State of Play

The revision of the Liquidity Ordinance enters into force on 1 July 2021. It assures national transposition of the Basel III standards. Foreign banks active in trade and commodity trade finance have approached the AFBS Secretariat with the concern regarding enhanced liquidity requirements imposed by the revised Ordinance and the unlevel playing field vis-a-vis the banks domiciled in the EU.

The Net Stable Funding Ratio NSFR requires banks to reinforce their resilience by increased liquidity coverage of financing business. It imposes long term (minimum twelve months) coverage of a part of banks' exposure, including the short-term ones.

That requirement particularly impacts banks active exclusively in the trade and commodity trade financing. Such transactions tend to be short term (generally up to 90 days) and of high volume, depending on prices and client activity.

The Swiss implementation of the NSFR imposes a required stable funding factor of 50% on all client assets up to six months. This means that trade finance banks need to obtain long-term financing in excess of twelve months while the exposure effectively to be coverd generally has a 30 to 90-day maturity. This results in:

• significant additional financing costs for the bank;

• possibly challenges to raise large amounts of long-term financing for some of them;

• additional risks to be managed (in particular, interest rate risks and a maturity gap as 90 day trade finance transactions are financed with borrowings above one year for banks which do not collect savings), the new regulatory constraint imposing a "reverse liquidity transformation".

In addition, the Swiss implementation leads to a disadvantage for banks in Switzerland compared to their EU competitors. The NSFR as applied in the EU provides for a specific treatment applicable to the trade finance business: the trade finance related exposures with a maturity up to 6 months are subject to a 10% weighing (instead of the 50% one applicable in Switzerland).

Proposal

In order to render re-financing for trade and commodity trade finance business accessible to individual market participants and defend the competitiveness and the leading position of the Swiss banks in this business, the Annex 5 of the Liquidity Ordinance shall be amended as below.

This modification has two key advantages:

• by reducing the required stable funding generated by trade finance assets (from 50% to 10%), it factors in the specific characteristics of the trade finance business (short maturity, uncommitted facilities) and better aligns the NSFR requirements in terms of refinancing with the economic reality of these activities.

• It puts the Swiss regulatory framework in line with the EU standards, which impose the same 10% required stable funding factor for "trade finance on-balance-sheet related products with a residual maturity of less than six months".