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There has always been a need for a domestic risk-free reference rate (RFR). First, it can now be used as an alternative benchmark in any emergency situation, such as if there is a discontinuation of a major benchmark index, following the enactment of the “Act on the Management of Financial Benchmarks in South Korea,” hereinafter referred to as the Financial Benchmark Act. Second, it can now replace the existing ask price-based interest rate in keeping with global benchmark rate reform trends. Third, it enhances consistency with global standards.

(Financial Benchmark Act) In November 2019, the government enacted the Financial Benchmark Act (which took effect in November 2020) to ensure that the benchmark rate calculated domestically could be used in the EU. In accordance with the Act, domestic financial benchmark users can use the RFR as an alternative index to brace for the discontinuation of major indexes.

(Replacement of the Ask Price-Based Interest Rate) Since the LIBOR scandal in 2012, the basic direction of global benchmark rate reform has been toward the use of benchmark rates based on actual transactions, rather than on ask prices, in order to enhance the reliability and transparency of the indexes. Domestically, there has also been a need to replace the benchmark rates that are based on ask prices, whose price discovery function has been weakened due to declines in the volume of issuances and transactions.

(Enhancing Consistency with International Standards) After the discontinuation of the LIBOR across international financial markets, an RFR that has been developed by major countries, including the U.S., the U.K., and the euro area, is highly likely to be used as the reference rate. On top of this, foreign investors are highly likely to require the use of a domestic RFR as a Korean won index in their transactions with domestic financial companies.


The candidates for the RFR included the overnight call and the overnight repo rates. 

The call rate is the interest rate at which financial institutions can borrow or lend short-term (overnight) uncollateralized funds to adjust temporary deficits or excesses of funds. The main participants include banks, securities companies, and asset management companies. Securities companies and asset management companies can only operate as borrowers and lenders, respectively. 

The repo rate is the interest rate at which transaction counterparties agree to buy or sell the securities back at certain prices at a future point in time or on a date notified by a counterparty. Unlike the call rate, repo transactions involve collateral, including government bonds and other prime bonds. Borrowers are mostly non-bank financial institutions, such as securities and asset management companies.

The Working Group broke down the call and repo rates by borrower and collateral type, and closely examined them in order to assess their credentials.

After a series of discussions and votes by the Working Group’s Market Participants Group, and in consideration of the risk-freeness, underlying market conditions and global consistency, the call rate on borrowings by banks and Korea Securities Finance Corporation (KSFC) and the repo rate on government bonds and Monetary Stabilization Bonds were selected as the final candidates.


The overnight repo rate was selected as the RFR based on the Market Participants Group’s consideration of the abundant liquidity and financing conditions for financial institutions in the repo market, and its usability in the derivatives market. 


A risk-free reference rate (RFR) should reflect average funding conditions in financial markets, while excluding credit risks at individual financial firms.

The Bank of Korea Base Rate is determined by the Monetary Policy Board when conducting monetary policy, not by any supply or demand for funding in financial markets. Also, they don’t change in accordance with daily financial market conditions. 

Korea Treasury Bond (KTB) yields were eligible to be RFR candidates because there are almost no credit risks to KTB yields. However, since they could change depending on the government’s supply and demand conditions, it is possible that they could not reflect actual funding conditions in the markets. Moreover, if financial market unrest were to grow, market rates would increase, but treasury bond yields could fall due to the appetite for safe assets. Therefore, not even major economies considered policy rates or treasury yields as potential RFR candidates.


The Working Group on Developing an Alternative Benchmark Rate (the Working Group), as part of the Reference Rate Reform Task Force, began work in July 2019 with the objective of developing an RFR applicable to domestic Korean won-denominated transactions. The Working Group consisted of a range of policy authorities, including the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service, as well as related organizations (associations and the KSD), private financial institutions (banks, securities companies, and asset management companies), and an expert advisory group (the Korea Institute of Finance, the Korea Capital Market Institute, and the Korea Exchange). 


The KOFR can be used as a reference rate for future contracts of, for example, interest rate swaps and floating rate notes. Also, it is hoped that the rate will serve as a fallback rate in times of emergency, such as during any discontinuation of the CD rate.


The KSD, which provides securities settlement and OTC-repo repurchase services, was designated as the organization responsible for calculating the RFR, in recognition of its capacity to build a highly credible calculation and its disclosure system, through the cross-checking of transaction data and settlement data of OTC repo transactions.

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