The hunt for a benchmark to replace yen Libor is gaining ground, with Japan’s traders leaning toward the Tokyo Overnight Average Rate in the battle to dominate the financing of the country’s $27 trillion derivatives market.
Transactions using TONA — which is based on overnight index swaps — almost doubled to 16 trillion yen ($147 billion) in July from the previous month, according to data from Japan Securities Clearing Corp. Those based on Tokyo Interbank Offered Rate, another potential alternative benchmark known as Tibor, climbed just 11% to 7 trillion yen.
The shift away from using yen Libor to determine borrowing costs comes as Japan seeks to counter a perception it has been slow to migrate to a new financial benchmark unlike its global peers. The Bank of Japan called for faster progress in the transition earlier this summer, with the aim of phasing out Libor’s use in new contracts by the end of September.
While deals pegged to yen Libor still led in July — totaling some 30 trillion yen — alternatives could lead the market as soon as this month.
“Given the BOJ’s recommendation, the shift in yen derivatives market is progressing smoothly,” said Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities in Tokyo. “OIS-based transactions may overtake yen Libor as early as August, which would mark a smooth shift away from Libor.”
Last month, a BOJ committee recommended that players opt for TONA over yen Libor in interest-rate swap markets, starting with interdealer broker transactions from August.
In one measure showing its suggestion was gaining traction, volumes in OIS-based deals increased across all maturities in July. Previously, they were concentrated in tenors of less than two years, suggestive of transactions that may have been trial exercises.
Officials overseeing the U.S. Libor transition last month formally endorsed a series of forward-looking term benchmarks tied to the Secured Overnight Financing Rate, a move many anticipate will propel its wider adoption across markets.
The other alternative reference rates in Japan are Tibor — a version of Libor overseen by the Japanese Bankers Association — and the Tokyo Term Risk Free Rate which is also based on OIS.