Bank of Korea to Select Risk-Free Reference Interest Rate Within This Year

[Asia Economy Reporter Kim Eunbyeol] A risk-free reference interest rate (RFR) to prepare for the suspension of the calculation of important financial transaction indicators will be finally selected within this year.

The Bank of Korea announced on the 23rd that it plans to select the final candidate interest rate and determine the RFR this year after holding public briefings. The RFR reflects the time value of money and refers to the theoretical interest rate expected from a risk-free investment.

Earlier, the Bank of Korea, together with the Financial Services Commission, launched a task force to improve reference interest rates in June last year. In preparation for emergencies such as the suspension of important indicator calculations due to the enforcement of the Act on the Management of Financial Transaction Indicators on November 27, and the need to establish replacement rates for existing indicators, the RFR has been developed.

Accordingly, earlier this month, the Bank of Korea shortlisted candidate interest rates including the interbank call rate, the call rate on bank and securities finance borrowings, the repurchase agreement (RP) rates on government bonds and monetary stabilization bonds, and the RP rates on government bonds, monetary stabilization bonds, local bonds, special bonds, and special bank bonds.

The Bank of Korea plans to select the final RFR by choosing the last candidate interest rate (one each from call and RP rates) among these four, considering qualitative characteristics such as transaction volume and volatility, ease of transition from the current indicator, and usability.

The Financial Services Commission and the Bank of Korea initially aimed to finalize the risk-free reference interest rate around June, but the selection process was delayed due to difficulties in face-to-face contact amid the COVID-19 pandemic. A Bank of Korea official stated, "We will strive to select the RFR before the law is enforced."

Major countries have been developing RFRs as part of reference rate reforms following the 2012 Libor manipulation scandal, selecting overnight (secured or unsecured) rates as risk-free reference interest rates. Ultra-short-term rates with a one-day maturity, traded mainly among highly creditworthy financial institutions, are close to risk-free and are calculated based on actual transactions, thus eliminating the possibility of manipulation.

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