Derivatives houses in Korea including Citibank, Crédit Agricole Indosuez and Kookmin Bank are in talks to set up a floating rate benchmark similar to LIBOR. "Swap dealers are concerned that the C.D. rate does not fully reflect market conditions," said Sang Ook Lee, swap trader at Kookmin Bank in Seoul. Dealers explained that the current floating rate benchmark, the three-month C.D. rate, is relatively illiquid due to the lack of an active money market. Banks tend to borrow and lend at overnight rates rather than through the money market.
The talks were sparked by recent volatility in Korean Treasury bills not being reflected in the C.D. rate. For example, in recent months there have been single-day 30 basis point moves in government bonds at the same time as the C.D. rate has moved just 1bps.
S.B. Hwang, head of derivatives marketing at Citibank in Seoul, said the issue is being discussed in the dealer community via the Korean Swap Dealers Association, which was set up last year (DW, 7/21/02).
Dealers are split on how long this process could take. Kookmin Bank's Lee thinks that while the discussions are in an early stage and so far inconclusive, it could establish a new rate within six months. However, other dealers think that it would take much longer, possible up to one or two years. "I think there should be something like a 'KIBOR' but I don't see it happening anytime soon," said an official at Standard Chartered Bank.
