August 10, 2017

Mr. Richard Grafen
Market Policy Department
Financial Conduct Authority
25 The North Colonnade
Canary WharfLondon E14 5HS
United Kingdom
FCA ref: CP17/15
Comments on the Consultation Paper, “Powers in relation to LIBORcontributions” issued by the Financial Conduct Authority
Dear Mr. Grafen:
We, the Japanese Bankers Association (JBA), would like to express our gratitude
for this opportunity to comment on the Consultation Paper: Powers in relation toLIBOR contributions, issued by the Financial Conduct Authority (FCA) on June12, 2017. We respectfully expect that the following comments will be sufficiently
reflected in your further discussion.
[General comments]
JBA has approximately 190 members comprising of banks and bank holding
companies operating in and outside Japan. Some member banks have operations
and conduct their business activities in the UK and other foreign jurisdictions.
Member banks widely use LIBOR in their lending/hedging activities andderivatives transactions particularly when such transactions are denominated incurrencies other than Japanese yen. Also, they constantly enter into a number ofloan agreements under which LIBOR is referenced for U.S. dollars or Britishpounds. Therefore, LIBOR is a critical benchmark for Japanese banks’ activities.
Furthermore, some member banks serve as a LIBOR panel bank and submit rates
for the LIBOR calculation.
Having looked at international developments, we understand that regulators intend
1

to maintain and enhance the quality of IBOR while at the same time to consider
risk-free rates (RFR), based on a multiple-rate approach (which moves away froma reliance on a single reference rate and allows users to choose amongst a range ofreference rates) proposed by the Financial Stability Board (FSB).
Meanwhile, we appreciate the FCA’s initiatives for maintaining, and enhancing thequality of, LIBOR.
However, regarding the FCA’s recent Consultation Paper, there are some points
that we would like to ask the FCA to consider in order to minimise impact on loantransactions and realize a sustainable framework from viewpoints of LIBOR users
and panel banks (including potential panel banks). In this respect, our commentson Questions 1 to 6 in the Consultation Paper are provided below for your future
consideration.

[Individual comments]
Question 1:
What time and costs do you think would be required for a new bank to prepare
itself for contributing to LIBOR for transactions-based submissions and for expert
judgment based submissions?
(Our comment)
Given that the business size and model and the development of information
systems vary across banks, it is difficult to pre-estimate the degree of difficulties
in establishing a relevant framework and time and cost that would be required fora new panel bank. Nonetheless, a considerable amount of time and cost would beneeded.
It would be difficult for potential panel banks, in particular, to estimate required
time and cost as they have less knowledge about developments of LIBOR reforms
and a sense of the required internal management framework level compared toexisting panel banks. Whilst potential panel banks are expected to require moretime than existing panel banks to develop systems and establish an internalmanagement framework, we believe, this is more achievable for the potential
panel banks to implement appropriate initiatives, within a sufficient period of time
for consideration, appropriate support by competent authorities, consideration tominimize or remove disincentives (e.g. risk), as well as incentives to the extent
practical.
2When currencies are added or in other cases, the same initiatives, such as systemdevelopment, would need to be implemented by the existing panel banks as well,albeit within a shorter timeframe. Therefore, a sufficient consideration should begiven in this respect.
Question 2:
Do you have any comments on our general approach to use of compulsion powers
in relation to LIBOR?
(Our comment)
Our view, as an organization with a number of member banks using LIBOR in theirtransactions, is that it is necessary to ensure continuation of LIBOR given its
importance as LIBOR is being used in all types of transactions around the world.
From this viewpoint, we would like to request the FCA to sufficiently consider (i)minimising an impact on transactions, such as loans, and (ii) establishing asustainable regime, in implementing its initiatives, with a view to maintaining andenhancing the quality of LIBOR. We believe that there would be a situation where
the exercise of compulsion powers would be acceptable in order to ensure
continuation of LIBOR provided that the policy is to allow such powers to beexercised only for necessary and limited cases. In light of the objective to secure
an adequate number of panel banks for stable and continued submission ofhigh-quality benchmarks, the exercise of such compulsion powers should belimited to the minimal extent and means.
Firstly, with respect to the above (i), it is necessary to carefully identify theavailability of alternative rates in loan transactions. The Consultation Paper
indicates that a key consideration in whether and for how long the use of powers tocompel contributions to LIBOR is essential for market integrity will depend on theavailability of alternative interest rate benchmarks (i.e. RFR). However, the FCA
should recognise that banks may have considerable difficulty in using the RFR forloan transactions.
In executing loan transactions, not only customers’ credit risk but also funding
cost associated with fund transactions (for example, liquidity premiums ininterbank transactions and credit cost) needs to be taken into consideration. Wherethe RFR is used in loan transactions, the portion of such funding cost (i.e. thespread between LIBOR and RFR) needs to be taken into account. Since this spread
may lead to a significant difference in fair valuation and thus will have a3

significant impact from the perspectives of risk management (valuation model)
and hedge accounting (effectiveness), banks would need to change their models ordevelop systems. In addition, in cases of credit default swaps (CDS), etc., it isdifficult to measure funding cost embedded in the spread and therefore it would be
extremely difficult to calculate a highly convincing and objective funding cost in astable manner. Moreover, as derivatives executed to hedge deposits/lending referto the RFR, it is also difficult for banks to hedge the portion of funding cost.
Given this, there is a high risk that the core functions (i.e. deposits and lending) ofbanks serving as a financial intermediary will be undermined.
Furthermore, where LIBOR is referred to for the portion of floating rates in fixed
rate swaps, the spread between LIBOR and RFR will be updated because LIBOR at
the time of each fixing will be used. Since, however, the spread specified in thecontract is fixed, consideration on how to transfer to customers those changes incredit risk occurred over a long loan term would need to be reflected in the form ofmodification of contracts with each customer. It is assumed that banks will requirea significant amount of time and burden for the negotiation of such a contractual
modification because many end users (e.g. corporates) are not well-versed in theRFR. The significance of the use of financial benchmarks is to enable an efficient
execution of transactions by avoiding such individual negotiations. If such abenefit of benchmarks is undermined due to benchmark transition, this would
contradict the original objective of the use of benchmarks. It is our understanding
that, from the above viewpoint, the FSB recommended a multiple-rate approach(which establishes multiple financial benchmarks) in its report: Reforming Major
Interest Rate Benchmarks, published in July 2014 with a view to providing
financial benchmark options that better meet the purpose of a transaction.
Secondly, in order to realise a sustainable regime, it is necessary for the FCA togive consideration to reducing risk, cost and workload associated with being apanel bank and thereby to mitigate disincentives for being a panel bank.
The main reason for discouraging banks from the benchmark submission is thatrisks inherent in the benchmark submission, such as legal risk (e.g. risk of being
subjected to a huge amount of payment of damages and legal risk to individual
employees), are considerably high and unbalanced relative to benefits of becoming
a panel bank. In this view, if banks are to be required to continue submission by
the FCA’s exercise of the compulsion powers, it is necessary to introduce aframeworks to eliminate legal risk (e.g. to take a measure to prevent banks frombeing sued in the class action simply because of being a panel bank so long as they4

make the submissions in accordance with predetermined rules). Moreover, forpurposes of leveling the costs, a framework where gaps in burden between panel
and non-panel banks are eliminated, each financial institution, etc. bears the costs
equally or authorities partially bear the costs should be considered as well.
Furthermore, where the use of compulsion powers affects those financial
institutions which are located in different jurisdictions and are supervised byoverseas authorities other than the FCA, the FCA should avoid imposing excessive
burdens that would disincentivise banks to continue the panel bank status, such as
requiring submission of group-level data. In addition, a framework should beestablished for sufficient exchange of opinions and coordination between relevant
authorities.
We believe that if the above initiatives are taken to ensure continued submission of
LIBOR in a stable environment without imposing excessive burdens, theintegration of markets will be promoted, which as a result would ultimately lead tobenefits for both panel and non-panel banks. This should secure the number of
LIBOR panel banks and enable continuation of highly reliable LIBOR that isanchored in a wide range of applicable actual transactions.

Question 3&4:
Do you have any comments on the description of the market we would propose touse for the BMR participation test in relation to LIBOR?
Do you agree with the criteria we propose to use to identify banks to include in
our population and the measures we propose to assess actual and potential
participation in the market LIBOR intends to measure?
Are there other criteria or measures that you would recommend using?
(Our comment)
It is our understanding that panel banks (including potential panel banks) might berequired to submit data on an ongoing basis for the participation test purposes. In
establishing criteria for data collection and selection, the FCA is requested toestablish a feasible framework in consideration of burdens, businesscharacteristics (e.g. the size of exposures by currency) and other relevant factorsof each bank.
The Consultation Paper requires all covered banks to submit each region’s data on5

a global basis, which is an extremely difficult requirement to comply with for
those banks not carrying out global book management. This may give rise to anissue of jurisdiction and other issues. Also, it is required to stably ensure the data
quality in data submission through appropriate testing, internal approval processes
and governance procedures, etc. As discussed above, however, a sufficientconsideration should be given to the point that due to differences in businesscharacteristics, etc., it would not be easy to capture and supervise global-level oraffiliates’ transaction data depending on the location or the size of exposures bycurrency and also that a compliance burden would be significantly heavy. In thisrespect, in consideration of data availability and visualization of transactions, theICE Benchmark Administration (IBA) allows the use of data to the extent agreed
beforehand. This necessitates an approach that is consistent with existing
agreements concerning the data scope, etc. Banks may be subjected to a heavy
compliance burden particularly in extracting and aggregating historical transaction
data, and may also face system-related challenges and may incur excessive costs ifthey are to capture affiliates’ transactions. The FCA needs to take this into accountand give a sufficient consideration to feasibility.
Furthermore, if it is apparent that a bank will continue acting as a panel bank for
coming several years given its size, transaction volumes or other factors, such anexisting panel bank for which sufficient information is captured should beexcluded from the scope of data collection in light of the intent of the Consultation
Paper. In this way, the FCA is requested to consider minimising banks’ burden indata submission to the extent practical.
From the business characteristics perspectives, the principal location of businessand the currencies transacted in large volume differ across banks. Therefore, theproposed criteria for selecting panel banks could be operated in an appropriate andstable manner if explicit, fair, convincing and reasonable rules (e.g. the volume ofactual transactions are considered for respective currencies for which rates are
submitted and those banks exceeding a certain threshold become a panel bank, inprinciple) are developed.

Question 5:
Do you have any comments on the draft Rule in the appendix?
(Our comment)
Given that financial institutions may have some currencies for which transactions
6referring LIBOR hardly exist, requiring panel banks to submit rates for suchcurrencies may affect the reliability of the benchmark of the currencies, and thus
should be avoided (see our comment to Q1).

Question 6:
Do you have any comments on our proposal to use the approach described above ifnecessary to require firms specifically under the BMR powers?
(Our comment)
To our understanding, the maximum period in which the BMR compulsion powers
to require submissions for the LIBOR calculation remain effective is twenty fourmonths. However, please note that it is difficult to prepare alternative rates for
LIBOR within the 24-month period since there are various challenges asmentioned in our comment on Q2.
Furthermore, consistency between the power under the UK acts and the BMR
power should be ensured if such powers are to be exercised.

7