SEOUL, March 30 (AJP) -South Korea will overhaul its benchmark interest rate system, phasing out vulnerable quote-based rates and shifting to a transaction-based standard to prevent manipulation risks and strengthen market credibility.
The Financial Services Commission (FSC) finalized the reform plan Monday at a joint meeting with the Bank of Korea (BOK) and the Financial Supervisory Service (FSS), marking one of the most comprehensive changes to the country’s rate-setting framework in decades.
At the center of the reform is the transition to the Korea Overnight Financing Repo Rate (KOFR), a risk-free benchmark based on actual overnight repo transactions backed by government securities. Unlike existing quote-based rates, KOFR is calculated from real trades, making it more transparent and resistant to manipulation.
The move reflects lessons from the 2012 global LIBOR scandal, when major banks were found to have manipulated benchmark rates used to price trillions of dollars in loans and derivatives.
South Korean authorities see structural similarities in their own system, where the Korea Interbank Offered Rate (KORIBOR) is also based on bank-submitted quotes rather than transactions.
“If we remain complacent with familiar practices, it could eventually lead to financial accidents,” FSC Vice Chairman Kwon Dae-young said, stressing that maintaining trust in benchmark rates is a core responsibility of the financial sector.
Under the plan, banks will in principle stop issuing new KORIBOR-based loans starting in April 2027. Existing loans will remain valid until maturity, but borrowers will be encouraged to switch to alternative benchmarks such as COFIX or bank bond rates when renewing contracts.
The CD rate, another widely used benchmark, will also be gradually phased out. Authorities plan to remove its designation as a “key benchmark” under relevant law by the end of 2030, signaling a clear shift away from legacy pricing standards.
Both KORIBOR and CD rates have been criticized for relying on limited or non-transactional data, making them vulnerable to distortions and declining in relevance as market structures evolve.
The government aims to establish KOFR as the core benchmark across financial markets, from derivatives to bonds and lending.
To accelerate adoption, authorities raised the target share of KOFR-based transactions in the Overnight Index Swap (OIS) market to 70 percent by 2030, up from the previous 50 percent goal. In the floating-rate note (FRN) market, banks will aim to issue 50 percent of new products based on KOFR by mid-2031.
Policy lenders such as Korea Development Bank and Industrial Bank of Korea will lead the transition by launching a combined 1 trillion won ($730 million) in KOFR-linked loan products in the second half of this year.
Authorities also plan to provide incentives, including incorporating KOFR-based activity into central bank operations assessments, to encourage faster market adoption.
Officials framed the reform as a preemptive move to strengthen financial infrastructure before risks materialize.
Benchmark rates serve as the backbone of financial markets, underpinning loans, bonds and derivatives. When their credibility is compromised, the impact can spread quickly across the entire system, ultimately affecting consumers.
The reform also comes amid heightened market volatility linked to geopolitical tensions, reinforcing the urgency of building a more resilient and globally aligned rate system.
BOK Deputy Governor Park Jong-woo described the clear timeline for phasing out legacy benchmarks as “a significant milestone” in aligning Korea’s financial markets with global standards.
While the transition is expected to take several years, authorities signaled that this marks the beginning — not the end — of broader efforts to modernize Korea’s financial infrastructure.
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