The hunt for a benchmark to replace yen Libor is losing ground, with Japan's traders leaning towards the Tokyo Overnight Average Rate in the battle to dominate financing of the country's $27 trillion derivatives market.
Transactions using TONA - which is based on overnight index swaps - almost doubled from the previous month to 16 trillion yen in July, according to data from Japan Securities Clearing Corp. Those based on Tibor, another potential alternative benchmark known as Tokyo Interbank Offered Rate climbed just 11% to 7 trillion yen.
The shift from using yen Libor to calculate borrowing costs comes as Japan seeks to counter perception it has been slow to migrate to a new financial benchmark unlike its global peers. The Bank of Japan called for faster progress in the transition earlier this summer, with the intention of phasing out Libor's use in new contracts by the end of September.
While deals demonetized to the Yen Libor still led in July - totaling around 30 trillion yen - alternatives could lead the market as soon as this month.
On the recommendation of the BoJ, the change in the Japanese derivatives market is progressing smoothly, said Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities in Tokyo. 'OIS-based transactions may overwhelm yen Libor as early August, which would mark a smooth shift away from Libor.
Last month a BOJ committee recommended that players opt for TONA over yen Libor in interest-rate swap markets, starting with interdealer broker transactions from August.
In one measure showing its suggestion was gaining traction, volumes in OIS-based acquisitions increased across all maturities in July. Previously, they were concentrated in tenors of less than two years, suggesting of transactions that may have been trial exercises.
Officials responsible for the U.S. Libor transition in October last formally endorsed a series of forward-looking term benchmarks tied to the Secured Overnight Financing Rate, a move many anticipate will propel its wider adoption across markets.
The other alternative reference rates in Japan are Tibor - a version of Libor, which is also controlled by the Japanese Bankers Association - and Tokyo Term Risk Free Rate which is also based on OIS.