Lee Chang-yong, Governor of the Bank of Korea, emphasized on the 28th that efforts must be made to activate domestic risk-free benchmark rate (KOFR) transactions.
In his opening remarks at the 'Bank of Korea-Capital Market Research Institute Joint Conference' held on the afternoon of the same day on the 2nd floor of the Bank of Korea annex in Jung-gu, Seoul, Governor Lee said, "I ask for active participation and support so that KOFR can quickly establish itself as the standard for financial transactions in our country," adding, "To avoid falling behind global standards, we need the courage and wisdom to proactively accept and overcome the changes ahead of us."
On the day, Governor Lee stated, "Following the LIBOR manipulation scandal, major advanced countries responded to the increased need for benchmark rate improvements by developing and selecting risk-free benchmark rates based on actual transactions that fit their domestic financial market conditions," and added, "Our country also began reforming benchmark rates in line with international trends and in February 2021 selected the overnight repurchase agreement (RP) rate collateralized by government bonds and monetary stabilization bonds as the domestic risk-free benchmark rate."
He continued, "However, despite questions being raised about the appropriateness of the CD rate as a benchmark rate due to a lack of actual transactions, it is still conventionally used as a reference rate for derivative transactions and others," he pointed out.
He said, "This is because there is little incentive for market participants to voluntarily break away from the long-standing widespread use of the CD rate, and conditions for KOFR to be utilized are also lacking, such as the absence of an OIS (Overnight Index Swap) market that exchanges overnight floating rates and term fixed rates," adding, "Foreign financial institutions, which are major counterparties in the derivatives market, still inevitably accept these domestic practices, but they are gradually raising concerns about the continued use of the CD rate, which includes credit risk, contrary to international trends."
Governor Lee said, "Looking at overseas cases, the transition process to new benchmark rates required a lot of time and effort, and the process was not always smooth," and added, "In Korea as well, many challenges are expected for policymakers and market participants to resolve while establishing trading practices for KOFR-linked derivatives and spot markets and building systems and institutions to create a new market," concluding, "I sincerely ask for your active participation and support so that KOFR can quickly establish itself as the standard for financial transactions in our country."
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