KOFR-Based Interest Rate Swap Transactions Exceed Targets

The share of KOFR-based interest rate swap transactions has surpassed the initial target set by financial authorities. The Korea Development Bank (KDB) and Industrial Bank of Korea (IBK) are launching a total of 1 trillion won in KOFR-based corporate loans, expanding its application to the lending market.

According to the Financial Services Commission, Financial Supervisory Service, and Bank of Korea, the share of KOFR-based transactions in interest rate swaps within the financial sector was recorded at 12.1% from July of last year to June of this year, exceeding the first-year target of 10% by 2.1 percentage points. In the third quarter of this year, the share of KOFR-based transactions is reported to have increased to 18.5%.

The authorities have set a second-year target of 25% from July this year to June next year, with plans to increase it by 15 percentage points annually, aiming for over 70% by June 2030.

Financial authorities also plan to increase the use of KOFR in the floating rate note (FRN) market. The Financial Supervisory Service has introduced a new target for banks to issue KOFR-based FRNs, similar to practices in major developed countries like the U.S. and the U.K. Under this plan, at least 10% of the total FRN issuance from July this year to June next year will be based on KOFR, with annual increases of 10 percentage points until reaching over 50% by June 2031.

In the lending market, KDB and IBK will each introduce KOFR-based corporate loan products worth 500 billion won on the 26th, applying preferential interest rates to small and medium-sized enterprises located in provincial areas to reduce their interest burden.

Related systems and information provision frameworks have also been improved. The Korea Banks Association revised its 'Guidelines for Loan Interest Rates' in June to include KOFR as a benchmark interest rate. The Korea Securities Depository has been disclosing the average KOFR rates for the past 30, 90, and 180 days since August. The Bank of Korea has also decided to increase the evaluation weight of KOFR-based transaction performance when selecting institutions for open market operations compared to the previous year.

Additionally, starting in April next year, new loans utilizing the Korea Interbank Offered Rate (KORIBOR) will be discontinued. KORIBOR has a calculation method similar to that of the London Interbank Offered Rate (LIBOR), which has faced issues of manipulation and collusion in the past. In anticipation of increased use of the Cost of Funds Index (COFIX) in the future, the Korea Banks Association has strengthened its review of the calculation system.