February 5, 2019The Secretariat of theAlternative Reference Rates Committee(via Email: arrc@ny.frb.org)
Comments on the ARRC Consultation Regarding More Robust LIBOR Fallback Contract
Language for New Originations of LIBOR Bilateral Business Loans
Dear Sirs/Madams:
We, the Japanese Bankers Association (JBA), would like to express our gratitude for thisopportunity to comment on Consultation Regarding More Robust LIBOR Fallback Contract
Language for New Originations of LIBOR Bilateral Business Loans published on December 7,
2018 by the Alternative Reference Rates Committee (ARRC). We respectfully expect that thefollowing comments will contribute to your further discussion. Please also refer to ourcomments1 on Consultation Regarding More Robust LIBOR Fallback Contract Language for
New Originations of LIBOR Syndicated Business Loans published by the ARRC in September
2018 since these two consultations have many issues in common.

1. General Comments(1) Reflecting international discussions
Fallbacks are being discussed globally, and the International Swaps and Derivatives
Association (ISDA) published final results to adopt compounded setting in arrears rate as theadjusted risk free rate (RFR) and the historical mean/median approach as the spreadadjustment for ISDA-based derivatives.
As noted in our comments on Consultation Regarding More Robust LIBOR Fallback
Contract Language for New Originations of LIBOR Syndicated Business Loans (“SyndicatedLoan Consultation”), we believe that there is a strong needs to ensure that the respective
fallbacks for derivatives and cash products are consistent, particularly in terms of both thereplacement rate and the timing of the occurrence of triggers, since the hedging needs of cash
products underlie most derivative transactions.
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https://www.zenginkyo.or.jp/fileadmin/res/en/news/news181126.pdf

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In this regard, we understand this consultation on bilateral business loans also covers
considerations on differences in trigger events and fallback rates between cash products andISDA-based derivatives. For instance, this consultation discusses fallback language for new
originations of hedged LIBOR bilateral business loans in Appendix VI, and also indicates that
the ISDA is considering to take certain actions for the pre-cessation triggers. We welcome thatboth discussion bodies for cash products and derivatives are undertaking initiatives in light of
the requests from market participants, and expect that the ARRC would continuously take into
account such views of market participants in finalizing this consultation.
(2) Needs for developing term RFRs for cash products
With respect to the waterfall under the hardwired approach for the fallbacks proposed inthis consultation, we welcome that the forward-looking term Secured Overnight Financing
Rate (SOFR) is placed as the first step, reflecting the needs of cash product users, which isconsistent with the Syndicated Loan Consultation.
If a term SOFR does not exist at the time the fallback takes effect, Compounded SOFR
(which would be SOFR compounded setting in arrears if it is so chosen to be consistent with
ISDA’s final conclusion) would be applied as a fallback rate. However, as indicated incomments from a broad range of stakeholders of cash products on the Syndicated Loan
Consultation, the "in arrears" approach has lower compatibility with current practices since therate for an interest period cannot be known till the end of the period, which may hinder smooth
operations (e.g. notifying interest amount) of borrowers and lenders in bilateral business loans.
We, therefore, expect that robust forward-looking term SOFR will be developed at an earlystage and the ARRC will continue undertaking its initiatives on the further developments of
SOFR markets. Moreover, the “Transition from U. S. Dollar LIBOR - Timeline” published in
October 2018 shows ARRC’s intention to produce an indicative SOFR-based term reference
rate in the first quarter of 2019. We highly welcome this movement since indicative term
SOFR would be very useful for potential users of a term SOFR in preparing for theirtransition.
(3) Consistency between bilateral business loans and syndicated business loans
While bilateral business loans and syndicated business loans contain different elements,
such as the number of parties and the involvement of an agent, these two cash products have
many similarities. In this respect, we believe that there are also many similarities in thecharacteristics which fallback framework for each of these two products should have, in termsof, for example, triggers, fallback rates and spread adjustments. Therefore, fallback languageof both products should be basically consistent, except those issues specific to bilateral2business loans and syndicated business loans respectively.
As one of the examples of inconsistency, we would like to point out that a replacement
rate under the hardwired approach for bilateral business loans does not include “overnight
SOFR + adjusted spread” taking into account the final conclusion published by the ISDA. On
the other hand, under the waterfall approach proposed in the Syndicated Loan Consultation,
this replacement rate is included as the third step in the waterfall. We request the ARRC toadjust such differences to ensure consistency when finalizing the proposals.
(4) The amendment approach and the hardwired approach
From practical perspectives, the hardwired approach that allows less flexibility inprocedures is expected to result in smoother and broader transition to a replacement rate at thetime of the occurrence of the trigger. However, since the development of term rates involves
uncertainties, there is a risk that the replacement rate at the time of the fallback might differ
from what is originally expected at the time of concluding a contract. Therefore, the ARRC
should take into account the progress of developing the term SOFR in determining theapproach to be selected, and should avoid reaching a hasty conclusion.
(5) Timing of the finalization and implementation
In finalizing the fallback language, it is necessary to ensure that financial institutions
and end users have in place sufficient infrastructures necessary for the fallbacks.
For example, as in the case with the Syndicated Loan Consultation, several triggers
other than those suggested in the ISDA Consultation are proposed in this consultation. We
believe that such triggers would be useful because they facilitate transition before anannouncement of a permanent discontinuation of a financial benchmark, thereby enabling
market participants to avoid concentration risk.
On the other hand, in order to ensure the effectiveness of new fallback language, it isnecessary to thoroughly review whether borrowers have completed their preparation, whether
borrowers recognize and understand the fallback well enough, and whether the front andmiddle offices have appropriately established revenue management and risk management
frameworks, including systems development.
In this view, the ARRC should carefully consider the timing of finalization andimplementation.
We have answered to the questions specified below based on the same attitude in the3general comments discussed above.
2. Answers to the questions
A. General Approach of the Two Fallback Proposals
Question 1
If the ARRC were to adopt one or more sets of bilateral business loan
fallback language, which one or both of the recommended provisions (i.e., amendment
approach and/or hardwired approach), in your view, is an appropriate policy? If you believe
the amendment approach is more appropriate at present, what specific information (forinstance, existence of term SOFR) would you need in order to get comfortable eventuallyadopting a hard-wired approach? Why?
(Answer)
ARRC should take into account the progress of developing the term SOFR, and avoid
reaching a hasty conclusion.
(Rationale)
Given that entities need to take certain actions for a number of bilateral business loans,
eventually, the hardwired approach is preferable because it incurs less practical burdens and is
expected to result in smoother transition to a replacement rate. It is however uncertain at thismoment whether a robust term SOFR will be developed, and therefore the ARRC should notreach a hasty conclusion.
We believe that it would be realistic to enter into a contract based on the amendment
approach that allows more flexibility at this stage, and apply the hardwired approach at a stage
when considerations on fallback rates and spread adjustments have made progress.
B. Triggers
Question 3(a)Should fallback language for bilateral business loans include any of the
pre-cessation triggers (triggers 3, 4 or 5)? If so, which ones?
(Answer)
We believe that any of the pre-cessation triggers could be included in contracts forbilateral business loans which are hedged using ISDA-based derivatives so long as thesetriggers are consistent with those of ISDA-based derivatives and agreed on by the parties inadvance. However, in developing pre-cessation triggers, the ARRC should also take into
account whether bilateral business loan users will be able to complete their preparation prior tothe occurrence of triggers and to take necessary actions in a smooth manner once a trigger
occurs.
Question 3(b)Please indicate whether any concerns you have about these precessation triggers relate to differences between these triggers and those for standard
derivatives or relate specifically to the pre-cessation triggers themselves.
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(Answer)If the hedge relationship between bilateral business loans and derivatives cannot be
maintained after a fallback is triggered, it will be extremely difficult to gain acceptance frommarket participants and borrowers. In this regard, ISDA’s effort to offer templates or othertools for derivative contracts for inserting pre-cessation triggers on a bilateral basis would be
useful.
Question 3(c)If pre-cessation triggers are not included, what options would beavailable to market participants to manage the potential risks involved in continuing toreference a Benchmark whose regulator has publicly determined that it is not representativeof the underlying market or a Benchmark permanently or indefinitely based on a number ofsubmissions that the Benchmark's administrator acknowledges to be insufficient to allow for
production in a standard manner?
(Answer)
Each entity is capable of making decisions and amendments individually. However,practical burdens would be high.
(Rationale)If pre-cessation triggers are not included in the contract, each entity will need to decide
whether to continue using the reference benchmark one by one, which imposes significant
practical burdens on them.
Question 4(a)Is an "opt-in" trigger appropriate to include? Why or why not?

(Answer)
For including an “opt-in” trigger, the ARRC should also consider whether bilateralbusiness loan users have completed their preparation, and are able to take necessary actions ina smooth manner once a trigger occurs. For bilateral business loans that are hedged using
ISDA-based derivatives, an “opt-in” trigger could be included in contracts so long as the opt-in
trigger is consistent with that of ISDA-based derivatives and is agreed on by the parties inadvance.
(Rationale)
Although basis risk may arise, it is expected that including an “opt-in” trigger in bothamendment and hardwired approaches could mitigate the concentration risk of operations
arising from the simultaneous occurrence of transitions to the replacement rate.
C. The Replacement Benchmark
Question 6
If the ARRC has recommended a forward-looking term rate, should thatrate be the primary fallback for bilateral business loans referencing LIBOR even though5derivatives are expected to reference overnight versions of SOFR? Please explain.
(Answer)
The forward-looking term rate should be the primary fallback.
(Rationale)
This is preferable from the practical perspective for bilateral business loans. (Asdiscussed in (2) in the General Comments)
Question 7
Should the Lender be able to eliminate certain interest period options if
there are no equivalent SOFR terms available? If so, consider the following options: (i) the
Lender may remove all interest periods for which there is not a published term rate or (ii) the
Lender may remove only the interest periods for which there is not a published term rate anda term rate cannot be interpolated. Which of the options do you support? Why?
(Answer)
We believe that (ii) is the preferable option.
(Rationale)
For cash products, such as bilateral business loans, it is preferable to reference
forward-looking term rates as much as possible.
Question 8
Should "Compounded SOFR" be included as the second step in thewaterfall? Why or why not? Would this preference be influenced by whether ISDA
implements fallbacks referencing compounded SOFR or overnight SOFR?
(Answer)
If Compounded SOFR is incorporated in the waterfall, it is appropriate to place as thesecond step.
(Rationale)
In light of the relationship with derivatives transactions used as hedging instruments, we
accept the inclusion of Compounded SOFR in the waterfall for bilateral business loans, since it
is highly likely that ISDA selects Compounded SOFR in arrears as a fallback for USD LIBOR.
As discussed in (2) in the General Comments, however, forward-looking term rates are
preferable from a viewpoint of cash product users, and hence Compounded SOFR should beplaced in a lower level than the term SOFR.
Question 9
If you believe that Compounded SOFR should be included, which
compounding period is preferable ("in arrears" or "in advance")? Would this preference be
influenced by whether ISDA implements fallbacks referencing compounded SOFR "in arrears"
or "in advance"?
(Answer)“In arrears” is the preferable compounding period in terms of ensuring consistency with6

ISDA-based derivatives. However, the ARRC should also take into account the possibility thatit might be difficult to complete necessary preparations by the end of 2021.
(Rationale)
Compounded SOFR in arrears is preferable to ensure consistency with ISDA-based
derivatives. A sufficient transition period, however, will be needed because its compatibility
with current practices is low as the rate cannot be known till the end of the interest period,
which may hinder smooth operations (e.g. notifying interest amount) of related parties inbilateral business loans.
Question 10
As noted, this consultation does not include Overnight SOFR as a final
step in the waterfall. Do you believe that Overnight SOFR is an appropriate fallback
reference rate for bilateral business loans or should the final step in the replacement ratewaterfall be Compounded SOFR (after which the hardwired approach defaults to a
streamlined amendment process)?
(Answer)Overnight SOFR is not an appropriate fallback reference rate for bilateral businessloans.
(Rationale)
As we have answered to the Question 9 in our comments on Syndicated Loans
Consultation, an overnight rate is not an appropriate fallback reference rate, considering thatinterest rates currently used widely are rates with a term structure. In addition, as the ISDA isreaching a conclusion not to use overnight rates as fallback rates, there is no need to use an
overnight rate in terms of ensuring the consistency with ISDA-based derivatives. The ARRC
should consider this point in finalizing the Syndicated Loan Consultation as well.
D. Spread adjustments
Question 12
Do you believe that the ARRC should consider recommending a spreadadjustment that could apply to cash products, including bilateral business loans?
(Answer)
ARRC should recommend a spread adjustment that could apply to cash products inadvance through guidance or other means.
(Rationale)
A spread adjustment entails a high risk of a conflict of interest between the borrowers
and lenders; therefore related parties may fail to reach an agreement. Furthermore, if a spreadadjustment method varies among individual contracts, it may cause confusion and increase thelitigation risk. For smooth execution of fallback procedures, it would be necessary to inadvance inform related parties of the calculation method for such a spread adjustment and7reach an agreement thereon. For reaching agreement smoothly, the ARRC should develop
some guidance through market consultation or other similar processes.
Question 13
Is a spread adjustment applicable to fallbacks for derivatives under the
ISDA definitions appropriate as the second priority in the hardwired approach spreadwaterfall even if bilateral business loans may fall back at a different time or to a different
rate from derivatives? Please explain.
(Answer)
We believe such a spread adjustment is appropriate.
(Rationale)
While it is a precondition that the relationship with derivatives transactions is taken into
account, the ARRC should first consider spread adjustments appropriate for bilateral businessloans. We therefore believe that it is appropriate to develop a waterfall where the logic of
spread adjustments in fallbacks under the ISDA definition is placed as the second step and will
be applied only when a spread recommended specifically for bilateral business loans as thefirst step is not developed.
E. The role of the Lender
Question 16
In any of these situations, should the Lender have the right to take therelevant action, for example to designate loan terms unilaterally within the framework ofeither Appendix I or Appendix II, simply by notice to the Borrower? Alternatively, should thelender have the right to take such action, subject only to the Borrower's right to withhold
consent? Please explain which approach, or what alternative approach, you think would bebetter.
(Answer)
A better approach depends on the circumstances of borrowers.
(Rationale)
If the borrower understands and agrees in advance on significant matters, such as afallback rate and an adjustment spread, and is able to reasonably predict an actual applicablerate, we believe that the lender need not seek consent again at the time the fallback trigger
occurs and should simply give a notice to the borrower. On the other hand, if it is unable, ordifficult for the borrower, to know in advance such matters, taking the relevant action simply
by a notice from the lender would harm the borrower's interests, which may lead to heightened
litigation risk. It would therefore be appropriate for the borrower to have the right to reaffirm
his or her intention.
Question 17
Is it necessary that any replacement rate and/or applicable spreadadjustment be published on a screen by a third party? Why or why not?
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(Answer)A fallback rate and/or applicable spread adjustment should be published on a screen by athird party.
(Rationale)
It is necessary from the viewpoint of sharing information among related parties in atimely manner and avoiding litigation risk.
F. Operational considerations
Question 19
Are there operational concerns about having the ability to convert manyloans over a very short period of time? Please explain.
(Answer)
Transition in a very short period of time raises operational concerns. It is therefore
important to secure an appropriate transition period, and for bilateral business loan users tocomplete their preparation and to take necessary actions in a smooth manner once a trigger
occurs. Furthermore, for reducing operational concerns, it would be useful to consider thetiming when a transition to a fallback rate takes effect as one of pre-agreed items, in addition
to considerations and agreement about the timing of a trigger.
(Rationale)
As compared to syndicated business loans, a considerable number of agreements areentered into individually for bilateral business loans, and therefore it may be extremely
difficult to complete a transition in a short period of time. While there is a trend that interest
payment dates (interest reset dates) concentrate on a particular date, transitioning a number oftransactions in a short period of time may hinder smooth operations. Insights that may be
useful includes Guiding principles for fallback provisions in new contracts for
euro-denominated cash products2 issued by the working group on euro risk-free rates inJanuary 21, 2019.
G. Hedged loans
Question 21
If bilateral business loans fall back to a different rate from derivatives,
how do market participants expect to handle the interplay of loans and their hedges? Would
market participants expect that current swaps would be terminated and a new swaps
entered into once the loan has transitioned?
(Answer)If bilateral business loans fall back to a different rate from derivatives, one of the2

See https://www.ecb.europa.eu/pub/pdf/other/ecb.sg3guidingprinciples201901.en.pdf
Paragraph 23 states that “[t]he date from which the fallback rate will apply after one or more of the trigger events
has occurred should also be specified clearly in fallback provisions.”

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approaches would be to terminate a swap and enter into a new swap referencing the same rate
as the loan’s fallback rate. However, cancellation of the swap, or entering into a new swap (inparticular, the case where a counterparty providing a loan and a counterparty providing a swap
for hedging purposes are different) may increase burdens in terms of negotiations andcontract-related operations, requiring a significant amount of time. A solution to avoid suchoperational burdens and basis risk that may arise before entering into a new contract would be
to include the same fallback language for a swap used as a hedging instrument individuallywhen including fallback language in a loan contract in advance.
Question 22
Would market participants that execute interest rate hedges prefer to fallback to the same rate and spread that becomes operative under the ISDA Definitions even if
a term SOFR is available? If so, please provide comments on the proposal for hedged loans
set forth in Appendix VI, including a discussion of any operational concerns. Please provide
comments on any other approaches you think could be useful in addressing fallbacks in loans
and related hedges.
(Answer)
When a robust term SOFR becomes available, the use of term SOFR is preferable fromthe practical perspective of bilateral business loans.

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