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To: goldsnow who wrote (4158)	12/12/1997 8:20:00 PM
From: goldsnow	Read Replies (1) \| Respond to of 116816

Japan bank crisis threatens Euroyen liquidity 11:47 a.m. Dec 12, 1997 Eastern By Danielle Bochove TOKYO, Dec 12 (Reuters) - Japan's banking crisis has caused serious distortions in the international Euroyen markets which threaten the future of cash trade and hedging, dealers and fund managers say. ''The volatility in the premium, and the uncertainty over the credit worthiness of Japanese institutions, is bringing some major distortions into the market,'' Paul Abberley, Group Head of Fixed Income at Lombard Odier in London, told Reuters Financial Television. ''Ultimately, all of these hedging instruments would be thrown into question.'' As stronger Japanese banks have become increasingly reluctant to provide cheap credit to the weak, the Japan premium soared. That has upset the established relationships between Euroyen futures and cash, and even between benchmarks for the underlying rates. At the beginning of November, the difference between the highest and lowest Euroyen rates on the Tokyo interbank market was just four basis points. As the banking crisis deepened, following news of the failure of Yamaichi Securities (8602.T), the gap widened briefly to 97 basis points. ''Two years ago, the Japan premium was something that foreign banks charged,'' said Shin Nagai, money market manager at ABN-AMRO Bank in Tokyo. ''But this time it has moved into the domestic money market.'' The widening spread raised the question of where the December three-month Euroyen contract that is listed on the Tokyo International Financial Futures Exchange (TIFFE) should settle -- and whether the futures remain a useful hedge. Dealers who have been bombarded with calls about Euroyen futures recently say many swaps players assumed, erroneously, that TIFFE Euroyen contracts were settled based on the Tokyo Interbank Offered Rate (TIBOR). ''The Japan premium and the deterioration of the credit quality...highlighted what was already an existing problem which was the lack of cohesion between the TIFFE settlement procedure and what people perceived was the basis for TIFFE -- which was TIBOR,'' said Anthony Limbrick, Group Head of the Interest Rate Product Group at Credit Lyonnais in Tokyo. In fact, there is no underlying rate for TIFFE Euroyen futures. TIBOR cash Euroyen rates are set on the basis of a 360-day trading period, while TIFFE futures are set on a 365-day system. In addition, TIFFE and TIBOR rates are set by independent bank panels with slightly different weightings of Japanese and foreign banks. The settlement process for TIFFE has been criticised as ''considerably opaque as banks could potentially quote a rate based on their position in the market,'' Merrill Lynch economist Ron Bevacqua said in a written commentary. Currently TIFFE asks those banks to give what they consider the ''best rate'' for three-month Euroyen cash. However, the growing gap between the strongest and weakest banks has called into question the concept of what comprises a ''best rate.'' In the last few days, TIBOR three-month Euroyen and TIFFE implied rates for the December contract, which settles on Monday, have begun to converge. On Friday the gap was just six basis points, but prior to that, some derivatives experts were predicting at settlement it would be wide enough to make the futures contract effectively useless as a hedge. ''When we were out at 25 basis points it was looking particularly nasty,'' said Evan Jones, Head of Fixed Income Derivatives Trading at UBS Securities in Tokyo. ''Even with a six basis point discrepancy you've definitely undermined the TIBOR swap market.'' ''No one is certain what appropriate hedges are any more,'' said Nagai. ''Euroyen futures markets are ignoring theoretical values and fundamentals and being pulled by a cash market that's being driven only by credit risk concerns.'' In addition to that new basis risk (the risk that the futures and underlying prices won't match at expiration) Japan's financial crisis has also created an unprecedented divergence between the London Interbank Offered Rate (LIBOR) and TIBOR Euroyen. The Japan premium has not pushed LIBOR rates as high as TIBOR because Japanese banks mark up a comparatively smaller share of the LIBOR reference panel. That divergence has created a window for arbitrage which is wider than ever before, and has led to substantial trading of the TIBOR-LIBOR spread, Jones said. On Wednesday, a senior official with the British Bankers' Association said the organisation has no plans to change the way it sets yen LIBOR, although he did not rule it out. The Federation of Bankers' Associations of Japan, which sets TIBOR, has said it has no plans to change its yen fixing method. However, an official with the association said it is considering introducing a new 360-day-based rate. TIFFE, despite the recent turmoil in its futures market, said it does not plan to change its settlement system. But dealers say the confusion has already convinced some foreign banks to pull out of the Euroyen and yen swap markets. ''If the foreign banks decide they don't want to play anymore, it's the Japanese banks that suffer,'' Jones said. REUTERS Copyright 1997 Reuters Limited. All rights reserved.