FSS to Reduce CD Rate Reliance, Encourage KOFR Use Starting Next Month

Starting next month, the Financial Supervisory Service (FSS) will encourage banks to use the Korea Overnight Financing Repo Rate (KOFR) when issuing floating rate notes (FRNs). This move is aimed at excluding the certificate of deposit (CD) rate, which has been used as a representative benchmark rate, from the list of key indices.

The FSS announced on June 29 that it will implement administrative guidance to promote KOFR-based transactions beginning next month. This measure comes amid concerns that the CD rate, which is calculated based on quotations, poses risks of rate manipulation or distortion. Until now, most FRNs issued by banks have used the CD rate as their benchmark.

From next month through June of next year, the FSS plans to guide banks and policy financial institutions to base at least 10% and 25%, respectively, of their FRN issuances on KOFR. The target proportion will increase by 10 percentage points each year. By June 2031, the aim is for 50% of bank issuances and 65% of policy financial institution issuances to be based on KOFR.

The FSS also plans to expand KOFR-based transactions in interest rate swaps (IRS), which are used to hedge against interest rate fluctuation risks. Since July last year through this month, the FSS has implemented administrative guidance for at least 10% of IRS transactions to use KOFR as the benchmark. This proportion will be raised to 25% from next month through June of next year. The target for June 2030 will also be increased from the previous 50% to 70%.

Additionally, incentives to encourage ultra-long-term transactions will be expanded. Currently, the proportion of long-term contracts among KOFR-based IRS transactions stands at 20%. Previously, an extra rate of 10% was applied to contracts exceeding five years but less than or equal to ten years, and 20% for those exceeding ten years, in performance evaluations. These rates will now be raised to 30% and 50%, respectively.

An FSS official stated, "We will review the current status of benchmark rate reform and support voluntary efforts by market participants to promote KOFR utilization."

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