Lee Chang-yong, the Governor of the Bank of Korea, rises to deliver the opening speech at the policy conference on major tasks and future directions for promoting the Korea Overnight Financing Repo Rate (KOFR) at the Bank of Korea’s annex building in Jung-gu, Seoul, on the afternoon of the 28th.
From next year, the share of the Korea Overnight Financing Repo Rate (KOFR) in the derivatives market will be significantly expanded. The government and the Bank of Korea aim to increase the share of KOFR in interest rate swaps to 50% by 2030.
In collaboration, the Bank of Korea and the Financial Services Commission held the 5th Benchmark Rate and Short-term Financial Market Meeting to discuss the “2025 Benchmark Rate Reform Promotion Plan.” The meeting included participants from institutions such as the Financial Supervisory Service, Korea Securities Depository, Korea Exchange, academia, and market experts.
A benchmark rate refers to a rate used as a reference for determining the value of money or financial products that must be paid or exchanged as a result of financial transactions. Typically, a rate that represents a financial company’s short-term funding cost is used.
Currently, interest rate derivatives trading and variable rate funding primarily rely on CD (Certificate of Deposit) rates. However, CD rates are limited by their dependence on expert judgment rather than actual transactions, which can prevent them from effectively reflecting market conditions.
Internationally, through global benchmark rate reforms, transaction-based Risk-Free Rates (RFR) have been established as the primary benchmark rates for derivatives. Although Korea introduced the KOFR in 2021, its adoption has been slow.
The government and the Bank of Korea have initially agreed to conduct a portion of new interest rate swap derivatives transactions based on KOFR starting next year. The “KOFR-OIS (Overnight Index Swap)” expansion plan will be implemented from July next year.
Next year, approximately 29 financial companies with significant trading volumes in the interest rate swap market will participate initially. They plan to use KOFR for at least 10% of interest rate swap transactions conducted between July 2025 and June 2026.
The target KOFR share will be flexibly adjusted upward by about 10 percentage points each year, and the range of participating financial companies will be expanded. Consequently, by 2030, it is projected that the KOFR share in the interest rate swap market will exceed 50%.
The government, the Bank of Korea, and related organizations are also pursuing support policies for KOFR expansion. A central clearing infrastructure is being developed to facilitate participation in KOFR-OIS transactions, with the system’s service expected to commence by October next year, centered on the Korea Exchange.
Furthermore, the Bank of Korea intends to incorporate records of KOFR-based derivatives trading, spot bond issuance and purchase, and loan operations when selecting institutions for open market operations to support initial liquidity for KOFR-linked products.
The process of standardizing emergency alternative benchmarks for OTC derivatives, which are currently CD rate-based, to KOFR is also underway.
The issuance of KOFR variable rate bonds will be increased. Starting next year, policy finance institutions (such as the Korea Development Bank, Industrial Bank of Korea, and Export-Import Bank) and banks are expected to procure over 10% of their funding through the issuance of KOFR-based floating rate notes (FRNs). The annual issuance volume of KOFR FRNs is predicted to be around KRW 3 trillion next year, with a mid- to long-term expansion to KRW 4-5 trillion.
Vice Governor of the Bank of Korea, Yoo Sang-dae, remarked, “Activating KOFR is a crucial milestone for the development of the domestic financial market and has significant implications for enhancing the effectiveness of monetary policy. We will actively strive to ensure a swift transition to KOFR as the benchmark rate.”