Attendees: BTMU, Citi, Daiwa Securities, Deutsche, Goldman Sachs (by phone), HSBC, ICE Benchmark Administration, JBA TIBOR Administration (“JBATA”), Mizuho Bank, Mizuho Securities, MUMSS, Nomura, SMBC, Société Générale (by phone)
Regulators: Financial Services Agency (“FSA”), Bank of Japan (“BOJ”)
Counsel: Linklaters Tokyo
ISDA read the anti-trust competition reminder to all participants at the JPY Meeting.
Minutes for the JPY Meeting
Each of the following agenda items were discussed at the JPY Meeting:
update regarding the call held by the ISDA US Dollar, Euro, Sterling and Swiss Franc Benchmark Working Groups (the “ISDA USD/EUR/GBP/CHF WGs”) on 7 March 2018 (the “Joint Call”);
update regarding the call held by the ISDA APAC Benchmark Working Group (the “ISDAAPAC WG”) on 8 March 2018 (the “APAC Call”);
update regarding ISDA’s work on the EU Benchmark Regulation (“BMR”);
discussions at the JPY Meeting; and
housekeeping and next steps.
Update regarding the Joint Call
ISDA summarised, amongst other things, the following topics discussed on the Joint Call:
formal feedback from the Financial Stability Board’s Official Sector Steering Group Subgroup on Contractual Robustness (the “OSSGSubgroup”), which ISDA received during a the call with the OSSG Subgroup on 5 March 2018 (the “OSSG Call”), regarding the letter which ISDA and the ISDA USD/EUR/GBP/CHF WGs, the ISDA APAC WG and the ISDA JPY WG (the “ISDA IR Benchmark Working Groups”) sent to the OSSG Subgroup on 26 January 2018 with the January version of the working draft note included at Annex 2 (the “Draft Note”), including:
the OSSG Subgroup’s request for a timeline setting out the target dates in respect of the work of the ISDA IR Benchmark Working Groups and the various implementation milestones;
the OSSG Subgroup’s request for detailed descriptions of the credit spread methodologies included in the Draft Note;
the OSSG Subgroup’s request for precise feedback from market participants explaining why a fallback based on a compounded version of the alternative risk-free rate (“RFR”) would not be suitable for certain market participants; and
whether a bifurcated definition of each interbank offered rate (“IBOR”) in the 2006 ISDA Definitions would be possible with one definition for the relevant IBOR with a fallback to the RFR compounded in arrear and another definition for the same IBOR with a fallback to a term RFR based on forward-looking overnight index swaps;
feedback from the end-users on the Joint Call regarding the use of a fallback based on a backward-looking compounded version of the RFR, the suggestion that feedback should be sought from operations personnel and the potential regulatory issues relating to the amendment of contracts to include new fallbacks;
the market consultation regarding the credit spread methodologies and ISDA’s plan to seek feedback from a wide range of market participants; and
next steps and housekeeping.
Update regarding the APAC Call
ISDA summarised, amongst other things, the following topics discussed on the APAC Call:
whether the credit spread would be applied daily to the overnight RFR and then compounded up in the same way as the RFR or whether it would only be applied once the RFR has been compounded for the relevant period; and
Treasury Markets Association members’ discussions regarding the alternative RFR for the Hong Kong dollar and their preference for the Hong Kong Overnight Index Average (“HONIA”) supplemented by Exchange Fund Bills issued by the Hong Kong Monetary Authority in order to provide a term structure.
Update regarding ISDA’s work on the BMR
At the JPY Meeting, ISDA distributed two diagrams to participants regarding the interaction between the ISDA Benchmarks Supplement (the “Supplement”) and the fallbacks to the IBORs. Linklaters summarised the interaction between the Supplement and the IBOR fallbacks by reference to those diagrams. One version of the diagram is based on the Supplement being drafted as an elective supplement to the 2006 ISDA Definitions and the other is based on the Supplement being drafted as a universally applicable amendment to the 2006 ISDA Definitions. Linklaters noted that the main difference between the two diagrams is whether the Supplement ‘index cessation event’ trigger and fallbacks will be automatically incorporated into all future transactions which incorporate the 2006 ISDA Definitions or whether parties will be required to expressly incorporate the Supplement.
One participant noted that, if the 2006 ISDA Definitions are amended to include the Supplement fallbacks as well as the IBOR fallbacks, parties will still need to adhere to an ISDA protocol in order to include the new fallbacks in transactions entered into before the 2006 ISDA Definitions are amended. Another participant noted that it is anticipated that the amendments to the 2006 ISDA Definitions to implement the IBOR fallbacks will be made before the relevant IBOR ceases to exist. Another participant asked whether an automatic amendment to the definitional booklets would be in line with the guidance of the International Organization of Securities Commissions (“IOSCO”) set out in its ‘Statement on Matters to Consider in the Use of Financial Benchmarks’, which was published on 5 January 2018. Linklaters noted that drafting the Supplement as an automatic amendment to the definitional booklets is one option and explained that, although the Supplement has been drafted generally and does not specifically reference the BMR in its substantive provisions, it is primarily intended to address certain requirements in Article 28(2) of the BMR.
Some participants were concerned regarding the time it would take to implement the Supplement as a universally applicable amendment noting that this approach may take longer to implement. Another participant asked whether the relevant EU regulators are concerned about timing if the universally applicable amendment approach is used. Linklaters noted that it is not aware of any feedback from the regulators regarding the approach to implementation of the Supplement.
Another participant asked whether a two-stage approach has been considered where the Supplement can initially be implemented on an elective basis and then, at a later stage, the 2006 ISDA Definitions are amended to include the provisions of the Supplement. Linklaters explained that a two-stage approach has not been considered in any detail but suggested that this could be considered further by the relevant working group.
Some participants asked whether a universally applicable amendment would mean that parties are required to expressly disapply the provisions of the Supplement if they do not wish to apply these provisions. The participants noted that it would be operationally challenging to opt-out in each confirmation. Linklaters confirmed that, if the universally applicable amendment approach is used, it would be necessary to expressly disapply the provisions of the Supplement if parties enter into transactions after the 2006 ISDA Definitions are amended to include the provisions of the Supplement and if those transactions incorporate the 2006 ISDA Definitions.
Discussions at the JPY Meeting
Regarding the credit spread methodologies, one participant who had joined a recent call held by the ISDA Benchmark Fallbacks Spread Calculation and Term Fixing Sub-Group (the “Technical Group”) noted that the market consultation is likely to include the ‘forward rate approach’, the ‘historical mean approach’, the ‘spot-spread approach’ and the ‘contingent approach’, each with a detailed description explaining how the methodology works. The ‘alternative “parameterized” approach’ will be removed from the market consultation if there is no feedback from members that such approach is suitable.
The participant also noted that the Technical Group has been discussing the potential sources of data for calculation of the credit spread, which includes the use of end of day central counterparty (“CCP”) data or an average of end of day CCP data. The Technical Group has also discussed the robustness of the data and the need to address the basis between different CCP’s data.
Regarding the speech made by Andrew Bailey (Chief Executive of the UK Financial Conduct Authority (“FCA”)) on 1 March 2018, ISDA noted that it has spoken to the FCA and, regardless of the reference to ‘synthetic LIBOR’ in the speech, the FCA’s position has not changed in terms of encouraging the transition to the RFRs and the need to develop robust fallbacks.
One participant noted that the Alternative Reference Rates Committee has published a second report on the RFR for the US dollar. The participant noted that similar developments would be encouraged in Japan to ensure that work on the RFR for the Japanese yen is aligned with the works of other jurisdictions.
Housekeeping and next steps
The next meeting will be held on Monday 2 April 2018.