Bloomberg
A $ 27 trillion challenge looms as the yen Libor shift approaches
(Bloomberg) – Japan is a key problem with global drift from the interest rate offered by the London Interbank. With only nine months until the yen Libor expires, only a fraction of the roughly 3 quadrillion yen (US $ 27 trillion) of derivatives that are linked to the discredited benchmark has been switched to alternative reference interest rates. Another $ 150 billion in cash products like loans and floating rate notes, many of which cannot be easily converted to new benchmarks, will not become due until after the Libor expires, says Fitch Ratings, with concerns growing that the country is facing a disorderly end of the year Transition could be affected by technical problems, litigation and increased volatility in interbank rates. Global regulators overseeing the end of Libor announced in March that they were considering creating a “synthetic” yen rate as a stopgap measure so that so-called hard legacy contracts could be rolled off the books: “The problem lies with the whole Spectrum. ”Said Willie Tanoto, director of financial institutions at Fitch Ratings in Singapore. “Things can still fit together in time, with very little room for error.” The Bank of Japan and the Financial Services Agency say they will monitor the companies’ progress and take action if necessary. According to a joint statement, companies should work to cease issuing new loans and bonds related to the Yen Libor by the end of June and significantly reduce the amount of these securities on their books by the end of September. A representative of the BOJ-supported Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks declined to comment. Japan, like the US, UK and others, has fought against the clock to prepare for the demise of Libor, a bedrock of the US financial system will be phased out by global policymakers due to the lack of underlying trade and after a high profile rigging scandal . Japan’s total exposure is limited compared to the $ 223 trillion pegged to the US dollar equivalent, where even sluggish progress has been made. Britain’s main Libor replacement has been in place since 1997, as has the Tokyo Daily Average (TONA), while its US equivalent was introduced three years ago. Markets are still waiting for one of the key Yen-Libor alternatives to launch in April, less than nine months before the old benchmark expires. And in the USA, the introduction of the Secured Overnight Financing Rate (SOFR) remains lukewarm, as no term structure has yet been introduced. While the US extended the retirement date for key tenor Libor tenors by 18 months late last year, such a move has proven impractical in Japan due to a lack of support from the panel banks helping determine the interest rate. Decisions made by Japanese authorities in recent years have added complexity to certain parts of the transition. Unlike in the US and UK, Japanese officials are not pushing market participants for a single Libor alternative. The decision to reform and keep the Libor-like interest rate of the Tokyo or Tibor interbank rate alive could slow the adoption of TONA, according to Fitch. TONA is mainly used for derivatives while another benchmark, the Tokyo Term Risk-Free Rate (TORF), is used for loans and bonds. In fact, only 3.5% of yen exposure is cleared and traded over-the-counter. Interest rate derivative transactions were tied to TONA in February, according to data and analytics firm Clarus Financial Technology, and were among the lowest of the alternative interest rates it monitored. “The TONA market is not ready to absorb all of the Libor exposure,” said Takeshi Iwaki, a director at Deloitte Japan, but added that many remain optimistic that the volume will accelerate in the coming months. The lack of liquidity could also delay efforts to develop a TONA-based forward-looking maturity structure that will allow borrowers to know their interest payments, according to Fitch. Legacy problem will be Japan’s struggle to tackle tough legacy contracts that, if something goes wrong, will still be linked to Libor Unlike the US – where lawmakers are pursuing laws that would impose fallback rates on problematic deals – officials in Japan have made little progress in solving the problem, market watchers say. Senior officials at the Japanese FSA, which is also involved in planning the transition, say the scope of difficult legacy issues is limited. According to these officials, the move to new interest rates could also bring further progress once TORF goes live. TORF is still at the prototype stage, and financial information company QUICK Corp. is expected to begin the rate publication on April 26th. The BOJ expects Yen-Libor contracts to be seriously switched to alternative rates once TORF starts in April and most transitions will be completed before the end of September. Read more about the end of Libor in the Libor Countdown. The UK regulator that oversees Libor said in March that it plans to consult the establishment of a synthetic yen Libor for an additional year in order for more legacy contracts to come due. Although the interest rate cannot be used on new transactions, this could help prevent a flurry of litigation between counterparties of Libor-linked trades once the benchmark is no longer published. But synthetic Libor is not a panacea and, according to Fitch’s Tanoto, bankers still have to work on adapting existing contracts, your see more reason to be optimistic. According to Ann Battle, head of benchmark reform at the International Swaps and Derivatives Association, a temporary version of TONA could be released as early as the middle of the year. “We would expect TONA’s liquidity to steadily increase over the course of this year, and this year, especially now, there is more clarity on the timetable for Libor’s death,” she said via email. However, if plans to facilitate a smooth transition are to be implemented, they must do so quickly. Earlier this year, Clarus warned the Libor administrator that the country’s derivatives market was in a “precarious position” given the low acceptance of alternative benchmarks: “I know how difficult it is to create a new market, I know how difficult it is is to tap liquidity from one product to another, ”said Chris Barnes, senior vice president at Clarus. “It still looks like a big problem.” (Adds background information on TONA.) For more articles like this, visit bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP
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