BOJ, together with JFSA, has written to the CEOs of major financial institutions regarding LIBOR transition. The letter is intended to urge financial institutions to take actions for permanent cessation of LIBOR at the end of 2021. The letter also requests submission of relevant materials, by July 10, 2020, for review of the progress of preparedness of individual firms. Although the letter has been sent to some financial institutions, preparedness of other financial institutions will also be monitored based on the contents of the letter. Any financial institution using LIBOR is expected to accelerate its actions by responsible and active involvement of management officials with due consideration for description of the letter.
The letter details that the following would be considered as actions generally required for the financial institutions:
- The plan regarding actions for “transition” or “fallback” for products and transactions referencing LIBOR has already been developed, including schedule. The board of directors or management has already approved the transition plan. The board of directors or management receives regular updates on progress of the transition plan and provide necessary directions on the actions of the plan.
- Robust fallback provisions should be inserted in new contracts and products referencing LIBOR with a maturity beyond the end of 2021. Transition to alternative rates or introduction of fallback provisions should be made as soon as possible in existing contracts and products referencing LIBOR with a maturity beyond the end of 2021. Target for termination of new issuance and contracts of LIBOR-referenced cash products (loans and bonds) maturing beyond the end of 2021 has been set.
- New products referencing risk-free rates should be available in the IT systems by early 2021. If products or transactions could not be available in the IT systems (in a case of part of procedure not to be supported by the IT system), operational rules and procedures should be reviewed to be able to provide new products referencing risk-free rates manually by the end of 2020.
The letter requests financial institutions to submit relevant materials approved by the board of directors or management, covering the following elements:
- Governance framework for LIBOR cessation issues
- Range of potential impact arising from permanent cessation of LIBOR, including specific name of IT systems, operational rules and procedures
- Contents of the transition plan, including schedule
- Framework for the management to oversee development and progress on the transition plan, and status of ensuring the effectiveness of the framework
- Status of securing and allocating resources (personnel and budget), based on the results of “Joint Survey on the Use of LIBOR” conducted by JFSA and BOJ in October 2019, and arrangements for flexible allocation of resources along the progress of the implementation timeline
- Status of identifying and evaluating conduct risks arising from transition or fallback and measures to mitigate these conduct risks
- Policy of preparation for unexpected termination of LIBOR-referenced transactions ahead of the schedule due to the decline of market liquidity in the products and transactions referencing LIBOR
- Disclosure policy in financial statements and investor relationships
Keywords: Asia Pacific, Japan, Banking, Securities, LIBOR, Interest Rate Benchmark, Risk-Free Rates, Governance, Benchmark Reforms, BOJ, JFSA
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.