August 12, 2014
Comments on the Consultative Document “Foreign Exchange Benchmarks”
published by the Financial Stability BoardJapanese Bankers AssociationWe, the Japanese Bankers Association, would like to express our gratitude for thisopportunity to comment on the Consultative Document Foreign Exchange Benchmarks
published by the Financial Stability Board (the “FSB”) on July 15, 2014.
We respectfully expect that the following comments will contribute to your further
discussion on this issue for finalizing the recommendations.

<Overall Comment>
To our understanding, the main causes of the manipulation of foreign exchange
benchmarks, such as WMR, were the inappropriate sharing of information and collusion
between dealers belonging to financial institutions, as indicated in the ConsultativeDocument.
Given this, the most important and essential ways to address this issue are, asincorporated in the draft recommendations, the establishment of appropriate internalprocesses and procedures to manage end user information as well as the improvement ofcodes of conduct in financial institutions. Some measures, in addition, could be taken
for the calculation method of benchmarks to reduce the incentive for manipulation. For
example, WMR may be reviewed to adopt Time Mean which appropriately reflects
bid-offer rather than referencing the median rate as under current practice. Further, thecalculation window of benchmarks may be extended to an appropriate extent. These
measures are expected to have a certain effects in disincentivising malpractice.
With regard to the development of a “global/central utility” referred in the market
infrastructure subsection, we are concerned that a concentration of the order flow to asingle utility may place the utility in the position to execute large one side trade (buyside or sell side) in a short window (e.g. the time of the global/central utility’s netting
settlement). Since there are few market makers who trade against such large orders, the1liquidity of the market in the window might significantly decrease and it is highly likelythat the utility is forced to make a deal, if any, at an unfavorable price and expose end
users to the risk of disadvantages. We recognize current market infrastructure works
smoothly. Therefore, we believe it is premature to recommend the development of asingle utility, and the Foreign Exchange Benchmark Group (FXBG) should give a
careful consideration on its risks.
We strongly support the FXBG’s encouragement for industry-led initiatives todevelop market infrastructure. Given that a framework where multiple private-sector
brokers, etc. provide netting arrangements is already in place, it is appropriate to solicit
market participants to utilize such a framework at their discretion.
Even if any kind of FX benchmarks and global/central utility is developed in thefuture in response to the FXBG’s recommendations, market participants should beallowed to use their own discretion in whether to use such a benchmark and utility
instead of being mandated by, for example, regulations.
The FX market is widely used to facilitate export and import trades, cross-border
capital transactions and other transactions. Therefore, ensuring sound liquidity in the FX
market and maintaining its function of best execution for end users would contribute toappropriate and fair development of global economy. From this viewpoint, we would
like to comment on each recommendation hereinafter.

<Specific Comments>
1. Appropriate Width of the Fixing Window (Recommendation 1)
It is generally considered that the wider the window, the more difficult for malicious
persons to influence the benchmark calculation; and as a result, chance of manipulation
may decrease. On the other hand, there is a disadvantage of widening a fixing window.
The wider the window, the more the rate could be affected by emerging news,
undermining its function as a benchmark rate at a specific point in time. While there isno obvious problem in the current width of one minute, it could be effective to extend it
to around five minutes in order to minimize the opportunity for rate manipulation.

22. Alternative Benchmarks and their Calculations (Recommendation 2)
Assuming that the fixing window described in the Comments 1. is extended to fiveminutes, we recommend that FX benchmarks should be calculated as the time mean ofbid-offer per second over a 5-minute period. Given the width of five minutes, it would
be reasonable to extract samples to calculate benchmarks every second.
As investors and other benchmark users want to avoid tracking errors, there is a needto execute transactions at the rate as close as possible to the benchmark rate. Therefore,
it is important for financial institutions receiving FX transaction orders to be able to“replicate” (1) the benchmark rate.
However, as the current median rate is not fixed until the fixing period finishes, it isdifficult in practice to hedge a non-fixed median rate during the fixing period. In thecase of the time mean rate, on the other hand, a certain amount can be hedged based ona replicated benchmark in every sampling cycle during the fixing period. Reducing therisk of incurring loss from tracking error would prevent dealers from manipulating
markets for their own benefits in order to avoid such loss.
Further, the execution of transactions based on a mid-rate is in itself loss-making
business for market makers in many cases. Therefore, the FXBG’s recommendation toset appropriate bid-offer and use them as a threshold when executing a transaction withend users would reduce incentives to manipulate benchmarks to cover loss making.
To our understanding, there is no demand for a benchmark with a long fixing period(up to 24 hours) at present.

3. Timing of the Fixing Window (Recommendation 3)
We support the recommendation to continue to center the fixing windows exactly on
the hour.
The three options for the timing of the fixing windows proposed in therecommendation do not vary much in terms of advantages and disadvantages. Further,
centering the fixing window exactly on the hour would be more suitable than(1) In this context, the ability to replicate means that third parties are able to assess the benchmark

based on price movements in the market, and that market participants are able to hedge based on a
replicated benchmark in accordance with the rate determination method publicly available.
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closing/starting it on the hour as a definition of benchmark rate.
As not many market participants are questioning the timing of the fixing windows (i.e.
being centered exactly on the hour or close or start on the hour), it is unnecessary tochange the existing common practice.
From the perspective of avoiding event risks related to benchmark determination, dueconsideration should be given in determining what times of day the fixing window
should be set at by keeping in mind not to overlap it with such times when major othereconomic indicators are published. For example, hardly any major economic indicatorsand other relevant data are released at 4pm London time, and other times are notreferenced in transactions in most cases. Therefore, impact is minimal in these cases.

4. Data Sources (Recommendation 4)
While broadening the range of data sources to expand the coverage of priceinformation would enhance the confidence in benchmarks, the data sources should be
reliable for benchmark users.

5. Foreign Exchange Reference Rates set by Central Banks (Recommendation 5)
Central bank reference rates are widely used. Central bank’s initiative to comply withthe relevant IOSCO principles would lead to raising market participants’ awareness.

6. Development of Market Infrastructure (Recommendation 6)(1)

Multiple brokers (including an electronic broker) and ECN have been addressing
the establishment of market infrastructure in relation to WMR order voluntarily.
We fully endorse that FXBG supports such industry-led initiatives. However, withregard to the market infrastructure operated by multiple private brokers, thefollowing should be considered:(i) Collection of orders
While currently orders are collected by financial institutions, there is a discussion
about how end users can directly place orders with brokers. Such effort for the4collection of orders should not be impeded because providing an option to an end
user how to place orders may reduce the room for collusion between particulardealers. Further, brokers and etc. should specify the scheme which should berequired to charge an appropriate execution fee (this fee may also be included in theexecution rate).
(ii) Netting
The treatment of the unexecuted orders after netting should be explicitly defined(e.g. mechanism of netting, participants of non-end users to netting (auction)
process, returning the unnetted orders or separately setting up a particular executor).
(iii) Execution
Where a particular executor (including such utility itself) carries out execution,
the executor has to have stricter internal rules and governing process. The operationof the executor should be appropriately recorded with time stamps.

(2)

The development of a “global/central utility” by consolidating such facilities to
one single utility should be deliberately considered for the following reasons:(i)

Decrease in liquidity
By concentrating end user’s orders using a benchmark in one single utility,

market makers may refrain from trading actively during the benchmark setting time,
which gives rise to a concern over a significant decrease in liquidity and an increasein volatility. (2)(2)

The reason why the appearance of a “global/central utility” gives rise to a decrease in liquidity isbecause transactions executed in the fixing window of WMR, etc. are concentrated in one single
utility, which results in increasing the possibility that financial institutions may refrain from
active trading during this window and end users also may refrain from actual transactions during
this window. The decrease in liquidity possibly may enlarge market fluctuation risk needlessly.
To date, a market maker has carried out dynamic hedge and risk-taking to give best execution for
an end user in the sense of the best possible price. However, a decrease in liquidity during thefixing window of WMR, etc. means that a transactional price is determined under the situation
where the market fluctuation risk is higher.

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(ii)

Discrepancy in execution rate
Under such a situation that liquidity declines and market fluctuation risk is higher

than the intrinsic one, the execution of unnetted orders may cause the execution rate
to significantly differ from the to-be market prevailing rate.
Where the execution of unnetted orders is entrusted to one single bank or market
participant, other market participants can estimate discrepancy in the position ofunnetted orders from the deals by such bank and market participant to estimate
discrepancy in the position of dealing through a central utility. As a result, unnettedorders are likely to be forced to be executed at an unfavorable price for end users.
Form the above two reasons, a probability that end users and their customers may
suffer from material disadvantages will increase.
(iii) Challenge in effectivenessIf the market participants and its end users avoid using the central utility due tothe economical disadvantages as described above, the operating cost of the utility
may be elevated a high level. Further, operational and litigation risks are not small,and the occurrence of systemic risk arising from concentration of the risk imposedon one single utility is of concern.

7. Pricing Reflecting Risk for a Transaction (Recommendation 7)
In light of minimizing the manipulation intended to cover loss-making as mentioned
in the Comment 2., bid-offer price, rather than mid-rate, should be used for end user
pricing with regard to the benchmarks such as WMR.
Application of imposing proper fee to end user is very critical to maintain thesoundness and liquidity of the FX market.

8. Code of Conduct for Market Participants (Recommendations 8 -10)
We agree with these recommendations.

69. Enhancement of Banks’ Internal Systems (Recommendation 11)
In OTC market such as the FX market, a market maker must retains the inventory
positions (assumes risk), thereby covering end user’s risk in a flexible manner andestablishing a highly liquid market. Thus, we definitely disagree with the differentiationof organizations intended to prohibit the holding of the inventory positions.
It is impracticable to differentiate the inventory positions, in a uniform and rigorous
manner, held by a market maker and the positions in proprietary book. On the other
hand, each financial institution confines the products in which each market maker candeal and sets position and loss limits appropriately, thereby enabling excessiverisk-taking that does not reflect the inventory positions to be minimized.
By strengthening the internal code of conduct for order execution andcommunications with which we agree with regard to Recommendation 8, it is believedto enhance the aforementioned management of the conflict interest.

10. Code of Conduct for Market Participants (Recommendations 12 and 13)
We support these recommendations.

11. Rates used in calculation of indexes (Recommendation 14)
In light of minimizing the manipulation intended to cover loss-making as mentioned
in the Comment 2., it is preferable to use bid or offer of FX benchmarks in calculating
indexes.

12. Recommendations for Asset Managers (Recommendation 15)
Conducting due diligence and demonstrating it to end users are expected to lead tomuch deeper understanding of the FX market.

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