The Financial Services Agency of Japan (JFSA) updated the frequently asked questions (FAQ) in relation to the liquidity ratio requirements based on introduction of fund-supplying operations to support financing for climate change responses. The updates mainly allow for collateral pledged by financial institutions to the Bank of Japan (BOJ) to be treated as an exception to the net stable funding ratio (NSFR) requirements, when using the fund-supplying operations to support the private sector's climate change-initiatives/responses (as applied to other non-standard funds-supplying operations). JFSA also requested that the relevant financial institutions facilitate financing for small- and medium-size enterprises during the calendar- or fiscal-year-end season and further beyond; this is because businesses are still facing difficult cash flow conditions with tight borrowing constraints amid COVID-19 pandemic. Additionally, the Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks published the final report on results of the public consultation on the treatment of tough legacy contracts in Japan.
The consultation on the treatment of tough legacy contracts took place from September 28 to October 19, 2021. Most of the responses to the items subject to public comments in the consultation paper were in support of the Committee's views and were mainly complementary. In response to the feedback received, the Committee is revisiting its views regarding the concept of contracts that could consider using synthetic yen LIBOR as tough legacy contracts and the points to note when using synthetic yen LIBOR between contracting parties. In consideration of the final report, BOJ and JFSA have sent a joint letter to financial institutions on transition away from JPY LIBOR. The letter highlights that it is necessary for each financial institution to take further actions to transition in the remaining period, as not all existing contracts requiring LIBOR transition have been completed and there are still risks and uncertainties that transition will not be completed by the end of this year. BOJ and JFSA will continue to monitor the progress of existing contracts referencing JPY LIBOR for which transition has not yet been completed, including conducting a third survey on the use of LIBOR as of the end of December 2021, and require financial institutions to take necessary actions in light of the situation. From January 2022, BOJ and JFSA will monitor financial institutions on their use of synthetic yen LIBOR and their engagement with customers when using synthetic yen LIBOR, as necessary. Based on the monitoring results, JFSA will mull on the appropriate supervisory measures.
Keywords: Asia Pacific, Japan, Banking, Securities, FAQ, Basel, Climate Change Risk, ESG, NSFR, SMEs, Credit Risk, LIBOR Transition, Interest Rate Benchmarks, Benchmark Reforms, Synthetic LIBOR, Legacy Contracts, Liquidity Risk, JFSA, BOJ
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Previous ArticleESAs Issue Multiple Regulatory Updates for Financial Sector Entities
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