The Libor rate will soon be phased out and needs to be replaced. The Swiss regulator is demanding proof of the country’s banking industry that it is ready for the change.

Swiss banks have time until April to show how they will adapt to the change in target rate due in 2021. The Swiss banking regulator Finma in mid-January sent a letter to the banks, where it listed the potential problems. finews.com has seen the letter.

One of the questions they need to answer concerns the volume of products that are linked to the Libor.

U.K. Precedent

The biggest risks associated with the change away from the Libor are linked to the legal questions arising from the valuation of financial instruments and the operative measures necessary for the change. Finma told banks they urgently needed to take steps to diffuse such risks.

The intervention by Finma comes after a similar move by the U.K.’s FCA. British banks had received a letter already in September. The Swiss central bank also has set up a working group that is looking into the specific problems that arise through the change.

Reputational Concerns

The Libor had its reputation shot to tatters after a scandal emerged that traders at a string of major banks had manipulated the rate to their advantage. UBS for one was forced to pay a billion-franc-fine to make amends.

The abolition of the Libor as a rate of reference affects a great number of products in the financial industry. In Switzerland, the Libor is due to be replaced by the Saron (Swiss Average Overnight), an average rate published daily. While the Libor is based on what bankers’ register, the Saron will be based on real interest paid. The big banks will have to fork out as much as 400 million francs to adjust their system to the Saron.

Mortgage Contracts

Contracts for mortgages and other financial products with a duration that extends beyond 2021 will have to be adjusted. If the banks fail to do so they risk legal challenges, for instance in respect to the correct level of flexible mortgage rates.

The change-over of the IT systems will also cost a significant amount and Finma has demanded explicitly that banks keep the resources in hand for this change. The regulator expects certain problems to arise through the coordination with subcontractors.

The banks now have until April 30 to fill in a form. Finma will evaluate the responses and consider appropriate measures to counter potential problems arising from the change.