LIBOR replacement

The Libor (London Interbank Offered Rate) is an indispensable instrument for the entire financial sector, the one that gives direction. Published daily in London since 1986, this reference, on which $300 trillion of financial contracts are indexed, will disappear at the end of 2021, along with the other interbank rates (Ibor).

It will be replaced by SOFR (Secured Overnight Financing rate) in the US, SONIA (Sterling Overnight Index Exchange) in the UK, TONA (Tokyo Overnight Average rate) in Japan, ESTER (EURO Short-term rate) in Europe, and SARON (Swiss Average Rate Overnight) in Switzerland.

According to my reading of various opinions on the matter, these new rates are considered to be more transparent and robust.

LIBOR has lost its credibility after the revelation in 2011 of the deliberate manipulations by banks. From my point of view, one of the main weaknesses of LIBOR is that it is calculated on the basis of banks’ estimates of the rates at which they could borrow on the interbank market. This method made large-scale manipulations possible.
I do not consider the new model and rates as miracle solutions. Nevertheless, I believe the substantial involvement of regulators will ensure a more reliable reference for the markets.
Transition to this model is no doubt will be very pricey and very complicated especially for banks. Among the main challenges, I must site the identification and management of their existing instruments benchmarked to former rates and the conversion of existing contracts containing  those rates , so called “tough legacy,”. Also the last but not least, possible shortcomings of new rates.
Swiss financial industry has undergone very significant changes and difficult times since 2008. I believe SARON can offer the sector an opportunity to demonstrate its competitiveness and savoir-faire.