With the Korean version of the London Interbank offered rate, named Korea Interbank Offered Rate (KORIBOR), set to debut in June 2004, global investors are paying close attention to the new benchmark rate for the local money market.  It is said by some experts that the introduction of KORIBOR is one of the most anticipated development in the Korean financial markets.

Currently, the Bank of Korea, together with 14 lenders that will contribute to the new reference rate, is testing the system that will be put into operation by the end of June 2004. Korea's 8 nationwide commercial banks, 2 special banks, 2 provincial banks, Citibank and HSBC will provide their respective rates to Infomax, a local financial news and pricing agency. Infomax then will calculate the reference rate by disregarding the three highest and three lowest rates and averating the remaining eight, the result of which will be reported to the central bank before it is released to the market.

It is predicted that KORIBOR would replace the currently used certificate of deposit interbank fixing, which is criticized for failing to represent the market situtation exaclty. The CD rates reflect the funding costs of only four highly rated domestic banks and is fixed for just two tenors - three and six months. However, the new benchmark will represent 14 banks and its curve will be fixed for 1 and 2 weeks, 1 through 6 months, 9 months, and 12 months tenors, to reflect the entire money market.

Even with the introduction of the new rate, a shift to the new system might not come immediately as it has yet to be seen whether he market would adopt the new new reference rate and trade on it. Some obverserves view that while it is true that KORIBOR tries to address some of the age-old problems of the CD rates, it remains an unproven and fairly theoretical rate at present.

The initial testing proved that the KORIBOR rate stood below the 91-day CD rate, which is attributed to the fact that the new benchmark rate is an offer rate, while the CD rate is a bid rate.

The inclusion of HSBC and Citibank in the KORIBOR panel, as well as the so-called "special government-linked banks" might also have skewed the panel toward a better credit level than originally thought.