South Korea is taking steps to promote the adoption of the Korea Overnight Financing Repo Rate (KOFR) as a reference rate in financial markets. This move comes as part of a global trend to move away from benchmarks based on bank submissions, such as the London Interbank Offered Rate (Libor). By incentivizing the use of KOFR, South Korea aims to align itself with international best practices and enhance the transparency and reliability of its financial markets.
One of the key incentives being floated by South Korean authorities is the consideration of banks‘ performance in KOFR-linked transactions when selecting institutions for the Bank of Korea’s open market operations. This means that banks that actively participate in transactions linked to KOFR may have a competitive advantage in accessing liquidity from the central bank. This incentive is designed to encourage banks to transition to using KOFR as a reference rate and to increase the overall liquidity and efficiency of the financial markets.
The joint statement released by the central bank and the Korea Capital Market Institute outlines the potential changes that may be implemented in the future. According to Hwang Young Woong, head of the BOK’s money markets team, any changes are likely to be applied in 2025. This timeline gives banks and other market participants ample time to prepare for the transition and adjust their systems and processes accordingly.
The adoption of KOFR as a reference rate is expected to have several benefits for the South Korean financial markets. By moving away from benchmarks based on bank submissions, such as Libor, South Korea can reduce the risk of manipulation and enhance the credibility and integrity of its financial markets. Additionally, using KOFR as a reference rate can improve the accuracy and consistency of pricing in financial transactions, leading to more efficient and transparent markets.
Overall, South Korea’s efforts to promote the adoption of KOFR as a reference rate demonstrate its commitment to modernizing and strengthening its financial markets. By aligning itself with global best practices and incentivizing the use of KOFR, South Korea is taking proactive steps to enhance the stability, transparency, and efficiency of its financial system. As the transition to KOFR progresses, market participants can expect to see increased liquidity, improved pricing accuracy, and a more robust and resilient financial market infrastructure.
