Accelerating Shift from CD Rate to KOFR in the Market... Expansion to 70% by 2030

Target Ratio Raised by 20 Percentage Points; KOFR-Based Loans to Launch in Second Half
CD Rate to Be Removed from Key Benchmarks by 2030; COFIX Inclusion Under Review

The government is accelerating the transition of the benchmark interest rate system for most financial transactions from the Certificate of Deposit (CD) rate to KOFR (Korea Overnight Financing Repo Rate), the domestic risk-free reference rate.

The previous goal of increasing the share of KOFR-based Overnight Index Swap (OIS) transactions to 50% by 2030 has been revised upward to 70%, and a new target has also been established for bond issuance. Korea Development Bank and Industrial Bank of Korea will launch KOFR-based loan products in the second half of this year, totaling 1 trillion won, to further broaden the base. Additionally, a clear timeline has been set to remove the CD rate from the list of critical benchmarks under the Financial Transaction Benchmark Act by the end of 2030.

Lee Changyong, Governor of the Bank of Korea (left), and Kwon Daeyoung, Vice Chairman of the Financial Services Commission, are sharing opinions at the "Bank of Korea-Korea Institute of Finance Joint Conference" held last November in Jung-gu, Seoul at the Bank of Korea. 2025.11.4 Photo by Jinhyung Kang

The Financial Services Commission and the Bank of Korea announced on the 30th that they had finalized the “Benchmark Interest Rate Reform Plan” at a council on benchmark rates and the short-term money market, presided over by Vice Chairman Kwon Daeyoung.

This benchmark reform plan is based on three main directions: ▲rapidly enhancing the credibility of benchmark rates, ▲minimizing market shocks during the process, and ▲strengthening protection for financial consumers. Four key tasks have been developed around these directions.

The core of the plan is to strengthen administrative guidance to ensure KOFR, introduced in 2021, quickly replaces the CD rate and functions as the benchmark rate in the Korean financial market. KOFR is a benchmark rate calculated based on the most actively traded ultra-short-term interest rates, such as call rates and repurchase agreement (RP) rates. As KOFR is calculated using rates from actual transactions, it is difficult to manipulate and typically remains very close to the base rate. KOFR was introduced as a new framework after concerns emerged over quote-based interest rate systems following the 2012 LIBOR (London Interbank Offered Rate) manipulation scandal, which had served as the global standard. The government is actively promoting KOFR to replace the CD rate, which is still widely used as a key benchmark in the market.

This reform plan includes an upward revision of the KOFR-based interest rate swap transaction ratio targets, which were first set through administrative guidance in July last year. The Financial Services Commission and the Bank of Korea had originally planned to raise the KOFR-based interest rate swap ratio by 10 percentage points annually over five years to reach 50% by June 2030. This target will now be increased by 15 percentage points each year, aiming to reach 70%. As a result, from July 2026, which is the second year of implementation, financial institutions will be required to conduct at least 25% of all interest rate swaps based on KOFR for one year.

In the floating-rate note (FRN) market, where risk-free benchmark rates serve as the main reference in major advanced economies such as the United States and the United Kingdom, a new issuance target has been set for banks to expand the use of KOFR. When the Financial Supervisory Service introduces administrative guidance in June, banks will be required to issue at least 10% of their total FRNs based on KOFR for one year starting in July, and increase the proportion by 10 percentage points each year. The plan is to expand KOFR-based FRN issuance to 50% by June 2031. In particular, policy finance institutions such as Korea Development Bank, Export-Import Bank of Korea, and Industrial Bank of Korea will set their targets 15 percentage points higher than those for commercial banks, reaching 65% within five years.

KOFR-based loan products will also be introduced. This is to expand the foundation for KOFR usage and provide consumers with more options. Korea Development Bank and Industrial Bank of Korea plan to launch KOFR-based loan products totaling 1 trillion won in the second half of this year, supporting short-term working capital for small and medium-sized enterprises and small business owners. The Bank of Korea will also boost the weight of KOFR-based transaction performance in its selection of open market operation counterparties this year to help activate the market.

The CD rate will be removed from the list of critical benchmarks at the end of 2030. Despite its low share of actual transactions and resulting limitations in reflecting market rates, the CD rate is still widely used in markets such as the interest rate swap market. The decision to specify the timing of CD rate removal aims to clearly signal the determination to transition to KOFR as the new benchmark. The Financial Services Commission explained that the Bank of Korea and other related institutions plan to promote KOFR-based swaps and related products to foreign investors through IR activities in the second half of this year, encouraging them to use KOFR instead of the CD rate.

The government will also gradually reduce the use of KORIBOR (Korea Interbank Offered Rate). KORIBOR, a quoted rate used in interbank short-term funding transactions, is similar in calculation method to LIBOR, which has already been discontinued internationally, resulting in limited utility. Currently, only a few banks use KORIBOR as a loan benchmark rate. Starting in April next year, new loans based on KORIBOR will be discontinued in principle to reduce its use. However, existing customers may continue to use KORIBOR as the benchmark rate for the duration of their contracts. For loan extensions after April next year, borrowers will have to switch to alternative benchmark rates such as COFIX or bank bonds when renewing their contracts.

The government will also proactively strengthen the calculation system for COFIX (Cost of Funds Index). As the use of KORIBOR and the CD rate declines, the share of COFIX in the lending market is expected to increase. The Korea Federation of Banks, which calculates COFIX, will first strengthen its self-inspection of COFIX calculation and approval processes to the level required for critical benchmarks by law. Member banks, which provide the underlying data for COFIX, will also conduct self-checks on the accuracy of the data and the adequacy of their internal controls. The Financial Supervisory Service will focus on reviewing the results. If COFIX becomes more widely used in the financial market, designating it as a critical benchmark under the law will also be considered.

Vice Chairman Kwon Daeyoung of the Financial Services Commission stated, “Benchmark interest rates are a core infrastructure of the financial market, serving as the basis for all financial transactions including derivatives, bonds, and loans. Although they are not always visible, when trust in benchmark rates is shaken, as in the 2012 LIBOR scandal, the resulting impact spreads to overall financial market instability and causes harm to financial consumers.”

He added, “It is necessary to proactively and rapidly pursue a comprehensive reform of the major domestic benchmark rates before problems arise in the financial market. In particular, we will use the current crisis in the Middle East as an opportunity for reform, building a robust market structure that will not be shaken by crises.”

Park Jongwoo, Deputy Governor of the Bank of Korea, commented, “Clearly announcing the timing of the CD rate’s removal from the list of critical benchmarks, ahead of the inflow of bond funds related to the World Government Bond Index (WGBI) starting this week, marks an important milestone in our capital market’s advancement toward global standards. Enhancing the credibility of the benchmark rate system will serve as a foundation for encouraging foreign capital inflows and creating a virtuous cycle for the development of the financial market.”

This content was produced with the assistance of AI translation services.