A $27 Trillion Challenge Looms as Clock Ticks on Yen Libor Shift
Japan is emerging as a key area of concern in the global migration away from the London interbank offered rate(LIBOR)
With just nine months until yen Libor is phased out, only a fraction of the roughly 3 quadrillion yen ($27 trillion) in derivatives pegged to the discredited benchmark have switched to alternative reference rates. A further $150 billion in cash products such as loans and floating-rate notes many of which can’t be easily shifted to new benchmarks aren’t due to mature until after Libor expires, Fitch Ratings says. As the deadline nears, worries are mounting that the country could face a disorderly transition come year-end marred by technical problems, legal disputes and increased interbank rate volatility. Global regulators overseeing Libor’s end announced in March that they were considering the creation of a ‘synthetic’ yen rate as a stopgap measure to allow more so-called tough legacy contracts** to roll off the books.
The Bank of Japan and the Financial Services Agency say they will monitor firms’ progress and take steps as needed. Companies should work to cease issuing new loans and bonds referencing yen Libor by the end of June, and to significantly reduce the amount of such securities on their books by the end of September, according to a joint statement. A representative for the BOJ-backed cross-industry committee on Japanese yen interest rate benchmarks declined to comment. Japan, like the U.S., the U.K. and others, has been racing against the clock to prepare for the demise of Libor, a bedrock of the financial system being phased out by global policy makers due to a lack of underlying trading and following a high-profile rigging scandal. Japan’s total exposure is limited compared with the $223 trillion pinned to its dollar equivalent, where progress has been sluggish too.
Yet while Britain’s main Libor replacement has been around since 1997 and its U.S. equivalent was launched three years ago, markets are still waiting for one of the main yen Libor alternatives to get started in April, less than nine months before the legacy benchmark expires. While the U.S. late last year extended the retirement date of key dollar Libor tenors by 18 months, such a move has proven impractical in Japan due to a lack of support from the panel banks that help determine the rate. Decisions made by Japanese authorities in recent years have also added an extra layer of complexity to certain parts of the transition. Unlike in the U.S. and U.K., Japanese officials aren’t pushing market participants toward a single Libor alternative. The decision to reform and keep alive the Libor-like Tokyo interbank offered rate, or Tibor, may slow adoption of the new Tokyo overnight average rate, or TONA, according to Fitch. TONA will be used mainly for derivatives while another benchmark, the Tokyo term risk-free rate, or TORF, will be employed for loans and bonds. For its part, the British regulator that oversees Libor said in March that it plans to consult on the establishment of a synthetic yen Libor for an additional year to allow more legacy contracts to mature.
While the rate can’t be used for new transactions, it could help forestall a flurry of lawsuits between counterparties of Libor-linked deals once the benchmark ceases to be published. Yet if plans are going to fall into place to facilitate a smooth transition, they need to do so quickly. Earlier this year Clarus warned Libor’s administrator that the nation’s derivatives market is in a “precarious position” given the low adoption of alternative benchmarks.
https://www.bnnbloomberg.ca/a-27-trillion-challenge-looms-as-clock-ticks-on-yen-libor-shift-1.1585593
**legacy contracts are mostly code for the pile(s) of paper shit they invent (derivatives, swaps, etc) to paper over things that do not go the way they were betting. Much of it has to do with assets that they own-and this is pervasive across the entire system not just Japan-when they use mark-to-model (fantasy) instead of mark-to-market (real value).
Have always felt that the last central bank battle will take place in Japan….the BOJ was largely responsible for keeping our dollar "valuable" after the 2008 event (along with Greenspan and the "magic" gold-backed bonds once again…) and was used as a carry-trade by many other governments to keep the speed of money or velocity going. Add-in Fukushima in 2011 when they were expected to print up again and balked at it…..a few days later they got a message which resulted in trillions of Yen printed up for "relief efforts"-and yet another money flow to attach themselves to.