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Japan to consider stripping Tibor supervision from banks-sources

Noriyuki Hirata and Emi Emoto
Wednesday, 27 Nov 2013 | 4:00 PM ET

TOKYO, Nov 28 (Reuters) - An advisory panel set up by Japan's financial regulator will consider stripping oversight for setting Tibor, the yen benchmark interest rate, from the banking group now responsible for its administration, said people with knowledge of the potential supervisory overhaul.

The move would bring oversight of the Tokyo interbank offered rate closer into line with that of Libor, following sweeping reforms of the London benchmark triggered by revelations that major banks had manipulated it to profit from related trades or to misrepresent borrowing costs.

Some in financial markets had raised questions as to whether Tibor had also been manipulated since the rates quoted in Tokyo for 3-month borrowing and those quoted for Libor diverged from 2009 after a decade of moving in near lockstep.

But an investigation by the Japan Bankers Association, which has oversight of Tibor, found no evidence that Tibor benchmarks had been manipulated.

Japan's Financial Services Agency, the country's main financial watchdog, announced this week that it had convened a 12-member advisory panel to study Tibor and other financial indicators. The panel, which is headed by Keio University economics professor Kazuhito Ikeo, will meet for the first time on Thursday and aims to complete its review by March.

One of the proposals the advisory panel will study is whether to shift responsibility for oversight of Tibor from the Japan Bankers Association to the FSA, or another independent body, according to people with knowledge of the preparations.

The Japanese Bankers Association, currently headed by Sumitomo Mitsui Banking Corp Chief Executive Takeshi Kunibe, said it welcomed the review.

"We fully understand it is both meaningful and necessary to consider the regulatory framework for Tibor given international developments," the association said in a statement to Reuters.

"We expect proposals for a regulatory plan that will secure the reliability and transparency of Tibor in the international context," the association said.

The banking group conducted its own review of Tibor, a process it says was prompted by the Libor scandals and the need to shore up the credibility of Tibor.

"We don't believe that there has been any problem in the administration of Tibor," the group said.

The banking association said in July it would consider setting up a new organisation within its ranks to administer Tibor along with an independent committee and outside auditors to examine governance of the rate-setting mechanism.

Those steps stopped short of the overhaul of Libor, where 2012 legislation in Britain gave UK regulators direct oversight of the interest rate benchmark and established criminal penalties for attempting to manipulate the market.

"Japan has been slow in moving to strengthen regulatory oversight," said Hideto Takata, a former yen money market trader at Deutsche Securities in Tokyo and a critic of the way Tibor rates have been set.

Takata, who left the financial industry in March 2008, published a book in February claiming Tibor has been vulnerable to distortions for years, especially rate "fixing" by Japan's largest banks.

The Japanese Bankers Association has been publishing Tibor yen interest rate benchmarks since 1995. The rates set by the Tibor panel are used as the basis for loan and derivative contracts like the more widely used Libor rate.

Under the current process, Tibor yen rates are set by a panel of 15 reference banks. They submit rates to the association at 11 a.m. each trading day. The association then strips out the top two and bottom two rates and averages the remainder in order to produce that day's reference rate.

Banks on the reference panel are required to submit what they estimate as the interest rate for trading between "prime banks," not to report their own borrowing costs.

The bankers association last month proposed dropping half of the Tibor tenors currently quoted to focus on the more liquid markets for yen borrowing, or those from 1 week to 3 months and for 1 year.

Japan's FSA has regulatory oversight over the settlement network for interbank payments and the dispute resolution system established as an alternative to lawsuits between financial institutions.