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

July 31, 2018
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 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 2017 Internal Audit

(1) Auditors: JBA TIBOR Internal Audit Office

(2) Effective date: December 1, 2017

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

(4) Audit result: There were 2 minor findings deemed desirable to improve such as facilitation of office functions. JBATA has set a deadline for completing a necessary action for each finding. Deadlines were set by no later than April 2019.[2]

2. FY 2017 External Audit

(1) Practitioner: Ernst & Young ShinNihon LLC

(2) Effective date: March 31, 2018

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

(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")

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, 2018. Accordingly, Ernst & Young ShinNihon LLC had not received any opinion on the representation of the assurance engagement for any other dates.

[2] Internal audit office confirmed that 1 outstanding finding raised in the previous audit is closed by implementing the JBA TIBOR reform in July 2017.

[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, 2018.

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.

With respect to IOSCO 13 "Transition", there are ongoing international discussions for financial benchmark reform 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.

JBATA determines that it is reasonable and appropriate to establish policy and procedure based on progress of such discussions, hence hasn't established reasonable and appropriate written policies and procedures relating to the transition to an alternative benchmark as at the effective date.

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.

[4] Regarding JBATA's compliance situation, JBATA publicized "Compliance with "IOSCO Principles for Financial Benchmarks(19 Principles)"" on March 15th, 2018. https://www.jbatibor.or.jp/english/news/Compliance_with_IOSCO_19principles_2017.html

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