The Korea Exchange said on the 22nd that it will launch central clearing for over-the-counter derivatives (OIS) based on the Korea Overnight Financing Repo rate (KOFR) on the 27th of next month.
The KOFR OIS clearing system is part of the financial authorities' plan to promote benchmark rate reform. KOFR is an index calculated and published by the Korea Securities Depository (KSD) and is created based on actual transactions in the repurchase agreement (repo) market for next-day maturities collateralized by Government Bonds and monetary stabilization bonds.
Eligibility to participate in clearing will be granted to the existing 54 clearing members (23 securities firms and 31 banks). From the start of clearing, applications will be accepted not only for new transactions concluded from that point but also for past transactions. To ease the burden on financial institutions and incentivize participation, the exchange plans to waive fees for one year after clearing begins.
KOFR OIS is a type of interest rate swap (IRS). While it shares the same transaction structure as an IRS, it differs in that the floating rate is calculated by applying KOFR with daily compounding. An IRS is a derivative in which fixed and floating rates are periodically exchanged on a notional amount in a specified currency, and in Korea the 91-day negotiable certificate of deposit (CD) yield is mainly used as the floating rate.
For KOFR OIS, while building on the existing CD IRS clearing system, clearing, settlement, and risk management measures are applied in consideration of the specifics of OIS transactions.
An exchange official said, "This launch of clearing will not only invigorate the OIS market but also spur the formation of other markets, helping spread KOFR," adding, "It will contribute to building a virtuous cycle by enhancing the reliability of the yield curve and providing effective risk management tools to foster the formation of the spot and futures markets."