Outline of Audits on Establishment and Implementation of JBATA's Framework
August 8, 2019
General Incorporated Association JBA TIBOR Administration
Article 23 of JBA TIBOR Operational Rules ("Rules") requires that, on an annual basis, in principle, the JBA TIBOR Administration (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 and the assurance engagement[1] for the Directors' Report on IOSCO Principles Compliance Framework as external audit by Ernst & Young ShinNihon LLC were recently performed. We hereby report the overview of internal and external audits.
1. FY 2018 Internal Audit
(1) Auditors: JBA TIBOR Internal Audit Office
(2) Effective date: December 3, 2018
(3) Audit subjects: Governance framework, Benchmark design, Establishment of benchmark calculation methodology, Framework for accountability
(4) Audit result: There were no findings in the control items. It was also confirmed that measures had been taken to address issues pointed out in last fiscal year (2 findings deemed desirable to improve such as facilitation of office functions).
2. FY 2018 External Audit
(1) Practitioner: Ernst & Young ShinNihon LLC
(2) Effective date: March 31, 2019
(3) Audit scope: Directors' Report on IOSCO Principles Compliance Framework[2][3]
(4) Applicable standard: Practical Guidelines for Assurance Engagements 3000 "Practical Guidelines for Assurance Engagements Other than Audits or Reviews" issued by The Japanese Institute of Certified Public Accountants ("JICPA")
(5)Conclusion of the assurance engagement:
In accordance with the "Practical Guidelines for Assurance Engagements with JBA TIBOR Code of Conduct (Practical Guidelines of the Japanese Institute of Certified Public Accountants, Committee on Business, No. 52)", the conclusion of the assurance engagement is not disclosed because it is subject to "Limitation of Users and Restrictions on Use".
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 I.4.(35) of the "Practical Guidelines for Assurance Engagements 3000 : Practical Guidelines for Assurance Engagements Other than Audits or Reviews" issued by The Japanese Institute of Certified Public Accountants. 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, 2019. Accordingly, JBATA had not received any opinion on the representation of the assurance engagement for any other dates.
[2] In the Directors' Report, Representative Director(Chairman) 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, 2019.
With respect to IOSCO 13 "Transition", JBATA hasn't established reasonable and appropriate written policies and procedures relating to the transition to an alternative benchmark as at the effective date, because it is reasonable and appropriate to take into account the progress of international discussions for financial benchmark reform (Discussions by the ISDA and other organizations. Such discussions include the transition to risk-free rates assumed as an alternative benchmark to IBORs (e.g. the JBA TIBOR) and the robustness of a contract under the fallback plan in the event of permanent cessation of the IBORs publication).
Therefore, JBATA hasn't complied with the IOSCO Principles 13 "Transition" and Principle 4 "Control Framework for Administrators" which requires completion challenges for maintaining quality of benchmark and soundness including IOSCO Principle 13.
Regarding IOSCO principle 7 " Data Sufficiency", JBATA has established and implemented an appropriate framework. However, JBATA fully recognize that size of the underlying market of Euroyen TIBOR (Japan Offshore Market) continues to be smaller compared to that of Japanese Yen TIBOR (Japan unsecured call market) and percentage of submission rates determined by actual data of the underlying market is lower compared to that of Japanese Yen TIBOR.
[3] Please refer to the "Compliance with IOSCO Principles for Financial Benchmarks (19 Principles)" dated March 7th, 2019, for JBATA's compliance with IOSCO Principles.（https://www.jbatibor.or.jp/english/news/Compliance_with_IOSCO_19principles_2017.html）