KOFR share of bank floating-rate bonds to expand

Target rises 10 percentage points a year, reaching 50% by 2031

Interest rate swap KOFR target also raised to 70%

[Newsis]
[Newsis]

The Financial Supervisory Service will begin requiring banks and other financial firms to make greater use of KOFR — the Korea Overnight Financing Repo Rate, a risk-free benchmark — starting July 1. The move aims to gradually replace the certificate of deposit rate, which has long served as the standard reference for loans and bond yields, with KOFR, which is calculated from actual transactions and considered more reliable.

The FSS announced Monday that it would launch one new administrative guidance measure and extend one existing measure beginning July 1, in line with the government's benchmark interest rate reform agenda, to accelerate KOFR adoption in financial markets. KOFR is an overnight repo rate collateralized by government bonds and monetary stabilization bonds. The government unveiled its benchmark rate reform plan through the Financial Services Commission in March, setting out a roadmap to transition from existing quote-based rates to the risk-free KOFR.

Under the new guidance, banks that issue floating-rate notes will be subject to a new KOFR-referenced issuance target. Most bank floating-rate notes are currently issued with reference to the CD rate, and the measure is intended to shift that practice toward KOFR. In the first year — from July 1 through June 2027 — banks must issue at least 10 percent of new floating-rate notes with KOFR as the reference rate. The target will rise by 10 percentage points each year, reaching 50 percent by June 2031.

Policy finance institutions — Korea Development Bank, Industrial Bank of Korea and Export-Import Bank of Korea — face targets set 15 percentage points higher than commercial banks, starting at 25 percent in the first year and rising to 65 percent by June 2031. The administrative guidance covers a total of 20 institutions: seven commercial banks, five regional banks, two special-purpose banks, three internet-only banks and three policy finance institutions.

The FSS is also raising the KOFR transaction target in the interest rate swap market. Since last July through this month, the regulator has run first-year guidance requiring that at least 10 percent of interest rate swap transactions reference KOFR. The share of KOFR-based interest rate swap transactions stood at only 11.8 percent as of early this year, however, indicating that reliance on existing quote-based benchmarks such as the CD rate remains high.

In the second year, running from July 1 through June 2027, the target will rise from 20 percent to 25 percent, and the final fifth-year target — previously set at 50 percent for June 2030 — has been lifted to 70 percent. The annual increment will also widen from 10 percentage points to 15 percentage points per year.

Incentives to encourage longer-tenor transactions are also being strengthened: the bonus rate for trades with maturities of more than five years and up to 10 years will rise from 10 percent to 30 percent, while the rate for trades exceeding 10 years will increase from 20 percent to 50 percent. A total of 29 firms are subject to this guidance, including 17 banks and 12 securities companies.

"We will continue to monitor transaction trends related to benchmark rate reform and support market participants' voluntary efforts to promote KOFR adoption," an FSS official said.


psj@heraldcorp.com