Japan has proposed basing benchmark interest rates on actual trades as part of global efforts to improve the transparency of this process following a series of rate-fixing scandals.
Global regulators are working on rules covering hundreds of financial benchmarks such as interbank lending and commodities to regulate them closely in the wake of attempts to manipulate the London Interbank Offered Rate (Libor).
The administrator of Tokyo Interbank Offered Rate (Tibor) on Wednesday proposed new ways to reflect rates used for actual transactions more accurately. This aims to remove potential scope for banks to manipulate the rates for their advantage.
Tibor is the benchmark for an estimated nearly 100 trillion yen ($831 billion) worth of bank lending in Japan and several times more for derivatives trades in terms of notional principal, according to Japanese Bankers Association.
The rate-rigging scandals have raised questions about how these benchmark rates are set, prompting authorities and banking industry bodies worldwide to overhaul rate-setting processes. For Tibor, no case of rate manipulation has been found so far.
Currently, reference banks, 15 for Japanese yen Tibor and 14 for euro yen Tibor, submit rates to the administrator at 1100 Tokyo time (0200 GMT) each trading day. The administrator then strips out the top two and bottom two rates and averages the remainder to produce that day's benchmark rates.
Banks on the reference panel are required to submit what they estimate as the interest rate for trading between "prime banks."
Banking industry sources said using the actual rates banks charge each other in interbank money markets would reduce the scope for potential manipulation. But transaction volumes were too small for some types of loans for them to be meaningful as reference rates.
The Tibor administrator, owned by Japanese Bankers Association, said it tried to address the issue by adding other actual rates to the rates the reference bank use for the calculation. These include rates banks pay for corporate clients' deposits.
