Seoul: Authorities will raise the share of the risk-free Korea Overnight Financing Repo Rate (KOFR) in key market transactions to 70 percent by 2030 as part of efforts to attract more global investment and strengthen confidence in the domestic financial market, the central bank said Monday. The plan is part of a broader reform of benchmark interest rates led by the Bank of Korea (BOK), the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), and was announced following a committee meeting involving financial institutions.
According to Yonhap News Agency, the KOFR was introduced in 2021 to replace the decades-old short-term benchmark, the 91-day Certificate of Deposit (CD) rate, in the derivatives market. However, financial institutions still widely use the CD rate as the benchmark, which has been criticized for failing to adequately reflect market conditions due to limited underlying transaction volumes.
To boost KOFR usage, financial authorities plan to increase the target share of KOFR-based transactions in the overnight index swap (OIS) market by 15 percentage points annually. This marks a faster pace than the previously announced goal of 10 percentage-point increases per year and will raise the target share of KOFR-based transactions in the OIS market to 70 percent by June 2030, up from the earlier goal of 50 percent.
Financial institutions will be required to conduct at least 25 percent of their total interest rate swap transactions based on KOFR from July through next June. As KOFR usage expands, the CD rate will be gradually phased out. The FSC stated it will remove the CD rate from its list of key benchmarks under the Financial Transaction Index Act by end-2030, though it will continue to be published for the time being.
Regarding the Korea Interbank Offered Rate (KORIBOR), new loans linked to the rate will be discontinued starting in April next year. "The announcement of a clear timeline for removing the CD rate from key benchmark status marks an important milestone in advancing our capital market toward global standards," BOK Deputy Gov. Park Jong-woo said.