JFSA Publishes Multiple Regulatory Updates in November 2021

In addition, JFSA finalized amendments to the "comprehensive guidelines for supervision of major banks, etc." pertaining to the enforcement of the "Act partially amending the Banking Act, etc." Also published was the feedback received on the draft guidelines that were in public consultation from August 27, 2021 to September 27, 2021. The amendments came into effect on November 22, 2021. In another notification, JFSA and Bank of Japan (BOJ) published key results of a survey on the use of JPY LIBOR. To understand the state of the transition away from JPY LIBOR at Japanese financial institutions, JFSA and BOJ asked large financial institutions about their estimates regarding the number of contracts referencing JPY LIBOR and incorporation of fallback provisions at domestic branches on a non-consolidated basis. JFSA and BOJ also asked financial institutions about their challenges and policies for the transition with regard to legacy contracts as of end-September 2021. Yet another development involved the publication of the finalized principles for model risk management by JFSA; these principles include the following: 

• Governance. The board of directors and senior management should establish a framework of comprehensive model risk management.
• Model Identification, model inventory, and model risk rating. Firms should identify models, record them in a model inventory, and assign a risk rating to each of the models.
• Model development. Firms should have in place a sound model development process. Firms should adequately develop model documents and carry out model testing.
• Model approval. Firms should have a robust process of model approval at various stages of a model lifecycle, for example, at the inception, material changes, and revalidation of a model.
• Ongoing monitoring. After a model goes into use, the model should undergo ongoing monitoring by the first line of defense to confirm that the model is performing as intended.
• Model validation. As an integral element of review and challenge by the second line of defense, models should be subject to independent validation. This includes initial validation prior to use, validation of material model changes, and revalidation after a model goes into use.
• Vendor products and use of external resources. Where firms use vendor products or external resources, the firms should have adequate controls in place over the use of those products and external resources.
• Internal audit. As the third line of defense, internal audit functions should assess the overall effectiveness of the model risk management framework.

Comment Due Date: November 29, 2021 (Leverage Ratio)

Effective Date: December 06, 2021 (LIBOR)/November 22, 2021 (Guidelines for Major Banks)

Keywords: Asia Pacific, Japan, Banking, Securities, Basel, Leverage Ratio, LIBOR, OTC Derivatives, Regulatory Capital, Guidance, Banking Act, LIBOR Transition, Model Risk Management, Benchmark Reforms, BOJ, JFSA