Domestic Financial Firms Must Conduct Risk Assessments Following LIBOR Cessation Announcement

Samjong KPMG Report on 'Financial Institutions' Response Strategies Following the Suspension of LIBOR Announcement'

[Asia Economy Reporter Minji Lee] As the LIBOR (London Interbank Offered Rate), which has been used as a benchmark interest rate in global financial markets for the past 30 years, is set to be discontinued from 2022, opinions have emerged that a company-wide response from domestic financial companies is necessary. According to a Financial Supervisory Service survey, as of June 2019, the balance of LIBOR-linked financial products held by domestic financial companies was estimated at 1,994 trillion KRW, of which contracts maturing after the discontinuation of LIBOR are estimated to amount to 683 trillion KRW.

On the 16th, Samjong KPMG published a report titled ‘Financial Institution Response Directions Following the Discontinuation of LIBOR,’ which forecasted that domestic financial companies would be directly affected in derivative transactions, foreign currency deposits, loans, and other foreign currency transactions due to the discontinuation of LIBOR and the benchmark interest rate transitions in major global countries. Significant changes are expected in financial transactions linked to this, following discussions on domestic benchmark interest rate reforms.

LIBOR is the interest rate applied when trading short-term funds between prime banks in London, UK, and is used as a benchmark interest rate in international financial markets. It is directly related to funding among various economic agents such as central banks, financial companies, and pension funds.

After the global financial crisis, the credibility of LIBOR plummeted due to a manipulation scandal involving collusion among panel banks during the LIBOR calculation process. Discussions on benchmark interest rate reforms led by global financial organizations and major countries’ financial supervisory authorities have resulted in the discontinuation of LIBOR publication from January 1, 2022.

Major countries worldwide are also seeking improvements in the calculation of interbank offered rates (IBOR) and risk-free reference rates (RFR) to reform national benchmark interest rates. Currently, the United States, Japan, and the United Kingdom have completed the development of improved IBORs and RFRs and are transitioning to single or multiple benchmark interest rate systems tailored to their respective circumstances, effectively preparing for benchmark interest rate transitions.

Discussions on benchmark interest rate reforms are also underway domestically. The ‘Act on the Management of Financial Transaction Benchmarks,’ which aims to secure the reliability of financial transaction benchmarks and establish an institutional framework that meets international benchmark management standards, is scheduled to be implemented in November. Additionally, discussions are ongoing regarding the improvement of the negotiable certificate of deposit (CD) rates used as domestic benchmark interest rates and the transition to RFR, which is expected to bring changes to internal financial transactions of domestic financial companies linked to these reforms.

Samjong KPMG urged domestic financial institutions to prepare simultaneously for both internal and external changes related to the discontinuation of LIBOR. The report recommended that domestic financial companies monitor the benchmark interest rate transitions in major global countries, the development of fallback provisions, and market changes, and prioritize reviewing the impact of these changes on their financial product exposures (risk exposures).

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