Financial institution of Korea Governor Rhee Chang-yong has known as for the secure institution of the risk-free benchmark price “KOFR” forward of subsequent 12 months’s inclusion within the World Authorities Bond Index (WGBI).
On the opening ceremony of the “Convention for Brief-term Monetary Market Improvement and KOFR Activation” collectively hosted by the Financial institution of Korea and the Korea Institute of Finance on Nov. 4, Rhee said, “I hope this convention will broadly focus on sensible options to speed up the tempo and reliability of KOFR growth, instructions for bettering the repo market system, and the position of open market operations,” including, “Primarily based on this basis, I anticipate we’ll advance our short-term monetary market construction by one stage and KOFR will efficiently set up itself as a benchmark price within the monetary market.”
Rhee notably emphasised, “Forward of alternatives for development reminiscent of WGBI inclusion, we should hurry to arrange by proactively presenting the event route of the benchmark price system to reinforce funding incentives and strengthen the worldwide credibility of our monetary market,” stating, “The BOK will even proceed coverage help and institutional preparations.”
The KOFR price is a risk-free benchmark price calculated utilizing in a single day RP charges collateralized by authorities bonds and financial stabilization bonds. It’s characterised by being calculated primarily based on precise transactions, eliminating the opportunity of manipulation reminiscent of rate-fixing, and sustaining ranges practically similar to the bottom price.
Such risk-free benchmark charges turned the worldwide commonplace after the 2012 LIBOR scandal. As manipulation points with LIBOR charges, which have been calculated primarily based on funding banks’ quotes, emerged, the necessity for brand new benchmark charges arose, main main nations together with the USA, United Kingdom, and Switzerland to undertake them. Nevertheless, in Korea, CD charges are nonetheless used as vital indicators.
Rhee in contrast KOFR to a brand new visitors mild and CD charges to an previous visitors mild, emphasizing the Monetary Companies Fee’s position. He said, “We’re within the course of of putting in a brand new visitors mild, and the Monetary Companies Fee’s position is essential in figuring out how lengthy the visitors mild will final,” including, “If there are previous visitors lights, there can be important confusion when abroad buyers getting into by way of WGBI use derivatives associated to our authorities bonds.”
The BOK additionally shared the progress of KOFR activation efforts and transaction standing on today. Since asserting the “Three-Stage Technique for Benchmark Price Transition” in August final 12 months, the BOK has been systematically pursuing activation duties for every market by way of working group discussions.
The three-stage technique consists of building technical foundations for KOFR growth, increasing KOFR market share by way of growth methods, and eradicating CD charges from main indicators and transitioning benchmark charges to KOFR.
Thanks to those efforts, KOFR-related transaction volumes have quickly expanded. KOFR-based rate of interest swap (OIS) transactions elevated 70-fold in comparison with the earlier 12 months.
Han Min, supervisor of the BOK Cash Market Group, said, “Since KOFR started being calculated in 2019, when evaluating absolute ranges with CD charges, KOFR has been decrease for many durations and the distinction from the bottom price can be smaller,” including, “Subsequently, when unfold charges are the identical, KOFR mortgage merchandise may cut back shoppers’ mortgage curiosity burden in comparison with CD rate-based merchandise.”
In the meantime, Kwon Dae-young, vice chairman of the Monetary Companies Fee, who delivered the opening remarks collectively on today, introduced that detailed measures for KOFR activation should be ready by the primary half of subsequent 12 months. Kwon said, “Authorities together with the BOK and Monetary Companies Fee will current instructions primarily based on detailed measures within the first half of subsequent 12 months.”
