CD Rate, Dogged by Collusion Allegations, to Be Phased Out... Larger Role for KOFR-Based Benchmark System

The financial authorities will remove the Certificate of Deposit (CD) rate from the list of critical benchmarks under the Act on the Management of Financial Benchmarks as of 2030. To expand the use of the Korea Overnight Financing Repo Rate (KOFR), they will increase KOFR’s share in market transactions and introduce new loan products based on KOFR.
On the 30th, the Financial Services Commission (FSC) held a meeting of the Benchmark Rate and Short-term Money Market Council, chaired by Vice Chair Kwon Dae-young and joined by the Bank of Korea, the Financial Supervisory Service and related policy institutions. At the meeting, the participants finalized a "benchmark rate reform plan" reflecting these measures.
Currently, there are two critical benchmarks under the Act on the Management of Financial Benchmarks: the Korea Overnight Financing Repo Rate (KOFR) and the Certificate of Deposit (CD) rate. For KOFR, which is calculated based on overnight repurchase agreement (RP) transactions backed by government bonds and Monetary Stabilization Bonds (MSBs), the authorities decided to raise the target share of KOFR-based trades in the interest rate swap (IRS) market from the original goal of 50% by June 2030 to 70%.
In particular, they will introduce KOFR-based issuance targets for banks in the Floating Rate Note (FRN) market and raise the target share to 50% by June 2031. To support this, Korea Development Bank (KDB) and Industrial Bank of Korea (IBK) plan to launch new KOFR-based loan products worth 1 trillion won in total in the second half of this year.
As KOFR becomes more widely used, the CD rate, which is currently designated as a critical benchmark by law, will be phased out. It is scheduled to be officially removed from the list of critical benchmarks at the end of 2030. The CD rate has inherent limitations, including a low share of actual underlying transactions, and it was at the center of a "rate collusion" controversy among banks in 2016.
The authorities recommended that financial institutions voluntarily refrain from using the CD rate as a benchmark in new financial contracts. To encourage foreign investors to choose KOFR-based IRS transactions and other alternatives instead of the CD rate, the BOK and other relevant institutions plan to hold joint overseas Investor Relations (IR) sessions in the second half of the year. However, even after the CD rate is de-designated as a critical benchmark, its publication will continue for the time being.
The authorities also plan to gradually reduce the use of the Korea Inter-Bank Offered Rate (KORIBOR), which is similar to the London Interbank Offered Rate (LIBOR) that was discontinued in the past. From April next year, when loans linked to KORIBOR mature and borrowers wish to roll them over, the benchmark must be switched to alternative rates such as bank bonds or the Cost of Funds Index (COFIX), known locally as "COFIX." The financial authorities and related bodies will monitor the decline in KORIBOR-linked loans and later decide when to completely stop calculating the KORIBOR rate.
As a result, the share of COFIX-based lending in the loan market is expected to increase. The financial authorities will preemptively review the methodology used to calculate COFIX and will also consider designating COFIX as a critical benchmark under the law.
Vice Chair Kwon Dae-young warned, "If financial industry practitioners are aware of potential risk factors but cling to existing practices simply because they are familiar, it could eventually lead to financial accidents, just as in the past LIBOR manipulation scandal." He stressed, "We must clearly communicate the timing of the CD rate’s removal from the list of critical benchmarks and ensure that financial institutions voluntarily refrain from using CD rate- and KORIBOR-based benchmarks in financial transactions."
zoom@fnnews.com Lee Jumi Reporter