Starting in July, banks must issue a portion of their floating-rate notes (FRNs) based on KOFR (Korea Overnight Financing Repo Rate), the risk-free benchmark rate.
The Financial Supervisory Service said on the 29th that it will implement two administrative guidances from July 1 to expand KOFR-based financial transactions. The key is to newly introduce a KOFR-referenced issuance target for banks' floating-rate notes and to raise the existing target for KOFR-based interest rate swap transactions.
The domestic financial market has broadly used the CD rate as a benchmark for loans, bonds, and derivatives. However, the CD rate reflects banks' credit risk and relies on quotes between financial firms rather than actual transactions, which has drawn consistent criticism for lacking representativeness. In response, the government is working to establish KOFR, which is calculated based on RP transactions collateralized by Government Bonds and monetary stabilization bonds and carries no credit risk, as the new benchmark rate.
First, the Financial Supervisory Service will require banks to issue at least 10% of the floating-rate notes issued from July this year to June next year with KOFR as the reference rate. It will then raise the target by 10 percentage points each year to expand it to 50% by June 2031. Policy finance institutions such as Korea Development Bank, Industrial Bank of Korea (IBK), and Export-Import Bank of Korea will face higher targets. The first-year target will start at 25% and expand to 65% in five years.
The target for KOFR-based overnight index swap (OIS) transactions will also be raised. From July this year, the transaction ratio will be increased from 20% to 25%, and the 2030 target has been lifted from 50% to 70%.
Incentives to stimulate long-dated transactions were also strengthened. Previously, 5-year and 10-year transactions were weighted at 10% and 20%, respectively, but going forward they will be expanded to 30% and 50% to actively encourage ultra-long KOFR transactions.
The Financial Supervisory Service will continue to monitor the expansion of KOFR transactions and support market participants' voluntary efforts to transition benchmark rates.