Yoon Myeon-sik, BOK Deputy Governor, Urges Financial Firms to Actively Respond to LIBOR Discontinuation

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[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea has urged private financial companies to actively prepare for the possibility that the calculation of LIBOR (London Interbank Offered Rate) may be discontinued starting in 2022. This is because the discontinuation of LIBOR calculation could directly affect foreign currency transactions.

On the 13th, Yoon Myeon-sik, Deputy Governor of the Bank of Korea, sent an open letter to CEOs of financial companies, stating, "Domestic financial companies will have no choice but to use new benchmark interest rates from the UK, the US, and other countries instead of LIBOR starting in 2022," and urged, "Please pay special attention to ensure that necessary measures for benchmark transition can be implemented by referring to the guidelines to be prepared soon." Deputy Governor Yoon is the co-head of the 'Benchmark Interest Rate Improvement Task Force.' The letter was sent to CEOs of domestic financial holding companies, banks, financial investment companies, insurance companies, specialized credit finance companies, and heads of financial sector associations.

According to the Bank of Korea, the likelihood of LIBOR calculation being discontinued from 2022 is very high. LIBOR refers to the average interest rate calculated based on rates submitted by major UK banks. After it was revealed in 2012 that some major banks submitted false data to manipulate LIBOR, the international community has been developing alternative benchmark interest rates to enhance the reliability and transparency of benchmark rates.

The UK Financial Conduct Authority (FCA) has decided to enforce the obligation to submit LIBOR quotes only until the end of 2021. Recently, although some financial reforms have been delayed due to the spread of COVID-19, the Bank of England (BOE) and FCA have reaffirmed that the LIBOR benchmark transition must be completed by the end of next year.

Major countries such as the UK, the US, and the Eurozone are implementing plans to switch benchmarks by choosing either a single benchmark system or a multiple benchmark system in response to the discontinuation of LIBOR calculation. The single benchmark system means applying the newly developed risk-free reference rate (RFR) to both derivative and spot products, while the multiple benchmark system means improving the existing benchmark interest rates and using them alongside the RFR.

Currently, the Bank of Korea and other policy authorities are responding through the 'LIBOR Response Task Force (TF).' Although the discontinuation of LIBOR calculation will not have a direct impact on domestic KRW transactions, it will directly affect foreign currency transactions such as derivative transactions, foreign currency deposits and loans, and foreign currency bond issuance and trading. A Bank of Korea official said, "If LIBOR calculation is discontinued, it could directly affect domestic foreign currency transactions linked to LIBOR, so it is necessary to prepare for this." As of June last year, the scale of foreign currency transactions linked to LIBOR maturing after 2022 was 683 trillion KRW.

The TF is sharing information on domestic and international response status and is establishing transition plans such as forming dedicated organizations and assessing related impacts. It is also promoting changes to existing and new contracts and building internal systems.

Meanwhile, the Bank of Korea and the Financial Services Commission are separately working on selecting a domestic KRW RFR. The domestic KRW RFR is necessary for ▲use as an alternative benchmark in emergencies such as the discontinuation of major benchmark interest rates under the 'Act on the Management of Financial Transaction Benchmarks (Financial Transaction Benchmark Act)' ▲replacement of existing quote-based rates in line with the global benchmark interest rate reform trend ▲and enhancement of international consistency. The candidates for the KRW RFR are 'Overnight Call Rate' and 'Overnight Repurchase Agreement (RP) Rate.' Once the KRW RFR is newly selected, it may also replace the negotiable certificate of deposit (CD) rate, which is a major benchmark interest rate used domestically.

This content was produced with the assistance of AI translation services.