The Federal Act on Financial Market Infrastructure has introduced a new regulatory framework for over-the-counter derivatives transactions. In line with recognised international standards, the Federal Council and the Swiss Financial Market Supervisory Authority have published draft versions of their implementing rules which regulate the clearing obligation in detail and define the criteria according to which derivatives are subject to the clearing obligation.
The Federal Supreme Court recently rendered its long-awaited decision on a withholding tax reimbursement claim related to total return swaps. The decision is of great relevance to Swiss and international derivatives markets. There are concerns that underlying values generating returns subject to Swiss withholding tax will no longer be included in total return swap structures.
In December the Swiss National Bank announced the introduction of negative interest rates on sight deposits by financial institutions. After the franc's peg to the euro was abandoned, it then lowered its three-month London Interbank Offered Rate (LIBOR) to -0.75% and moved the target range for the three-month Swiss franc LIBOR down to -1.25% and -0.25%. This update discusses the potential effect on hedging transactions.
The Swiss Bankers Association and Swiss Structured Products Association have jointly issued the new Guidelines on Informing Investors about Structured Products. The new guidelines have been recognised by the Swiss Financial Market Supervisory Authority as a minimum standard for derivatives – or 'structured products' as they are known in Switzerland.
The existing rules governing the asset management of pension funds, including the use of derivative instruments, are set out in the Federal Act on Occupational Benefit Plans and the Federal Ordinance on Occupational Benefit Plans. In the future, pension funds incorporated in Switzerland will also be subject to the new derivatives regulations pursuant to the proposed new Financial Market Infrastructure Act.
The Federal Council has presented a first bill for a new Financial Market Infrastructure Act that will implement the Financial Stability Board's recommendations on over-the-counter derivatives trading. The council will have to determine whether the new rules will also apply to derivatives transactions that are outstanding at the time the new law enters into force.
Except for some regulated entities, market participants are in general free to assume unlimited counterparty risk at their discretion, whether under over-the-counter derivative transactions or otherwise. Collateralisation is a useful means of significantly reducing counterparty risk, although it cannot fully eliminate any remaining credit risks relating to the counterparty.
Warrants, certificates and other types of derivative instrument suitable for mass trading may be listed on the Swiss Exchange (SWX). The SWX provides a substantial marketplace in such derivatives, especially since the Directive on Listing Derivatives entered into force, introducing a new framework for the listing of derivatives and abolishing the minimum free-float requirements.