South Korea Advances KOFR Adoption in Derivatives Market

​South Korea is planning to increase the prominence of the Korea Overnight Funding Rate (KOFR) in its derivatives market. The government, alongside the Bank of Korea and various financial stakeholders, has agreed to implement the "KOFR-OIS Expansion Plan," which aims to boost the proportion of interest rate swaps conducted on a KOFR basis beginning next year.

Approximately 29 major financial institutions are expected to participate initially, targeting over 10% of their interest rate swaps to be settled using KOFR during the designated timeframe extending into 2026. The plan includes an annual increase in KOFR's market share, with the goal of exceeding 50% in the interest rate swap market by 2030.

To facilitate this transition, authorities are working on establishing a centralized clearing infrastructure to make participation in KOFR-OIS transactions more accessible. The Korea Exchange is currently developing this clearing system, which is expected to launch in the near future.

Additionally, the Bank of Korea plans to consider the trading performance of KOFR-linked products when selecting institutions for open market operations. Performance data will be collected over the coming months to influence the selection process in the future.

There are also efforts underway to standardize benchmarks by replacing CD rates with KOFR as the primary alternative indicator for over-the-counter derivatives. A public-private working group has reached an agreement to designate KOFR as the uniform alternative benchmark, addressing challenges faced by financial institutions in selecting substitutes.

Currently, most funding in the financial sector relies on CD rates. However, the use of KOFR is anticipated to rise as institutions increasingly turn to the bond market for financing. Policy financial institutions, including the Industrial Bank of Korea and the Export-Import Bank of Korea, plan to issue at least 10% of their funding through KOFR-based floating rate notes (FRNs), with intentions to gradually increase this share.

Kim So-young, Deputy Chair of the Financial Services Commission, underscored the importance of collaboration among the government, the central bank, and financial institutions in advancing benchmark interest rate reform. She noted that engaging in this reform is essential for managing operational risks within the financial system.

Bank of Korea Vice Governor Yoo Sang-dae highlighted that activating KOFR is significant for ensuring global consistency and enhancing the stability of financial transactions. He pointed out the close relationship between KOFR and the central bank's policy rate, emphasizing its importance for effective monetary policy.

As South Korea moves forward with these initiatives, the focus remains on achieving meaningful results in the adoption of KOFR as a leading benchmark in the financial landscape.