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$ 27 trillion challenge looms as Yen Libor change approaches

(Bloomberg) – Japan is emerging as a major concern in the global migration away from the London Interbank Offered Rate. With just nine months before the yen Libor was phased out, only a fraction of the roughly 3 quadrillion yen (27 trillions of dollars) of derivatives indexed to the discredited benchmark have moved to alternative benchmark rates. An additional $ 150 billion in cash products such as loans and floating rate notes – many of which cannot be easily transferred to new benchmarks – will not mature until after the Libor expires. , according to Fitch Ratings. that the country could face a messy transition at the end of the year, marked by technical problems, legal disputes and increased volatility in interbank rates. Global regulators overseeing the Libors announced in March that they were considering creating a synthetic yen rate as an interim measure to allow more so-called harder contracts to get off the books. The problem is across the spectrum, said Willie Tanoto, director of financial institutions at Fitch Ratings in Singapore. Things can still fall into place over time, it’s just that there is very little room for error. The Bank of Japan and the Financial Services Agency say they will monitor the progress of companies and take the necessary measures. Companies should work to stop issuing new loans and bonds that refer to yen Libor by the end of June, and significantly reduce the amount of such securities on their books by the end of September, according to a statement. spouse. A representative of the BOJ-backed cross-sector committee on Japanese yen benchmark interest rates declined to comment. Japan, like the United States, the United Kingdom and others, has raced against time to find its way. Preparing for the demise of Libor, a staple of the financial system is being phased out by global policymakers due to an underlying lack of negotiation and as a result of a high-profile rigging scandal. Japan’s total exposure is limited from the $ 223 trillion pinned to its dollar equivalent, where progress has also been slow.The main UK Libor replacement has been around since 1997, as has the average overnight rate of Tokyo, or TONA, while its American equivalent has been launched. three years ago. Markets are still waiting for one of the main alternatives to the yen’s Libor to kick in in April, less than nine months before the old benchmark expires. And in the United States, the adoption of the guaranteed overnight financing rate (SOFR) remains lukewarm and no term structure has yet been introduced. Japan due to a lack of support from the panel banks helping to determine the rate. Decisions taken by Japanese authorities in recent years have also added an additional layer of complexity to parts of the transition. Unlike the United States and the United Kingdom, the Japanese authorities are not pushing market players towards a single alternative to Libor. The move to reform and keep alive Tokyo’s Libor-like Interbank Offered Rate, or Tibor, could slow TONA adoption, according to Fitch. The TONA will be used primarily for derivatives while another benchmark, the Tokyo Risk-Free Term Rate, or TORF, will be used for loans and bonds. Interest rate derivative transactions were indexed on TONA in February, according to data and analysis firm Clarus Financial Technology, among the lowest of the alternative rates it monitors. The TONA market is not ready to absorb global exposure to Libor, said Takeshi Iwaki, a director at Deloitte Japan, but added that many remain optimistic about the recovery in volumes in the coming months. Lack of liquidity could also delay efforts to to develop a forward-looking TONA-based term structure that allows borrowers to know their interest payments in advance. Equally worrying to some are the struggles of the Japanese to resolve the difficult legacy contracts that will still be tied to the Libor when it is finally unlike the United States. – where lawmakers are pursuing legislation that would impose cutback rates on troublesome deals – Japanese officials have made little progress in addressing this issue, according to market watchers. the transition, let’s say the scope of difficult legacy questions is limited. And the move to new rates could also progress again once TORF is launched, according to these officials. TORF remains in the prototype stage, and financial information firm QUICK Corp. is expected to start posting the rate on April 26. For its part, the British regulator that oversees Libor said in March that most transitions should be completed before the end of September. he plans to work together on putting in place a synthetic yen Libor for an additional year to allow more legacy contracts to expire. Although the rate cannot be used for new transactions, it could help prevent a wave of lawsuits between counterparties in Libor-related transactions the benchmark stops being published, but synthetic Libor is not a panacea and bankers will still have to work on adjusting existing contracts, according to Fitchs Tanoto . see more reasons for optimism. A draft version of TONA could be released as early as mid-year, according to Ann Battle, head of benchmark reform at the International Swaps and Derivatives Association. , especially now, the timeline for the Libors’ demise is clearer, she said via email. Yet if plans are to be put in place to facilitate a smooth transition, they must do so quickly. Earlier this year, Clarus warned the administrator of Libors that the nations derivatives market is in a precarious position given the low adoption of alternative benchmarks. I know how difficult it is to create a new market. , I know how difficult it is to move liquidity from one product to another, said Chris Barnes, senior vice president of Clarus. It still seems to be a big concern. (Add more information on TONA) For more articles like this please visit us at Subscribe now to stay ahead with the most trusted source of business information.

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