The Financial Services Commission held a meeting with the Bank of Korea, the Financial Supervisory Service and relevant industry groups and institutions to monitor how domestic financial institutions are preparing for a transition away from LIBOR (London interbank offered rate) and discuss issues surrounding the operation of domestic financial benchmark rates.

In coordination with relevant institutions and financial companies, the government has been working to make a transition away from LIBOR, responding to the European Union’s Benchmark Regulation (BMR) compliance and participating in the global benchmark rate reform efforts. The following is an overview of these efforts so far.

First, all financial contracts based on non-USD LIBOR, which ceased to be published in 2022, were successfully converted, and financial contracts based on LIBOR, which will be discontinued from July 2023, are being converted to an alternative rate such as secured overnight financing rate (SOFR). As of the end of May 2023, about 95.3 percent of domestic financial institutions’ contracts have made this transition.

Second, the government enacted the Act on the Management of Financial Benchmarks, which became effective in November 2020 and reflects international standards on benchmark rate reform, to strengthen credibility of domestic benchmark rates. In order to ensure a seamless utilization of domestic benchmark rates (Korea overnight financing repo rate and certificate of deposit rate) in the European Union, authorities have been working with EU counterparts to get an approval for congruity.

Third, in February 2021, authorities selected the Korea Overnight Financing Repo Rate (KOFR) as Korea’s new risk-free reference rate (RFR) and designated it as a critical benchmark rate under the Act on the Management of Financial Benchmarks. The KOFR is being published by the Korea Securities Depository (KSD) since November 2021. Currently, three-month KOFR futures and exchange traded funds (ETFs) have been introduced which are listed on the Korea Exchange (KRX). However, there has been no direct usage of KOFR in interest rate derivatives trades or spot transactions so far. The certificate of deposit (CD) interest rate was also selected as a critical benchmark rate under the Act on the Management of Financial Benchmarks in March 2021, but its statutory effect is yet to go into force as the FSC needs to designate an administering agency and approve its duties. As such, the FSC plans to designate a CD rate administering agency and approve its duties at a regular meeting scheduled in June to ensure that CD rates are calculated and published as a more credible benchmark rate based on an improved method.

Authorities will continue to monitor how domestic financial institutions are making transitions away from LIBOR (discontinuation expected in July 2023) and encourage them to make sure that conversion of contracts takes place seamlessly. Authorities will also work with relevant institutions and financial sectors to seek ways to promote the use of KOFR in derivatives and spot transactions. The issue of designating the Korea Financial Investment Association as the administrator of CD rates will be decided by the FSC during its regularly scheduled meeting in June. The meeting on benchmark rate and short-term money market will be held regularly to check updates and seek coordination on the future direction of benchmark rate operation. In the meetings, authorities will also discuss short-term money market issues that are closely linked to benchmark rates.

* Please refer to the attached file for details.