September 28, 2018
RFR Secretariat
Bank of EnglandThreadneedle St, London, EC2R 8AH
United Kingdom
Comments on Consultation on Term SONIA Reference Rates
issued by the Working Group on Sterling Risk-Free Reference Rates
Dear Sirs/Madams:
We, the Japanese Bankers Association, would like to express our gratitude for thisopportunity to comment on Consultation on Term SONIA Reference Rate issued on July 17,
2018 by the Working Group on Sterling Risk-Free Reference Rates (“Working Group”). We
respectfully expect that the following comments will contribute to your further discussion.
[General Comments]
1. Development of Term SONIA reference rates (TSRRs)
We welcome that the Working Group has considered and proposed the following
with a view to developing Term SONIA reference rates (TSRRs).
i)ii)

iii)
iv)

In light of the possibility that the submission of LIBOR will be permanently
discontinued after the end of 2021, the Working Group has been considering
forward-looking term risk-free rates based on demands in cash products such asloans and securitisations to establish a framework for a smooth transition to a
new financial benchmark;The consultation proposes the use of firm quotes available on exchange or MTF
central limit order books (“CLOBs”), on the premise of compliance with theIOSCO principle, instead of relying solely on executed transaction data;
The consultation proposes the use of regulated electronic trading platforms toenhance the robustness of TSRRs; andThe consultation sets timing for TSRRs available for use by the second half of2019 to improve the liquidity of transactions and ensure a smooth transition.

(Rationale)
In general, the reliability and robustness of financial benchmarks will improve provided
that there are sufficient volume of actual transactions and that the rates are calculated based on1relevant executed transaction data. On the other hand, there may be cases where the volume ofactual transactions will decline as market and economic environments are changing frommoment to moment.
Considering these, we appreciate the content of the consultation, as it proposes to use
the regulated electronic trading platforms and reference weighted average of firm quotes,
instead of relying solely on executed transaction data, to make the price discovery process
more transparent and robust as much as possible. We believe that the consultation contain agood reference for other benchmark reforms as well.
We also appreciate that the Working Group has given due consideration to practicalfeasibility based on surveys and other inputs in the design of the regime and setting of specifictransition timing.
[Specific Comments]

Section 1 – Summary of reported use cases for TSRRs(1) Would the availability of robust TSRRs facilitate transition to SONIA for end users inloan and debt capital markets? Are there other use cases which should be considered?

(Comment)
We consider that the availability of robust TSRRs would facilitate transition to SONIA.
(Rationale)
In the current market practice, the method of determining interest rates using fixing inarrears based on calculation by compounding overnight SONIA has the following problems
with respect to loans and bonds.
--

The amount of interest payments for the most recent interest period cannot bedetermined at the time of pricing, and hence burdens such as cash flow management
may increase.
The calculation of accrued and unpaid interest payments for account closing
procedures will become complicated.
Since this method is not compatible with current settlement processes, it is necessary
to modify systems and establish new operational flows.

These challenges will be resolved if robust TSRRs becomes available, and the transition
to SONIA will be facilitated if TSRRs are used as a reliable benchmark by end-users in
lending markets, etc.

2(2) In what context would you foresee use of TSRRs in OTC and listed derivative markets?
What risks might arise with their use and how could they be managed?

(Comment)
For hedging loans and bonds, it is preferable to use hedging instruments referencing thesame rate as much as possible. Therefore, TSRRs may be used in derivatives for hedging loans
and bonds that reference TSRRs.
Potential risks include the risk that the spread between the LIBOR curve andSONIA/TSRRs will fluctuate before and after applying TSRRs. It is therefore necessary toestimate and examine the impact on pricing in advance.

Section 3 – Data sources and methodologies for a TSRR
(6) Do you agree that firm OIS quotes on regulated, electronic trading platforms are likelyto offer the most feasible and robust data source for TSRRs in the near term? Are there
alternative proposals which merit further consideration?

(Comment)
We agree.
(Rationale)
Given the increasing use of regulated electronic trading platforms, we believe it isfeasible to gather feasible and robust transaction data in a short period of time.

(7) Do you agree that greater transparency and verifiable quotes would be required tosupport the development of robust TSRRs? How would trading practices in SONIA
derivatives need to evolve in support of robust TSRRs?

(Comment)
We agree.
(Rationale)
In order to improve the robustness of TSRRs, it is vital to pursue both the improvementof transparency and promotion of the use of regulated electronic trading platforms.

(8) Do you see benefit in early publication of ‘prototype’ TSRRs based on currently
available data sources?

(Comment)
We consider that there are benefits.
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(Rationale)‘Prototype’ TSRRs can be used to estimate and examine the extent of differences
between TSRRs and existing benchmarks, such as spreads with the current LIBOR.

(9) Do you agree that the definition of TSRR benchmarks should allow data sources toevolve (for example, to include inputs from listed futures) to reflect potential futurechanges in market structure?

(Comment)
We agree.
(Rationale)
As the SONIA market has just started to expand, and its market structure may change inthe future, we believe that it is crucial that data sources of TSRRs can be flexibly changed inorder to bring the level of TSRRs closer to interest rates reflecting prevailing market rates.

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