Japan Markets ViewThe Road to the Birth of TORF: Story of JPY LIBOR Transition (1)

 

As you all know, interest rate benchmarks for the Japanese yen are actively used not only in Japan, but also in other countries’ major financial markets. The next two articles will introduce the birth of TORF (Tokyo Term Risk Free Rate), a new interest rate benchmark for the Japanese yen, and its features.

 

TORF is calculated by QUICK Benchmarks Inc. (QBS), a group company of QUICK, a financial information service provider in Japan. QBS calculates and publishes benchmarks in compliance with the “Principles for Financial Benchmarks” set by the International Organization of Securities Commissions (IOSCO) to support the stabilization and development of financial markets.

 

LIBOR Scandal
The term “interest rate benchmark” refers to a benchmark reflecting the prevailing market rates and is used as a reference rate for interest rate fixing in financial transactions such as loans, bonds, and derivatives. The most widely used interest rate benchmark in the world is the London Interbank Offered Rate (LIBOR), calculated and published by the ICE Benchmark Administration (IBA).

 

As an appropriate benchmark of the prevailing level of interest rates, LIBOR was used as reference rate for lending and the terms and conditions for issuing bonds, and was also incorporated on a large scale in the derivative transactions that followed. LIBOR was also used to manage interest rate risk, and in both name and reality it has become an infrastructure that supports finance.

 

In 2012, a scandal arose with LIBOR, which had been used on such a large scale. It turned out that some of the financial institutions (panel banks) that had submitted rates in the LIBOR calculation process had been submitting inappropriate data.

 

This was a shock to the public, as it undermined confidence in LIBOR, which had been widely used. An interest rate benchmark that is not trusted by both parties cannot be used in transactions and may hinder the smooth execution of financial activities. In response to this situation, the “Interest Rate Benchmark Reform” was launched as an effort to restore the credibility of interest rate benchmarks.

 

Interest Rate Benchmark Reform of Japanese Yen
At the time the Interest Rate Benchmark Reform was launched, the typical interest rate benchmark for the Japanese yen was the JPY LIBOR published by the British Bankers’ Association (BBA) and TIBOR published by the Japanese Bankers Association (JBA). In 2014, LIBOR was placed under the supervision of the monetary authorities and the management was transferred from BBA to IBA. The Japanese TIBOR was also transferred to the JBA TIBOR Administration (JBATA), which was established under the JBA, and became subject to regulation by the Financial Service Agency as a “Specified Financial Benchmark” under the Financial Instruments and Exchange Law. In this way, the two existing benchmarks for Japanese yen were reconstructed.

 

In 2017, Andrew Bailey, who was serving as Chief Executive Officer of the Financial Conduct Authority (FCA) at that time, made a statement strongly suggesting a permanent halt to the publication of LIBOR at the end of 2021, which prompted countries to consider taking action.

 

In Japan, the ”Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks” was established in 2018 with the Bank of Japan as its secretariat. In the market consultations conducted by this committee in 2019, the “uncollateralized overnight call rate (TONA),” which is the risk free rate for the Japanese yen without credit risk, and the “term risk free rate,” which is the term rate for the uncollateralized overnight call rate, gained the most support as alternatives to the JPY LIBOR, leading to the development of these rates.

 

Administration of Term Risk Free Rate
In the winter of 2019, the committee solicited administrative entities to calculate and publish the term risk free rate. This solicitation included the challenging requirements of: (1) calculating a highly reliable and robust benchmark that takes into account the objectives of the Interest Rate Benchmark Reform; and (2) establishing a system for the calculation and publication of the benchmark in a very short period of time to give market participants sufficient time to proceed with the transition from the JPY LIBOR.

 

However, since QUICK has experience in benchmark calculation as a financial information service company and has accumulated various achievements in the past, it was deemed the most highly rated in almost all categories in this competition and was chosen as the appropriate institution for the administration of the term risk free rate.

 

 

Continue to Story of JPY LIBOR Transition (2)

 

 

For more details about TORF
https://corporate.quick.co.jp/en/torf/

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