The Korea Overnight Financing Repo Rate (KOFR) is Korea’s risk-free reference rate (RFR).
A RFR is a theoretical rate that an investor can expect without any credit or liquidity risk. In calculating the RFR in reality, it is necessary to use financial transactions that are theoretically near risk-free.
Major countries, such as the U.S., the U.K., and countries in the euro area, select (collateralized or uncollateralized) overnight rates for their RFRs. This is because overnight transactions are conducted mainly by financial institutions with high credit ratings and have short maturities, all of which makes these overnight rates near risk-free. Furthermore, since they are calculated based on actual transactions, these rates are completely free from any risk of manipulation.
Based on examples from major countries, the KOFR is calculated using overnight RP rates on government bonds and MSBs.
Who calculates the KOFR?
The KOFR is calculated by the Korea Securities Depository (KSD).
By 11:00 a.m. every business day, the KSD publishes the KOFR for the previous business day.
How is the KOFR calculated?
In order to improve the reliability of Korea’s benchmark rate, the KOFR is calculated based on a volume-weighted average after removing data corresponding to the top 5% and the bottom 5% in terms of trading volume.
The KOFR is calculated based on the following steps.
①Sort individual transactions (over-the-counter overnight RP transactions in Korean won with government bonds and MSBs as collateral) in descending order.
②Remove 5% of the total trading volume starting with the transaction with the highest interest rate, and 5% of the total trading volume starting with the transaction with the lowest interest rate. In total, 10% of the total trading volume is removed.
③Calculate the trading volume-weighted average rate.
For more details, please visit the KSD website.
Development of the KOFR
Since the LIBOR scandal in 2012, major countries have been working on developing a risk-free reference rate (RFR) as part of their efforts on reference rate reform, in accordance with IOSCO Principles and based on recommendations from the FSB.
In line with these international trends, Korea launched its own Benchmark Rate Reform Task Force in June 2019 to improve the existing reference rate and to develop an RFR in order to increase the confidence and transparency of domestic financial transactions.
The development of a domestic RFR was led by the Working Group on Developing an Alternative Benchmark Rate, a subgroup of the Task Force. The Working Group began its activities in July 2019, and pursued the development of an RFR that can now be used across domestic transactions in Korean Won.
In February 2021, after voting by MPG(Market Participants Group), the Working Group selected the overnight repo rate on government bonds and monetary stabilization bonds as Korea’s RFR, and after discussions and more voting by MPG decided on other details, such as the name of the RFR and its calculation method.
Based on this, the Korea Securities Depository officially listed its domestic RFR, the KOFR, starting in November 2021.