Dokyusang "New Repo-Linked Contracts Should Be Halted Starting Q4"

Financial Services Commission Decides Government Bond and Monetary Stabilization Bond RP Rates Using Risk-Free Reference Rate (RFR)
Alternative Rate Must Be Reflected in Contracts Until Q3... Futures to Be Listed on Exchange in Second Half of This Year

[Image source=Yonhap News]

[Asia Economy Reporter Wondara] The Financial Services Commission (FSC) has recommended halting the signing of new contracts linked to the LIBOR rate starting from the fourth quarter of this year. The financial authorities have finalized the selection of the government bond and Monetary Stabilization Bond RP rate (overnight) as the risk-free reference rate (RFR) in preparation for the discontinuation of key financial transaction benchmark rate calculations.

Risk-Free Reference Rate Futures to be Listed in the Second Half of This Year... Pilot Issuance of Floating Rate Notes (FRNs) Linked to Risk-Free Reference Rate by Policy Financial Institutions Next Year

Do Gyusang, Vice Chairman of the FSC, stated in his opening remarks at the Financial Risk Response Team meeting and Benchmark Rate Promotion Task Force meeting held via video conference on the 26th, "The future of LIBOR calculation after next year is uncertain," adding, "To minimize risk, we recommend halting the signing of new contracts linked to LIBOR no later than the fourth quarter of this year." He further urged, "For LIBOR-linked contracts with maturities remaining after the end of this year, please complete the process of reflecting alternative rates in the contracts before the third quarter in case LIBOR calculation is discontinued."

Following the LIBOR collusion scandal, which is the most widely used benchmark rate in international transactions, major countries have initiated reform discussions to secure the reliability of benchmark rates. The representative domestic benchmark rate is the CD rate, but like LIBOR, it is calculated based on quotes, and the continuous decline in underlying transaction volumes has led to ongoing concerns about its representativeness and reliability as a benchmark rate. Recognizing the need to develop an alternative rate, the FSC, in collaboration with the Bank of Korea, established the Benchmark Rate Improvement Task Force to carry out domestic benchmark rate reform efforts, ultimately selecting the government bond and Monetary Stabilization Bond RP rate as the risk-free reference rate.

Vice Chairman Do explained, "After discussions and voting by the Market Participant Group (MPG), the government bond and Monetary Stabilization Bond RP rate was finally selected as it was evaluated to have abundant underlying market liquidity and high usability in the derivatives market." He added, "We aim to list futures based on the risk-free reference rate on the exchange in the second half of this year," and "Next year, policy financial institutions such as the Korea Development Bank and Industrial Bank of Korea plan to pilot issue floating rate notes (FRNs) linked to the risk-free reference rate."

"We Will Continue to Encourage Conservative Capital Management to Maintain Financial Institutions' Loss Absorption Capacity"

▲Financial Sector Support Performance (Financial Services Commission)

Chairman Do also reaffirmed that the financial authorities will continue to encourage conservative capital management, including the accumulation of reserves, to manage financial risks. He said, "There is a consensus across the entire financial sector to extend the maturity extension and repayment deferral measures until September this year," adding, "The financial authorities will also extend the flexible measures on capital, liquidity, and business regulations applied to the entire financial sector and continue to encourage conservative capital management such as reserve accumulation to ensure that financial institutions maintain sufficient loss absorption capacity."

According to the 'Overall Loan and Guarantee Support Performance' compiled and announced by the FSC on the day, as of the 19th, 2,743,000 cases and KRW 296.7 trillion in funds have been supported. By industry, the food service sector had the highest number of cases at 528,000, followed by retail (429,000 cases) and wholesale (328,000 cases). In terms of support amount, the machinery and metal manufacturing industry was the largest at KRW 51.2 trillion, followed by wholesale (KRW 38.3 trillion) and textile and chemical manufacturing (KRW 21.4 trillion).

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