Responding to the Suspension of Libor Rate Calculation... Replaced by Government Bond and Monetary Stabilization Bond RP Rates

Final Selection of Government Bond and Monetary Stabilization Bond RP Rates (Overnight) Using Risk-Free Reference Rate (RFR)

[Asia Economy Reporter Park Sun-mi] In anticipation of the discontinuation of the LIBOR (London Interbank Offered Rate) calculation after January 2022, financial authorities have prepared countermeasures.

On the 26th, the Financial Services Commission announced that it has finally selected the government bond and Monetary Stabilization Bonds RP rate (overnight) as the risk-free reference rate (RFR) to prepare for the discontinuation of important financial transaction indicators. 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.

Although the representative domestic benchmark interest rate is the CD rate, it is calculated based on quotes like LIBOR, 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, in collaboration with the Bank of Korea, established a Benchmark Interest Rate Improvement Task Force to carry out domestic benchmark rate reform work, ultimately selecting the RFR as the government bond and Monetary Stabilization Bonds RP rate.

If LIBOR calculation is discontinued by the end of the year, it is highly likely that the use of RFR instead of CD, which is similar to LIBOR, will be required as the international standard in derivative transactions such as IRS. The selected RFR can also be used as an alternative rate to the CD rate in emergencies (discontinuation of calculation, decline in reliability, etc.). 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 measures to activate RFR-based ultra-short-term interest rate swap (OIS, Overnight Index Swap) transactions will be prepared. In the spot market, consultations are underway for the issuance of RFR-based bonds and the launch of loan products by policy banks and major banks.

Lee Se-hoon, Director of the Financial Policy Bureau at the Financial Services Commission, said, "For the government bond and Monetary Stabilization Bonds RP rate to successfully establish itself in the market as an RFR, it is necessary to enhance the stability, efficiency, and transparency of transactions." He 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 other efforts."

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