First-year target exceeded by 2.1 percentage points; share rises to 18.5% in Q3

Floating-rate note issuance reaches 20.5 trillion won, accounting for 32.3% of total

KORIBOR-based loans to be phased out from April next year

Overseas investor roadshows set for London and Hong Kong next month

A loan consultation desk at a bank in Seoul. [Herald DB]
A loan consultation desk at a bank in Seoul. [Herald DB]

The share of interest rate swap transactions based on Korea's risk-free benchmark rate, KOFR, has exceeded the authorities' first-year target, while Korea Development Bank and Industrial Bank of Korea have launched KOFR-based corporate loan products totaling 1 trillion won ($755 million), extending the rate's reach into the lending market.

According to the Financial Services Commission, the Financial Supervisory Service and the Bank of Korea, KOFR-based transactions accounted for 12.1 percent of all interest rate swap deals in the financial sector from July last year through June this year.

A risk-free reference rate is a benchmark derived from ultra-short-term rates grounded in actual transactions and conducted at sufficient volume to make manipulation difficult. Authorities developed KOFR — the Korea Overnight Financing Repo rate — to address the shortcomings of the certificate of deposit yield, which dominates domestic financial transactions but has struggled to accurately reflect market rate movements.

Authorities had set target shares for KOFR-based transactions of 10 percent in the first year (July last year through June this year) and 25 percent in the second year (July this year through June next year), with plans to raise the share by 15 percentage points annually until it reaches at least 70 percent by June 2030.

Against that benchmark, the first-year KOFR transaction share of 12.1 percent beat the target by 2.1 percentage points. In the third quarter of this year, the share provisionally climbed further to 18.5 percent.

Banks issued 20.5 trillion won in KOFR-based floating-rate notes in the first nine months of this year, provisionally accounting for 32.3 percent of total floating-rate note issuance over that period.

The Financial Supervisory Service has also established new targets for banks' KOFR-based floating-rate note issuance, requiring at least 10 percent of total floating-rate note issuance to be KOFR-based from July this year through June next year, rising by 10 percentage points annually until it reaches at least 50 percent by June 2031.

The Bank of Korea said it will raise the weighting given to KOFR-based transaction performance when selecting institutions eligible to participate in its open market operations, as part of broader efforts to promote KOFR adoption.

Korea Development Bank and Industrial Bank of Korea each launched KOFR-based corporate loan products worth 500 billion won on Monday, bringing the combined total to 1 trillion won and marking the rate's expansion into the lending market.

Korea Development Bank introduced the "NEXT KOREA KOFR Short-Term Credit Line Special Product," a facility of up to 500 billion won with a maximum loan term of one year. Small and medium-sized enterprises and mid-sized companies are eligible for a preferential rate of up to 0.65 percentage points, with an additional 0.05-percentage-point discount available to companies based in or relocating to regional areas. Industrial Bank of Korea launched a product of the same size — the "KOFR Short-Term Liquidity Support Loan" — targeting small and medium-sized enterprises facing temporary cash shortfalls due to delayed payment collection, seasonal funding needs, or rising payroll and rental costs. The bank will offer rate reductions of up to 0.3 percentage points for small and medium-sized enterprises in regional areas and will waive early repayment fees entirely to ease short-term repayment burdens.

The Korea Federation of Banks revised its "Model Guidelines on Loan Interest Rates" in June to include KOFR as an eligible loan reference rate, paving the way for smooth product launches. The Korea Securities Depository has also been publishing additional disclosures of 30-, 90- and 180-day KOFR averages since August.

Meanwhile, new loans based on KORIBOR — a rate whose calculation method resembles that of Libor, the London interbank offered rate that was subject to manipulation and collusion by banks in 2012 — will be discontinued from April next year. As a result, COFIX is expected to account for a growing share of the lending market.

The Korea Federation of Banks has also proactively strengthened its oversight of the COFIX calculation process. Starting with the June COFIX disclosure, it added an audit office review and approval step on top of the existing pre-verification by the calculation department to ensure rates are computed accurately. It also added key benchmark items under the Financial Transaction Indicators Act to its quarterly self-inspection checklist.

To help foreign investors expand their use of KOFR, the Bank of Korea, the Financial Services Commission, the Financial Supervisory Service, the Korea Securities Depository and Korea Exchange will jointly hold overseas investor relations events in London and Hong Kong next month to promote KOFR adoption.


kimstar@heraldcorp.com
hyuk@heraldcorp.com