European Commission implementing Regulation (EU) 2021/1847 published in Official Journal of the European Union an EU Regulation on the designation of a statutory replacement for certain settings of CHF LIBOR

In the Official Journal of the European Union there has been published a new Regulation on the designation of a statutory replacement for certain settings of CHF LIBOR ("Regulation").  

By this Regulation, the European Commission established the replacement rate for CHF LIBOR for 1, 3, 6 and 12 months, for any contract in force using CHF LIBOR as reference rate, and also for derivative instruments agreements. The replacement shall be realized by operation of law, automatically, without any amendment to the contracts concluded by the parties. Therefore, starting from 1 January 2022 all agreements concluded by banks (savings accounts, mortgages and loans, including consumer credit agreements and small business loans, governed by the laws of one of the Member States that do not contain fall-back provisions or suitable fall-back provisions) and derivative instruments agreements with maturity after 1 January 2022 shall replace their LIBOR reference rate with compounded rate of SARON.

SARON (Swiss Average Rate Overnight) represents the overnight interest rate of the secured money market for the Swiss franc (CHF). SARON is based on transactions and quotes posted in the Swiss repo market. Based on data from the secured money market, SARON can be used for different financial market instruments but it is particularly suitable for secured loans due to the negligible counterparty and liquidity risks. Compounded SARON is a backward-looking rate meaning that the interest rate over a given period is only known at the end of that period.

There is a difference in value between CHF LIBOR and SARON Compound Rate. In order to reflect such difference and minimize the economic impact of a replacement, a fixed adjustment spread will be added to SARON Compound Rate for each of the CHF LIBOR tenors it replaces. That fixed adjustment spread shall be equivalent to the spread published for each relevant tenor and calculated on 5 March 2021 as a historical median spread between the CHF LIBOR concerned and the respective SARON compound over a five-year lookback period for each particular term.

The replacement rates for CHF LIBOR shall be designated in accordance with the following rules:

(a) 1-month CHF LIBOR is replaced by 1-month SARON compound Rate, as observed over the 1-month period preceding the interest period;

(b) 3-month CHF LIBOR is replaced by 3-month SARON Compound Rate, as observed over the 3-month period preceding the interest period;

(c) 6-month CHF LIBOR is replaced by 3-month SARON Compound Rate, as observed over the 3-month period preceding the interest period;

(d) 12-month CHF LIBOR is replaced by 3-month SARON Compound Rate, as observed over the 3-month period preceding the interest period.

The replacement rates for CHF LIBOR shall be designated in accordance with the following table:

 
The Regulation is directly applicable in all EU member states.