Overview of Audits on Establishment and Implementation of JBATA's Framework

June 21, 2017

General Incorporated Association JBA TIBOR Administration

Article 23 of Operational Rules ("Rules") of JBA TIBOR Administration (JBATA) requires that, on an annual basis, in principle, the JBATA shall be subject to internal and external audits on "the execution of the JBA TIBOR calculation and publication operations, establishment and implementation of processes/procedures and frameworks required under the Rules and the review of the JBA TIBOR administration framework (including reviewing the definitions and calculation methods)".

Internal audit by the Internal Audit Office of JBATA and external audit by Ernst & Young ShinNihon LLC (the assurance engagement[1] for the Directors' Report on IOSCO Principles Compliance Framework) were recently performed. We hereby report the overview of internal and external audits.

1. FY 2016 Internal Audit

(1) Auditors: Internal Audit Office of JBATA

(2) Effective date: December 1, 2016

(3) Audit subjects: Governance framework, Benchmark design, Establishment of benchmark calculation methodology, Framework for accountability

(4) Audit result: After inspections and assessment for audit subjects regarding execution of the JBA TIBOR calculation and publication operations, there is no new fining that required taking remedial action.[2]

2. FY 2016 External Audit

(1) Practitioner: Ernst & Young ShinNihon LLC

(2) Effective date: March 31, 2017

(3) Audit scope: Directors' Report on IOSCO Principles Compliance Framework[3][4]

(4) Applicable standard: "Research Report on Assurance Engagements Performed by Certified Public Accountants or Audit Firm." (Research Report No.20 issued by the Auditing and Assurance Practice Committee of JICPA)

JBATA will seek to maintain and enhance the credibility and transparency of JBA TIBOR, JBATA is going to sophisticate and strengthen the administration framework of JBA TIBOR so that JBA TIBOR continues to be recognized internationally as a benchmark that confirms to the IOSCO Principles, and continues to be used widely as a representative benchmark for the Japanese Yen interest rates.

 



[1] The assurance engagements refer to those defined in 2.(1) of the "Research Report on Assurance Engagements Performed by Certified Public Accountants or Audit Firm." (Research Report No.20 issued by the Auditing and Assurance Practice Committee of JICPA). These assurance engagements have limitations because the procedures are performed by sample based testing and internal control system involves inherent limitations. This assurance engagement was performed for establishment and implementation of JBATA's Framework as at March 31, 2017. Accordingly, Ernst & Young ShinNihon LLC had not received any report on the conclusion of the assurance engagement for any other dates.



[2] Internal audit office confirmed that 4 out of the 5 findings remained in the previous audit were completed in FY 2016 and the other finding which requires JBATA's full compliance with the IOSCO principles will be completed through implementation of the JBA TIBOR reform.


[3] In the Directors' Report, a chairperson who is an executive officer of the JBATA makes a representation that the JBATA has established and implemented an appropriate framework to comply with the IOSCO Principles, except for the following significant matters, as at March 31, 2016:


(1) With respect to IOSCO Principle 4 "Control Framework for Administrators", JBATA has not established an appropriate control framework to ensure the maintenance of the quality and integrity of JBA TIBOR in accordance with IOSCO Principles 6, 7, 9, 11 and 13. Therefore, there is a deficiency in the framework related to this item as at the effective date.


(2) With respect to IOSCO 6 "Benchmark Design", since JBA TIBOR uses rates that are considered to reflect market rates prevailing in the Japan unsecured call market (Japanese Yen TIBOR) or Japan offshore market (Euroyen TIBOR), a benchmark corroborated by actual transactions, which reflects the economic realities of the Interest it seeks to measure with accuracy and reliability, has not been established. Therefore, there is a deficiency in the framework related to this item as at the effective date.


(3) With respect to IOSCO Principle 7 "Data Sufficiency", for JBA TIBOR, the definition of an active market having observable Bona Fide, Arms-Length transactions is not clarified, and the criteria for assessing whether a benchmark is anchored by the market, or data analysis underlying such assessment is not established. Therefore, there is a deficiency in the framework related to this item as at the effective date.


(4) With respect to IOSCO Principle 9 "Transparency of Benchmark Determinations", a concise explanation of the size and liquidity of the market being assessed, and the extent to which and the basis upon which expert judgment was used in establishing JBA TIBOR determination is not specified. Therefore, there is a deficiency in the framework related to this item as at the effective date.


(5) With respect to IOSCO Principle 11 "Content of the Methodology", JBATA stipulates the criteria for use of expert judgment. However, JBATA has to review the methodology to ensure consistency of use of expert judgment. Therefore, there is a deficiency in the framework related to this item as at the effective date.


(6) With respect to IOSCO 13 "Transition", the JBATA determines that it is reasonable and appropriate to establish written policies and procedures relating to the transition to an alternative benchmark. However, the JBATA has not established such written policies and procedures, and therefore, there is a deficiency in the framework related to this item as at the effective date.


[4] Regarding JBATA's compliance situation, JBATA publicized "Compliance with "IOSCO Principles for Financial Benchmarks(19 Principles)""" on March 9th, 2017. (https://www.jbatibor.or.jp/english/news/Compliance_with_IOSCO_19principles_2016.html


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