SEOUL (Reuters) – According to two sources, South Korea intends to provide guidelines to promote the adoption of a substitute benchmark in its $4.3 trillion interest rate swap market, which will replace the Certificate of Deposit (CD) rates that presently dominate transactions.
One of the sources, who asked not to be identified due to the sensitive nature of the subject, told Reuters that “the BOK and the FSC will make clear their intention to restrict the use of the CD interest rate when conducting future interest rate swap transactions, although they won’t talk about any specific schedules to phase it out.”
Following the global discontinuation of the London interbank offered rate, South Korea has been tasked with creating local substitute reference rates to account for variations in CD rates brought about by shifts in CD issuances.
The majority of interest rate swap transactions in South Korea, valued at 5,874 trillion won ($4.3 trillion), are dependent on CD rates. Financial regulators have been attempting to replace CD rates with the KOFR and get the market ready for the transition to the benchmark.
Interest rate swaps, which allow banks and investors to manage risk in the financial markets, include trading a fixed interest rate for a variable rate or vice versa.
The most popular reference rates in South Korea for figuring out borrowing costs for interest rate swaps and collateralized loan obligations have been CD rates. $1 equals 1,370.5500 won.
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