Rhee Chang-yong: "We Must Enhance International Credibility Ahead of WGBI Inclusion"... Emphasizes Smooth Transition to KOFR

Rhee Chang-yong, Governor of the BOK, stressed on the 4th that "preparations must be accelerated to enhance the international credibility of the financial market," adding that "the Korea Overnight Financing Repo Rate (KOFR) should be established as the benchmark rate for the domestic financial market."
At the conference, co-hosted by the BOK and the Korea Institute of Finance (KIF), Governor Rhee stated, "With opportunities for advancement such as inclusion in the World Government Bond Index (WGBI) ahead, we must proactively present the direction for benchmark rate system development to enhance investment incentives."
KOFR was introduced as a benchmark to replace the Certificate of Deposit (CD) rate. With sufficient transaction volume and being based on actual trades, KOFR reflects market conditions more swiftly and accurately than the CD rate. Since June 2023, the BOK and the Financial Services Commission (FSC) have been promoting the transition to KOFR as the benchmark rate.
The BOK and financial authorities have issued administrative guidance to ensure that at least 10% of new transactions in the interest rate swap (IRS) market use KOFR and Overnight Index Swap (OIS) rates. As of September, KOFR-OIS transactions accounted for about 7% of the total IRS market.
The BOK proposed maintaining the 10% target until June next year, then raising it to 30% from July 2026 to June 2027, and to 50% from July 2027 to June 2028. The BOK also suggested prioritizing KOFR for new IRS transactions with maturities of less than two years after 2027, and for those with maturities of less than five years after 2028.
The BOK believes that if banks and other financial institutions use KOFR as the benchmark rate for loan products, it could reduce interest burdens for consumers. Han Min, head of the BOK's Money Market Team, explained, "Since KOFR calculations began in 2019, KOFR has generally been lower than the CD rate and closer to the base rate. If the spread remains the same, loans based on KOFR are likely to carry lower interest rates than those based on the CD rate."
Because KOFR reflects market conditions more quickly than the CD rate, it also makes interest rate forecasting easier. Han added, "For financial institutions, issuing Floating Rate Notes (FRN) based on KOFR as the base rate could also be advantageous for funding."
Financial authorities are also preparing institutional measures to promote KOFR adoption. Kwon Dae-young, Vice Chairman of the FSC, stated, "We are considering phased introduction plans so that KOFR can be used in the loan market as well, and will swiftly complete reforms to replace the CD rate with a more reliable benchmark. Detailed plans for benchmark rate reform will be established and implemented in the first half of next year."

eastcold@fnnews.com Kim Dong-chan Reporter