SARON® As The Future CHF-Alternative To LIBOR

At the end of July 2017, the UK Financial Conduct Authority (FCA) announced to persuade the panel banks no longer than the end of 2021 to submit the rates for the London Interbank Offered Rate (LIBOR). This announcement from the regulator of the key international interest rate highlighted the dwindling trust in LIBOR and proposed an orderly transition to alternative reference interest rates. This now assumes a new urgency in the search for a suitable follow-up solution

Reform process advancing worldwide

In Switzerland, a national working group on the topic of CHF reference interest rates was set up back in 2013. Similar working groups have been formed for other LIBOR currencies, such as the USD, GBP and JPY. Their main task is to assess alternative solutions for existing reference rates. The working group in Switzerland has already analyzed and evaluated various approaches and benchmarks. Its findings from the last four years as well as an outlook on further actions were presented on Friday, 22 September 2017, to the roughly 250 participants of the joint event staged by SIX Swiss Exchange and the SFAA Swiss Bond Commission in Zurich.

• First of all, Dewet Moser, an Alternate Member of the SNB's Governing Board and initiator of the national working group, provided an update on the internationally coordinated reform process and the significance of the reference interest rates from the central bank's perspective.
• Darrell Duffie, Professor of Finance at Stanford University and member of the scientific council of the Swiss Finance Institute, then explained why LIBOR had to be replaced and what role Switzerland could play in the replacement process.
• Martin Bardenhewer, co-chairman of the national working group, outlined the working group's developments since its foundation, the factors underlying the focus on SARON and the steps to be taken now.

All presentations are available as webcasts and PDF-downloads.

Convincing arguments in favor of SARON

The Swiss average overnight rate, or SARON in short, is a Swiss stock exchange index that was launched in 2009 in conjunction with the SNB as an alternative reference interest rate for the CHF market. It is based on actual market transactions and prices in the Swiss repo market and thus on secured assets. The unsecured counterpart in the Swiss money market is TOIS-fixing. Like LIBOR, TOIS-fixing is calculated based on reports from banks. For this purpose, the panel banks determines the rates at which they can borrow money from other institutions on an unsecured basis. Both in Switzerland and abroad, unsecured transactions have become less common. This makes the determination of the LIBOR and the TOIS-fixing in comparison to the transaction-based SARON not sustainable. A first measure will be taken therefore in the Swiss money market at the end of 2017, when the TOIS-fixing will be replaced by SARON.