not automatically qualify as newly concluded derivative contracts. If such adjustments are solely made to address the reference rate reforms necessary due to the LIBOR replacement, they do not trigger the clearing or margin obligations as concluding new derivative contracts would. The following adjustments are enumerated in the guidance and are, as described therein, exempt from triggering a clearing or margin obligation:
- the replacement, extension or other modification of an existing derivative contract that replaces the operative benchmark rate;
- the introduction of a fallback clause in relation to the operative benchmark rate for a derivative contract;
- technical adaptations required to implement the adjustments outlined above.
If an amendment is necessary for the replacement of the reference rate and is in line with the respective market practices applicable to the new reference rates, the maturity or actual notional amount of the existing contract may be modified as well, without triggering a clearing or margin obligation.
The guidance only covers the regulatory obligations for derivative contracts under the Financial Market Infrastructure Act (FMIA).
For more information see: FINMA Guidance 02/2021 (5 July 2021).
Sandra ZyssetAssociate Attorney at law
Sandra Zysset, attorney at law, is an associate in our Zurich office. She is specialised in finance transactions including acquisition finance and transportation finance, financial restructurings as well as regulatory matters.T: +41434346700 E: [email protected]