Beyond LIBOR Future of Yen Derivative

Activity in Japan

RFR Specification and TIBOR reform

To response to “Reforming major interest rate benchmarks” , Study Group on Risk Free Reference Rates, composed financial institutions etc , started in Decemnber2016 and this study group identified the Uncollateralized Overnight Call Rate ( Mutan ) that published by Bank of Japan (BOJ) as a Risk Free Rate of Japanese Yen, and JBA TIBOR administration (JBATA) reformed TIBOR in July 2017. JBATA has unified and clarified the process of calculating and sub mitting Reference rate of TIBOR. Specifically, the calculation process called “Waterfall Structure” was defined in the “Code of Conduct”, and TIBOR calculation and submission t ran sparency were improved.

Toward the abolition of LIBOR

Following the announcement of Bailey that Reference Banks will not be required to submit LIBOR reference rates after 2021, the possibility of LIBOR retirement has increased, and consideration of measures to prepare for the LIBOR retirement has become a central issue.

To consider the above issue, Cross Industry Committee on Japanese Yen Interest Rate Benchmarks started in August 2018. This committee considers appropriate select and using Yen reference rate. Also to prepare LIBOR retirement, this committee develops term structure of reference rate based upon the RFR that expected to shift from LIBOR etc.

Choose of Alternative Reference (or Fallbacks) Rate

For selecting Alternative Reference Rate or Fallback rates for LIBOR, main options are below list and appropriate one will be selected according to the characteristics of each product.

O/N RFR Compound
(Fix in arrears)
Term Structured RFR
(Fix in advance / swap)
(Fix in advance IBORs)
Classification TONA TONA Derivatives IBORs
Underlying Rate TONA Yen OIS TIBOR
Reference period of the rate Figure Figure



Regarding option the [Delay] method is adopted for derivatives transactions same as current OIS.

Regarding the term RFR of option above, the reference value of TORF (Tokyo term risk-free rate) has been announced by QUICK from May 2020 for the Japanese yen interest rate. From 2021 Q2, the confirmed value of TORF for use in actual transactions will be announced.

At the Review Committee on the Japanese Yen Interest Rate Index, it was said that the pre-determined RFR of option and TIBOR of option are easy to use because the interest rate is decided first. Since LIBOR is also pre-determined, there are many voices that the pre-determined interest rate index is consistent.

On the other hand, ISDA Derivatives chose the RFR method after option (1).
In Japan as well, it is expected that TONA transactions will increase in the future while exploring the use of new TORFs.

Distinguishment between OIS and LIBOR swap

Following are the difference points between OIS and LIBOR swap

  1. In LIBOR, the applicable interest rate is fixed before the calculation period of the interest rate. While in the OIS, the app lic able interest rate is fixed after the calculation period because the calculation period and the reference period are almost the same. Therefore, the settlement date of the LIBOR swap is the reset date or the maturity date, while the settlement date of OIS is 2 business days after from the maturity date because the OIS rate is calculated on the maturity date. Thus, even if LIBOR swap and OIS have the same maturity date, t he present value of future cash flows will be slightly different.
  2. LIBOR rate is that expected to be in the future because it’s fixed in advance, while OIS rate reflects the actual interest ra te level during the calculation period because it’s determined on maturity date.
  3. LIBOR includes credit and liquidity risks. While, the credit and liquidity risks included in the OIS, based on the TONA, are lim ited. Thus LIBOR OIS spreads may widen amid financial crisis.
  4. Cash flows timing and frequency are difference. In LIBOR swaps, there are various cash flows transactions, for example: fixed an d floating both semiannually, both quarterly, and fixed annually floating quarterly etc. In OIS, the cash flows frequency is basically once a year, both fixed and floating. For maturities of 1year or less, JSCC currently sets one settlement for 1M / 3M / 6M / 1y maturities. However, it doesn’t necessarily mean that the OIS cash flows are once a year, the frequency of OIS cash flows may also be diversified in the future.

Current situation of Yen OIS

Yen OIS transactions are much less market liquidity than LIBOR swap transactions right now. Following are the Yen OIS transaction status.

According to the ISDA-Clarus RFR Adoption Indicator, only 4.7% of yen interest rate derivative transactions in October 2020 were related to RFR (calculated on a DV01 basis).

For the pound sterling, 40.4% of GBP interest rate derivatives are RFR (SONIA) related transactions and are moving away from LIBOR. As for the USD, the current ratio is still low at 9.7%, but it has increased by about 67% from September 2020 of the previous month. It seems that this is due to the fact that SOFR was applied to USD-denominated public loans in October and that major CCPs such as LCH and CME started applying SOFR to the calculation of PAI and discounting. It is expected that SOFR derivative transactions will continue to increase in the future.

Please refer to this LINK for RFR transition shift analysis.
ISDA-Clarus RFR Adoption Indicator (

In addition to improving liquidity for yen OIS, we believe that it is necessary to reorganize trading practices, such as encouraging the use of CLOBs and placing orders with amounts for short-term OIS.

Migration schedule to OIS

25/1/2021 The Protocol announced by ISDA on October 23, was in effect. Supplemnet includes fallback clauses and so on.
5/3/2021 FCA announced the permanent cessation of LIBOR publication and ISDA fallback spread adjustment fixed.
31/3/2021 Dealers should shift USD derivatives quotes from LIBOR to SOFR.
31/3/2021 Suspension of transactions of GBP-LIBOR derivatives and LIBOR reference cash products that mature after the end of 2021.
26/4/2021 QBS start to publish 1m,3m, and 6mTORF term rate officially.
30/6/2021 Stop of new transactions of business loans and floating interest rate securitized products referring to Yen LIBOR.
30/6/2021 Suspension of transactions that increase LIBOR risk in USD-LIBOR-referenced business loans and floating rate securitized products and derivatives transactions excluding CLO.
30/7/2021 Quotation of Yen Swap market should shift from LIBOR to TONA.
2021 2Q~3Q Suspension of transactions that mature after the end of 2021 for non-linear and cross-currency derivatives with reference to GBP-LIBOR.
30/9/2021 Suspension to issue of loan-backed securities (CLO) with reference to USD-LIBOR.
30/9/2021 Suspension of new transaction of Yen Swaps with reference to Yen-LIBOR
End of 2021 Permanent cessation of publication of LIBOR.( USD LIBOR 1,3,6m and 1y will end at 30 June 2023)

Draft Roadmap to Prepare for the Discontinuation of LIBOR