KSD Promotes Provision of CD Alternative Rates Using KOFR

The Korea Securities Depository announced on the 9th that it plans to provide a market for CD alternative interest rates based on the Korea Overnight Financing Rate (KOFR), which applies the International Swaps and Derivatives Association (ISDA) fallback calculation methodology, in preparation for emergency situations such as the suspension of CD rate calculation.

Last year, the Depository implemented a CD alternative interest rate calculation model by analyzing LIBOR alternative rate calculation methodologies through consulting with external experts, and this year, it has applied the ISDA calculation methodology to the CD alternative interest rate calculation model to pilot the calculation and operation of the CD alternative interest rate spread.

Major foreign countries such as the United States and the United Kingdom calculate LIBOR alternative rates by applying the ISDA calculation methodology, utilizing each country's risk-free reference rates (RFR). A certain spread is added to the RFR determined by each country. Similarly, the CD alternative interest rate is calculated by adding a certain spread to KOFR, applying the ISDA calculation methodology used for LIBOR alternative rates. The ISDA calculation methodology adjusts for term and credit differences, which are structural differences between LIBOR and RFR, by correcting for term risk and credit risk. Likewise, the CD alternative interest rate calculation methodology adjusts for term risk and credit risk to align the structural differences in term and credit between CD and RFR.

A representative from the Depository explained, "Since the CD alternative interest rate using KOFR applies the ISDA calculation methodology like major foreign countries, it possesses international consistency, reliability, and acceptability," adding, "In situations where users must individually determine the CD alternative interest rate, this also aligns with the original purpose of RFR development when selecting the domestic RFR."

The Depository plans to hold a briefing session for industry and academia on the 14th to explain the CD alternative interest rate calculation methodology and gather market opinions, after which it will provide the CD alternative interest rate using KOFR to the market through the KOFR website and other channels.