"99% Completion of Termination and Transition for Ribo-Related Contracts Ending Next Year"

LIBOR, Used as a Benchmark Interest Rate, to Be Phased Out Starting Next Year
Financial Authorities "Responding Swiftly"

[Asia Economy Reporter Park Sun-mi] As LIBOR, which has been used as the benchmark interest rate for foreign currency loans and derivative transactions, is set to be phased out starting next year, the financial industry is responding swiftly.

On the 26th, the Financial Services Commission and the Financial Supervisory Service announced that they are supervising and supporting a smooth transition to alternative reference rates in line with the LIBOR discontinuation schedule. Since last month, they have also been actively promoting the won-denominated risk-free reference rate, which has begun to be disclosed, to replace the CD rate, thereby responding promptly to changes in the global financial market environment.

LIBOR, which has been widely used in international derivative transactions, is scheduled to be phased out starting in 2022 following the 2012 rate-rigging scandal. From 2022, all non-USD LIBOR rates and some USD LIBOR tenors (1-week, 2-month) will be discontinued, and from July 2023, all LIBOR rates will cease to be published.

Currently, major countries including the United States, the United Kingdom, Japan, and Europe are developing and promoting risk-free reference rates (RFRs) based on actual transactions to replace their respective currency LIBOR rates (which are quote-based). The Financial Stability Board (FSB) recommends that financial authorities in each country halt the signing of LIBOR-based contracts and transition to alternative rates based on actual transactions.

Our financial authorities have also formed a public-private joint inspection task force (TF) since the second half of this year to promote the transition of LIBOR-based financial contracts that will be discontinued, ensuring a smooth response in line with international trends. As a result, 99.6% of LIBOR-related contracts in pounds, euros, yen, etc., which will be discontinued in 2022, have been successfully terminated or transitioned, and 87% of USD LIBOR-related contracts, which will be discontinued from July 2023, have also been transitioned.

Additionally, to replace the CD rate, a quote-based rate widely used in won interest rate derivatives (IRS, etc., approximately KRW 7000 trillion in scale), a risk-free reference rate based on actual repurchase agreement (RP) transactions, KOFR, has been developed. Since its official calculation and disclosure began last month, KOFR has been evaluated as steadily settling in the market.

A financial authority official stated, "We plan to conduct quarterly inspections and provide support to ensure that USD LIBOR-related financial contracts, which will be discontinued in July 2023, are smoothly transitioned or terminated. We also plan to actively promote the activation of the KOFR market to ensure its successful market establishment."

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