March 28, 2019The Secretariat of the
ICE Benchmark Administration(via email: IBA@theice.com)
Comments on the U.S. Dollar ICE Bank Yield Index
issued by ICE Benchmark Administration
Dear Sirs/Madams:
We, the Japanese Bankers Association (JBA), would like to express our gratitude for thisopportunity to comment on “the U.S. Dollar ICE Bank Yield Index,” published on January 24,
2019 by ICE Benchmark Administration (IBA). We respectfully expect that the following
comments will contribute to your further discussion.
1. General Comments
It is our understanding that a full transition to a risk-free rate (RFR) (Secured Overnight
Financing Rate: SOFR) is being pursued through vigorous discussions by the Alternative
Reference Rates Committee (ARRC) in the U.S. in consideration of a possible permanent
cessation of LIBOR after the end of 2021.
On the other hand, as indicated in the report, “Reforming Major Interest Rate Benchmarks”
published by Financial Stability Board (FSB) in July 2014, IBOR is preferred for loans as it
reflects credit risk of banks. Like this, a preferred interest rate may vary depending onproducts. Particularly for loans and other similar cash products, there are strong needs forforward-looking term rates. Given this, currently in the U.S., the development of aSOFR-based term rate is being discussed in preparation for a possible permanent cessation of
LIBOR and is expected to be available soon. In such circumstances, non-ARRC members
including JBA particularly are concerned about how much earlier the development of such rate
can be available than the end of 2021, which is indicated as the schedule in the ARRC’s Paced
Transition Plan in order to achieve smooth transition from LIBOR.
We consider that the U.S. Dollar ICE Bank Yield Index (ICE BYI) proposed by IBA
takes into account interest rate characteristics that are preferred for cash products. From theperspective of developing financial benchmarks as social infrastructure, it would be preferable
for various benchmark users, including retail and corporate borrowers, to have multiple
options available and select a rate from such options depending on respective purposes,
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products, preferences and other relevant factors. It is therefore important to establish several
options of interest rates that meet various needs of market participants (both borrowers andlenders).
Given the above, we support the development of ICE BYI as one of benchmarks
available in the cash markets under the condition that it does not undermine sound transition toRFR including the forward-looking term SOFR. Please refer to the followings for more detailsof our reasoning.
(1) Needs for forward-looking term rates
In business practice of indirect finance, a bank notifies the interest rate amountand other necessary information to borrowers in advance so that they can prepare for thepayment of interest, etc., and hence there are constant and strong needs forforward-looking term rates. As it is not fully clarified when a SOFR-based term rate will
be developed and introduced at the moment, in order to avoid the risk of LIBOR
cessation at an earlier stage, it should not remove the possibility of developing the ICE
BYI that can provide a forward-looking term rate to end users.
(2) Easier to understand for end users
In indirect finance where financial institutions often negotiate with end users,
which are non-financial institutions, it would be important to have an interest rate that iseasy to understand especially for borrowers in order to ensure an agreement is smoothly
reached between the parties. From this viewpoint, an interest rate structure “Interest ratebenchmark (that includes risk premiums associated with funding in the entire bankingsector) + Spread (that reflects borrower’s credit premiums and risk premiums associatedwith funding of individual banks),” which is consistent with LIBOR-based structure, isfunctional.
In the case of the proposed ICE BYI, we consider that this rate is intended torepresent the average funding rate of banks (i.e. lenders). In this perspective, it can besaid that ICE BYI is consistent with LIBOR. Therefore, it is easy for borrowers tounderstand the interest rate applied that includes the spread. This, combined with the factthat borrowers in indirect finance are familiar with such a structure, would help avoid
confusion arising from the benchmark transition and would meet the needs of users who
desire to reduce LIBOR exposures at an early stage before LIBOR is discontinued.
(3) Convenience for banks
The ICE BYI would be highly convenient not only for borrowers but also for2

banks (i.e. lenders). For example, since the ICE BYI has similarities in components of
the interest rate with LIBOR, banks will be able to retain the concept of spreads or risk
management approaches established on the basis of LIBOR. In this regard, the ICE BYI
would incur lesser burdens arising from changing the current practice. This will reduceburdens of, in particular, small- and medium-sized financial institutions in appropriately
managing and addressing uncertainties relating to the transition from LIBOR toalternative rates.
(4) Robustness of the benchmark
One of the major concerns of LIBOR has been its excessive reliance on “expertjudgment.” The proposed ICE BYI, on the other hand, is underpinned entirely by data ofactual transactions of large, internationally active banks in multiple markets. This meansthat the ICE BYI is more robust than LIBOR since it does not allow expert judgment ofpanel banks.
As discussed above, since the ICE BYI meets needs of both borrowers and lenders and it
increases robustness relative to LIBOR as discussed above, we believe that the development of
the ICE BYI would be useful. There are, however, areas requiring further improvement: (i) it
will place the same level of burdens of panel banks on large financial institutions since they
will need to submit data continuously as in the case with LIBOR, (ii) it is required to take into
consideration the “Principle 7: Data Sufficiency” of IOSCO’s Principles for Financial
Benchmarks.
In the following section, we respond to IBA’s specific questions based on the “1.
General Comments” discussed above.
2. Answers to the Specific Questions
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Do you agree that the U.S. Dollar ICE Bank Yield Index will be representative of the average
yields at which investors are willing to invest U.S. dollar funds on a senior, unsecured basis inlarge internationally active banks operating in the wholesale U.S. dollar markets?

(Answer)
We agree with the proposal under the condition that transaction data are provided byfinancial institutions in a stable manner and resulting rates are representative of the averagefunding rate of banks that LIBOR originally intends to represent.
(Rationale)The ICE BYI can be construed as a benchmark with enhanced reliability and robustness
relative to LIBOR because its calculation entirely relies on actual transaction data of large,3

internationally active banks. Therefore, it could be a representative U.S. dollar-denominatedbenchmark that incorporates credit risk of banks. However, to ensure this, transaction data that
underpins the calculation of the ICE BYI needs to be provided sufficiently and continuously.
For this purpose, IBA will need to enter into an agreement with financial institutionspertaining to submission of transaction data.
Furthermore, as benchmark users in the cash markets want to minimize the transfer ofeconomic value arising from the change in the benchmark, it is necessary to retain thecontinuity from LIBOR to a certain extent by ensuring that the new benchmark isrepresentative of the average funding rate of banks that LIBOR originally intends to represent.

2Do you agree that the U.S. Dollar ICE Bank Yield Index should be published for one-month,three-month and six-month tenors, or should other tenors be included?

(Answer)We agree with the proposed three tenors. In addition, we would like to request IBA topublish for a one-week tenor.
(Rationale)
If the one-week tenor is published in addition to the three tenors, banks can use rates
that better reflects actual market conditions when calculating interest rates on loans with thematurity of less than one month by the linear interpolation method.

3-b Should IBA seek to address or exclude outlier transaction yields when constructing the yield
curve, either through the use of a robust regression model or by imposing a +/- 100bps
sensitivity test relative to the calculated curve?

(Answer)
To the extent necessary to stabilize the benchmark level, it is preferable that someadjustments be made to outlier transaction yields.
(Rationale)
Eliminating outliers is expected to reduce the influence of conditions unique to somemarket participants and the possibility of manipulation, and thereby stabilizes the benchmark.
Specific examples of adjustments include eliminating a certain percentage of the highest andlowest data or eliminating those data that are higher or lower than the median value by certaintimes (e.g. more than 1.5 times higher or more than 0.5 times lower), instead of eliminating
data based on the absolute value of an interest rate differential. It is however necessary to4

conduct a test sufficiently because such elimination of outliers may conversely undermine thelevel of the benchmark’s representation of actual market conditions.

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Do you agree with a target of ten (10) transactions per maturity range, or should this target beincreased for some/all maturity ranges? When responding to this question please considerthe curve-fitting methodology, which incorporates all eligible data points across the curve on
any given day to construct a “best fit” yield curve.

(Answer)
We agree with the target. It is also necessary to further consider actions to be taken when
the target cannot be achieved due to a decline in the transaction volume.
(Rationale)
In order to ensure the stable rate calculation, a target number of transactions should be
set at a number that is achievable in consideration of the number of actual transactions.
On the other hand, from the perspective of ensuring the benchmark reliability androbustness and preventing insufficient transaction data from widening the range of fluctuations
in daily interest rates, it would be necessary to consider how to secure transaction data when
the transaction volume is not sufficient to calculate the benchmark.

5.

Do you agree with using eligible transactions from input windows for up to five (5) previous
calculation days where the target number of transactions for a particular maturity range is notachieved using only the input window for the current calculation day? Would it be more
appropriate to use transactions from a greater/smaller number of previous days’ input
windows for any or all of the maturity ranges where the target is not achieved using thecurrent day’s window? Would it be more appropriate to use transactions from previous days’
input windows irrespective of whether the target is reached using the current day’s window?

(Answer)
We agree with the proposed approach.
(Rationale)
Referencing historical data is expected to enhance the robustness and stabilize theinterest rate level, and thereby ensures continuity. With respect to appropriate calculation days,
we cannot comment on it unless data showing impacts on the interest rate level caused bychanges in the reference period is provided.

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Do you agree that transactions from input windows for previous calculation days should begiven a lower weighting than transactions from the current day’s input window? Do you haveany comments on the weightings suggested?

(Answer)
We agree with the proposed approach as it will reflect actual market conditions.
However, from the perspective of ensuring the continuity from performance of historicalbenchmarks, we do not support changing the weighting without a careful consideration oncesuch a weighting is decided..

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Where transactions from input windows for previous calculation days are allocated to amaturity range, is an OIS-based adjustment sufficient or should other factors be taken into
consideration?

(Answer)
An OIS-based adjustment would be appropriate provided that the liquidity of OIS
market is sufficient. However, there may be an issue if this adjustment intends to reflect a
risk-free based market volatility while the risk premium portion remains unchanged from theprevious day. Under a stressed situation where RFR and risk premium move in opposite
directions (i.e: RFR declines and risk premium increases), the proposed approach would makean adjustment only for the move of RFR. In such a case, we believe that a practical approach
would be to simply use the interest rate of the previous day.

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Do you agree that no single bond issuer should be able to represent more than ten (10)percent of the number of bond transactions used to construct the U.S. Dollar ICE Bank Yield
Index for any given calculation day?

(Answer)
We agree with the proposed approach because it is not preferable to unduly reflect
conditions of transactions unique to some market participants.

10 Should IBA include transactions for bank holding companies in any circumstances? Forexample, should the methodology include the holding company debt of Goldman Sachs
Group Inc. and Morgan Stanley or The Bank of New York Mellon Corporation given theirbusiness profiles and the minimal amount of bond issuance at the bank operating company
level for each of these institutions?

(Answer)
From the perspective of ensuring the robustness of the benchmark, IBA should consider
6using bonds issued by bank holding companies. In doing so, IBA should take certain measures,such as establishing a cap of 10% (see Q9), to ensure that the average funding rate of banks
will be appropriately calculated because it is not preferable to unduly reflect conditions uniqueto some market participants. In addition, recent developments in banking regulation shouldalso be taken into account.
(Rationale)
It is preferable to include bonds issued by bank holding companies into the benchmark
calculation because it is expected that an increased number of referenced bonds will enhance
the robustness of the benchmark. However, in the case of a holding company having a
non-bank subsidiary, risks of the subsidiary will also be reflected, and therefore if data ofbonds issued by such a holding company is excessively used, the prevailing average funding
rate of banks that the ICE BYI intends to represent may not be achieved. In this view, IBA
should appropriately select bonds data to be referenced.
Furthermore, taking into account that most of G-SIBs are required to hold senior debt
instruments issued by holding companies under the TLAC regulatory framework, it should be
noted that senior debt instruments issued not by bank subsidiaries but by holding companies
may increase going forward.

11 Please provide feedback on any of the eligibility criteria for:a. Primary market funding transactions (i.e. transaction type, counterparty type, funding
location, transaction size, minimum number of transactions, minimum number ofcounterparties) ; andb. Secondary market bond transactions (i.e. bond type (coupon type and call eligibility),
coupon range, bond issuance size, transaction size, days to maturity of bond).

(Answer)With respect to the eligibility criteria for the primary market funding transactions (“a”),
IBA could consider relaxing the transaction size criteria in order to increase the number oftransactions that can be referenced.

12 Should IBA use evaluated prices and associated yields for bonds that otherwise satisfy theinput data eligibility criteria for the Index but in respect of which there are no secondary
market transactions that are eligible for the purposes of constructing the yield curve for aparticular calculation day? The purpose of incorporating evaluated prices would be to expand
the input data set that is used to calculate the Index on any given day (note that evaluated7

prices are widely used in the calculation of fixed income benchmarks incorporating corporate
bonds given the liquidity characteristics of the corporate bond market).

(Answer)
While the proposed approach is, by nature, not preferable, we consider it to be apractical option.
(Rationale)
A situation where the publication of interest rate benchmarks is ceased due to, forexample, an extreme reduction in market liquidity, should be avoided even in a short period oftime, and the stable calculation and publication of daily rates should be prioritized.

13 Do you agree with publishing the U.S. Dollar ICE Bank Yield Index daily in the morning New
York time on the day following the day in respect of which the yield curve is calculated?

(Answer)
Although we have to see how the market practice will be, if the interest rate tenor starts
from the two business days after the calculation date, interest rates should be published by
6:45a.m. New York Time on the following date of the calculation date at the latest, similarly tocurrent practice of LIBOR.
(Rationale)
Retaining current LIBOR practice would not basically incur operational issues andrather enhance the convenience of benchmark users, and thereby help revitalize transactions
referencing ICE BYI.

14 Should the administration and calculation of the U.S. Dollar ICE Bank Yield Index beundertaken in the United Kingdom, in the United States or in another jurisdiction?

(Answer)
We have no particular preference of which jurisdiction should undertake theadministration and calculation provided that benchmarks are linked to various derivatives
including interest rate swaps and currency swaps, and holidays in London and New York andtime differences are adjusted using a standardised approach.

15 Please provide any other feedback you have on the U.S. Dollar ICE Bank Yield Index or its
methodology.

(Answer 1)
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The term sheet in Appendix D should take into account adjustments related to holidays.
(Rationale)
If the number of days assumed in Appendix D does not count holidays, instability ofresulting indices may be increased, as data supposed to be included is not considered.
(Answer 2)
In order to enhance robustness of the indices, it is preferable to consider expanding
markets and transactions which the calculation of indices rely on. Potential approaches include,for example, (i) introducing a waterfall methodology, and (ii) adding referencing products suchas senior bonds issued by holding companies to a lower level or adding them to the scope of areferencing data in the case of contingency.
16 Please provide any feedback you have on IBA’s proposed timeline and next steps for thelaunch of the U.S. Dollar ICE Bank Yield Index.

(Answer)
Feedback from market participants on the use of ICE BYI as an interest rate benchmark
should be published as soon as possible. On the other hand, we support the proposed timeline
since the index methodology should be finalized by the end of September, after careful
discussions and testing based on comments received.
We also request IBA to clarify other matters that users should understand for using theICE BYI as an interest rate benchmark as soon as possible, taking into account a preparation
period required for users to establish their practice.
(Rationale)
We suppose it will take at least half a year for users of interest rate benchmarks to makenecessary preparations. Therefore, if the ICE BYI is to be used from 1Q of 2020, IBA should
provide its direction on whether the ICE BYI will be used as an interest rate benchmark or not,prior to the proposed timing of finalizing the index methodology.

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