UBS is responding to the upcoming Libor replacement by developing new Saron products in the Swiss financial center. Switch from Libor – to Saron-referencing products represents a paradigm shift in the lending and mortgage business.
UBS is launching Saron real estate financing worth more than 25 million francs for the first time as part of a pilot project for selected clients. It plans to launch Saron Mortgage during 2020, UBS announced. Saron stands for Swiss Average Rate Overnight. UBS is working hard on the global introduction of alternative reference rates that will replace Libor (London Interbank Offered Rate) in the coming years, it said. It is planned to offer the first Saron mortgages as an alternative in the course of 2020. More Saron products to follow in 2021.
The Saron is a reference rate for Swiss francs. It is calculated daily on the basis of completed transactions and prices in the Swiss money market and administered by the Swiss stock exchange SIX. In order to obtain a reference interest rate from the daily rates over a term, the so-called "SARON Compound" is used formed. This is calculated on the last day of the interest period from the average of the compounded daily rates and will be used as a reference for a large part of credit products in Swiss francs.
Paradigm shift in lending and mortgage business
The change from Libor – to Saron referencing products represents a paradigm shift in the lending and mortgage business, as the reference rate is now not known until the end of the interest rate period. Nevertheless, according to UBS, the product change will not result in any significant financial changes for customers. Libor and Saron have not diverged much in the past. Analogous to Libor, Saron products are based on a published reference interest rate plus an individually determined margin. In the case of negative reference rates, values lower than 0 are not applied in the calculation of the customer interest rate for either Libor or Saron products.
Since the financial crisis around ten years ago, the number of transactions in the interbank market has declined significantly, especially after fraudulent manipulation of the reference interest rate was uncovered in 2011, involving several banks. The Libor scandal resulted in multi-billion dollar settlements and fines for the banks involved. This shook the credibility of the Libor system.
In 2017, the U.K. Financial Conduct Authority announced that it would change Libor as of 31. December 2021 would no longer support. This accelerated the transition process and market participants began to identify alternative reference rates for a sound and robust financial market. In Switzerland, the National Working Group on Reference Rates in Swiss Francs has adopted the Saron as the successor to the "CHF LIBOR" recommended.