Final Selection of Government Bond and Monetary Stabilization Bond RP Rates as Risk-Free Benchmark Interest Rates

Background of selection including abundant liquidity and potential use in derivatives market

[Asia Economy Reporter Park Sun-mi] The government bond and Monetary Stabilization Bonds RP rate (overnight) has been finally selected as the risk-free reference rate (RFR) in preparation for the discontinuation of the calculation of important financial transaction indicators.

On the 26th, the Financial Services Commission announced that after investigating overseas cases, holding discussions and votes with a market participant group, the government bond and Monetary Stabilization Bonds RP rate was finally selected as the RFR. The selection was based on ▲ abundant liquidity in the RP market, ▲ the interest rate characteristics that vary according to financial institutions' funding conditions, and ▲ the potential for use in the derivatives market.

Following the LIBOR collusion scandal, which was the most widely used benchmark in international transactions, major countries have begun reform discussions to secure the reliability of benchmark interest rates. The representative domestic benchmark interest rate is the CD rate, but like LIBOR, it is calculated based on quotes, and the continuous decline in underlying transaction volume has led to ongoing concerns about its representativeness and reliability as a benchmark rate. Feeling the need to develop an alternative rate, the Financial Services Commission, together with the Bank of Korea, established a Benchmark Interest Rate Improvement Task Force and has been working on reforming domestic benchmark interest rates.

After selecting the bank and securities finance borrowing call rate and the government bond and Monetary Stabilization Bonds RP rate as final candidate rates through overseas case studies and analysis of the domestic call and RP markets last November, the FSC and the Bank of Korea held online public briefings, discussions with a market participant group (MPG) consisting of 26 financial institutions, and three rounds of voting until this month, finally selecting the government bond and Monetary Stabilization Bonds RP rate as the RFR.

Lee Se-hoon, Director of the Financial Policy Bureau at the FSC, explained, "The representative benchmark interest rate may transition from CD to RFR in the long term," adding, "If LIBOR calculation is discontinued by the end of the year, the use of RFR rather than CD, which is similar to LIBOR, will likely be required as the international standard in derivative transactions such as IRS." He further stated, "The selected RFR can also be used as an alternative rate in emergencies (such as calculation discontinuation or reliability decline) for the CD rate," and added, "The Korea Securities Depository is expected to start publishing the RFR as early as the third quarter of this year."

Measures to promote the establishment of the RFR market will also be prepared.

In the derivatives market, the listing of exchange-traded RFR futures is planned for the second half of this year, and plans to activate RFR-based ultra-short-term interest rate swap (OIS, Overnight Index Swap) transactions will be developed. In the spot market, consultations are underway for RFR-based bond issuance and loan product launches by policy banks and major banks.

The FSC plans to designate the PFR as an important indicator under the Benchmark Act within the third quarter to encourage the use of RFR as an alternative rate in emergencies for the CD rate, and if necessary, provide guidelines related to fallback provisions by referring to overseas cases. If the use of RFR becomes widespread in the future, the artificial support measures for CD benchmark issuance, which have been promoted to encourage CD benchmark issuance, will be gradually normalized.

Director Lee said, "For the government bond and Monetary Stabilization Bonds RP rate to successfully establish itself as the RFR in the market, it is necessary to enhance the stability, efficiency, and transparency of transactions," and added, "We will review institutional improvement plans within the second half of the year, focusing on RP market improvement tasks collected through the Benchmark Interest Rate Improvement Task Force and others."

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