[Asia Economy Reporter Kim Hyo-jin] The government plans to consider the overnight call rate or repurchase agreement (RP) rate as a risk-free benchmark interest rate in response to the Libor (London Interbank Offered Rate) manipulation scandal.
On the afternoon of the 20th, the Financial Services Commission and the Bank of Korea held a meeting of the "Benchmark Interest Rate Improvement Task Force" at the Government Seoul Office, where they decided on this policy and agreed to gather opinions for a final decision. The authorities plan to select a risk-free benchmark interest rate by June.
Before selecting candidates, the Financial Services Commission explained that it conducted surveys on the current status and characteristics of domestic call and RP rates, cases of selection in major countries, criteria and procedures for selecting risk-free benchmark interest rates, and market participant surveys on benchmark reform trends.
Since the Libor manipulation scandal, major countries have strengthened public regulation of benchmark interest rates and are improving benchmark rates based on actual transaction prices rather than quotes.
Libor is an average interest rate calculated based on rates submitted by major UK banks. It is an important benchmark referenced in setting base rates for corporate loans, mortgage loans, credit cards, and more.
In 2012, it was revealed that some major banks submitted false data to manipulate the rates, and at the request of the Group of Twenty (G20), the Financial Stability Board (FSB) proposed improvements to major financial benchmarks.
Additionally, it recommended selecting a risk-free benchmark interest rate that minimizes manipulation risk and removes credit risk, reflecting only changes in the base rate.
As of June last year, the balance of domestic Libor-linked financial products was 1,994 trillion won, of which contracts maturing after the Libor rate discontinuation (2022) amount to 683 trillion won.
Son Byung-doo, Vice Chairman of the Financial Services Commission, who chaired the Benchmark Interest Rate Improvement Task Force meeting, urged that "it is desirable to gradually reduce new contracts using the Libor rate."
Vice Chairman Son also requested, "In cases where financial companies inevitably enter into contracts using the Libor rate, alternative clauses should be included in the contracts to prepare for the eventual discontinuation of the related rate calculation."
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