KOFR OIS Rate as KRW Risk-Free Rate Proxy: Winners, Losers and Fair Value in KRW CD Swap

The domestic swap market has seen the establishment of collateralized transactions driven by CCP clearing and global margin requirements. Despite this progress, the CD swap curve continues to be utilized as the risk-free rate (RFR) curve for discounting. This single-curve framework fails to adequately reflect the mitigation of default risk and collateral-specific funding costs. Transitioning the RFR to the KOFR OIS (overnight index swap) curve requires a fundamental revision of CD swap valuation methods. This shift implies the adoption of a dual-curve framework that accounts for collateral characteristics, where cash flows are projected using the CD swap curve but discounted using the KOFR OIS curve. This approach aligns with the global practice employed from the global financial crisis (GFC) to the LIBOR transition, where the major swap dealers adopted the OIS curve as the standard for discounting collateralized LIBOR swaps. This paper examines whether the KOFR OIS curve is suitable as an RFR curve and explores changes in fair value resulting from the discount curve transition. Furthermore, it assesses whether single-curve MTM values are overstated or understated and investigates reshaping issues related to economic transfers. In addition, it proposes managerial alternatives to resolve adverse valuation effects until the full implementation of dual-curve valuation.