About 50% of derivatives referencing LIBOR will mature beyond end-2021, Japanese survey shows

Maria Nikolova

In the aggregate of USD, EUR, GBP, CHF, JPY, the amounts outstanding of contracts referencing LIBOR are about 164 trillion yen of assets, 35 trillion yen of liabilities, and 6,300 trillion yen of notional amounts of derivatives.

The Financial Services Agency of Japan (JFSA), together with the Bank of Japan, today published the findings of a joint survey of financial institutions, including banks, securities companies and insurance companies, about their quantitative LIBOR exposures and their qualitative LIBOR transition progress.

The survey covers 278 entities: 9 major banks, 104 regional banks, 9 trust banks, Norinchukin Bank, Shinkin Central Bank, 12 other Japanese banks, 15 foreign bank branches, 19 major Japanese securities companies, 13 foreign securities companies, 42 life insurance companies, and 53 non-life insurance companies.

The survey shows that, in the aggregate of the five currencies (JPY, USD, EUR, GBP, CHF), the amounts outstanding of contracts referencing LIBOR are about 164 trillion yen of assets (e.g., loans), about 35 trillion yen of liabilities (e.g., deposits and bonds), and about 6,300 trillion yen of notional amounts of derivatives. Of these, respectively, about 60% of assets (about 97 trillion yen), about 50% of liabilities (about 17 trillion yen), and about 50% of derivatives (about 3,200 trillion yen of notional amounts) will mature beyond end-2021.

The bulk of contracts reference USD LIBOR, followed by JPY LIBOR. Contracts referencing EUR, GBP, and CHF LIBOR are limited.

In terms of amounts outstanding, about 60% of asset-side contracts are on loans. On the liability side, deposits and bonds account for about 13% and about 12%, respectively.

A very few contracts incorporate fallback provisions, the survey shows.

Almost all the entities have either developed a framework that can continuously track the volume of contracts referencing LIBOR or recognized the approximate volume. Approximately 85% of the entities have identified or roughly identified business operations affected by the LIBOR transition.

In terms of what needs to be done, the authorities advise financial institutions with a large number of contracts maturing beyond end-2021 with no fallback provisions to press ahead with necessary actions for customers given the limited time available. They need to promptly set policies on new products referencing RFR and on new contracts referencing LIBOR, so that the number of contracts referencing LIBOR will not increase.

In addition, financial institutions with a larger number of contracts need to strengthen coordination among customer services, back office, and legal sections as they may incur more costs on those sections than anticipated. Even if they have fallback provisions, if they take the “amendment approach,” they need to prepare for scenarios where a number of consultations with customers can arise at one time.

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