"Let's Activate KOFR"... Bank of Korea and Capital Market Institute Hold Joint Conference

28th Bank of Korea-Capital Market Institute KOFR Joint Conference
Developed Domestic Risk-Free Benchmark Rate After LIBOR Crisis
Most Financial Transactions Based on CD Rates... KOFR Benchmark Rate Not Established

The Bank of Korea held a joint conference with the Korea Capital Market Institute on the 28th to promote the activation of the domestic risk-free reference rate (KOFR).

That afternoon, the Bank of Korea and the Capital Market Institute held a conference on the 2nd floor of the Bank of Korea Annex in Jung-gu, Seoul, under the theme "Key Tasks and Future Directions for Activating Domestic KOFR," discussing ways to establish KOFR as the new benchmark rate, moving away from the past practice of using the negotiable certificate of deposit (CD) rate as the benchmark rate.

KOFR is a domestic risk-free reference rate calculated using the overnight repurchase agreement (RP) rate secured by government bonds and monetary stabilization bonds. The LIBOR rate, which was the global benchmark in the past financial markets, lost credibility after the interest rate collusion scandal in June 2012. Since then, major advanced countries such as the United States and the United Kingdom have developed risk-free reference rates (RFRs) as new benchmark rates to replace LIBOR. In line with this global trend, Korea selected KOFR as the domestic risk-free reference rate in February 2021 and has been calculating and publishing it. However, KOFR has not been established as the benchmark rate, and most financial transactions are still based on the CD rate.

The CD rate has continuously faced limitations as a benchmark rate. Despite institutional improvements by policy authorities to enhance trust, the trading volume has not been sufficient for it to serve as a benchmark rate, and there have been criticisms that the rate does not accurately reflect actual fund supply and demand conditions. During periods of falling interest rates, it showed rigidity by not fully reflecting declines in other market rates, and during market instability, credit risk was highlighted, causing excessive increases and unsettling financial consumers. Overseas investors have also consistently pointed out that Korea’s practice of using the CD rate as a benchmark rate does not align with global financial transaction standards.

In response, the Bank of Korea, the Financial Services Commission, and other policy authorities formed a related consultative body in March last year to promote the transition from the CD rate to KOFR as the benchmark rate. This year, to accelerate this effort, a public-private working group involving related institutions and market participants was launched in March and has been active. This conference was organized to announce the KOFR benchmark rate transition plan, which has been concretized through the working group’s activities, and to solidify consensus between policy authorities and the market.

The first presentation of the day was given by Senior Research Fellows Baek In-seok and Jang Geun-hyeok of the Korea Capital Market Institute on "The Global Benchmark Rate System in the Post-LIBOR Era and Domestic Implications." They emphasized, "It is necessary to gradually move away from reliance on CD yields domestically," and added, "Efforts to expand KOFR application should be accompanied by the advancement of the RP market, which is the underlying market for KOFR, and improvements in KOFR’s rate stability."

The second presentation was delivered by Hwang Young-woong, Team Leader of the Money Market Team at the Bank of Korea’s Financial Market Department, on "Key Tasks and Future Directions for Activating KOFR." He stated, "The sluggish KOFR-based transactions so far are mainly due to the habitual use of the CD rate, the absence of an Overnight Index Swap (OIS) market, and the lack of a KOFR roadmap led by policy authorities," and warned, "If KOFR activation is delayed, concerns such as divergence from global consistency and deterioration of financial transaction stability may arise."

Through the conference, the Bank of Korea and the Financial Services Commission announced, "We aim to transition to a KOFR-centered benchmark rate system," and "We strongly recommend financial institutions to prioritize using KOFR as the reference rate in derivatives and spot markets."

At the opening remarks, Governor Lee Chang-yong urged, "As former General Electric CEO Jack Welch advised, 'Prepare for change before you have to,' we ask market participants to actively engage so that KOFR can be utilized as the benchmark rate."

In her congratulatory remarks, Vice Chair Kim So-young said, "We will swiftly promote the transition to KOFR through a three-stage plan: establishing the technical foundation for KOFR expansion, presenting periodic KOFR utilization targets led by the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea to increase KOFR market share, and completing benchmark rate reform by delisting the CD rate as an important benchmark," and added, "Let us unite the financial authorities, the Bank of Korea, and the financial sector to establish new market practices."

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