South Korea's financial regulator said Wednesday that it will boost the super short-term call money market among banks, while gradually excluding non-bank financial institutions, as part of the efforts to preemptively counter possible systemic risks from call market volatility.

Participation in the one-day unsecured call money market will be restricted in principle to commercial banks from 2015, according to the Financial Services Commission (FSC).

Here in South Korea, the call money market has been open to banks, which seek to meet excess and deficiency for reserve funds imposed by the central bank via the call market, as well as to other non-bank institutions that try to borrow short-term, low- rate funds through the call market and operate the funds for long- term investment.

The overnight call money transactions, which account for 99.9 percent of overall call money trade, were launched originally to help the banks meet the reserve funds, but the participation of higher-risk, non-bank institutions raised credit risks in the market, leading to greater potential for systemic risks.

Participants of the call money, or borrowing money via the call money market, will be limited in principle to banks, but some securities firms, including primary dealers in the Korea Treasury Bond (KTB) market and participants in the central bank's open market operations, will be allowed to join the call market.

For the brokerages, ceiling will be imposed to reduce their dependence on the overnight unsecured funding market. The limit will be set at 15 percent of equity capital from the first half of 2014, down from the current 25 percent.

For the call loan, or lending money via the call money market, participants will be restricted to banks in principle, but asset managers will be allowed to join the market temporarily as the asset management firms are the main money provider in the overnight call market.

"Long-term asset management with overnight call money is a practice that should be corrected," Kim Yong-beom, director general of the FSC's financial policy bureau, told reporters at a briefing.

Kim noted that such practices were at the core of shadow banking, which continues refinancing short-term debts, saying that the size of shadow banking in Seoul cannot be dismissed.

Meanwhile, the FSC said that it will make efforts to vitalize the usage of Korea Inter-bank Offered Rate (KORIBOR), or the South Korean version of London Inter-bank Offered Rate (LIBOR), as an alternative to the rate of certificate of deposit (CD).

The CD rate, which is widely used as a benchmark in setting market interest rates, came to the forefront last year after the anti-trust watchdog probed into local brokerages and banks on suspicions that they colluded on fixing 91-day CD rates. High level of CD rates benefits banks as a large portion of bank loans consists of CD rate-linked loans.

It is also used as the sole reference rate in Seoul to a floating rate of interest rate swap (IRS) transactions, whose value was estimated to reach trillions of U.S. dollars in the country. The IRS is a financial contract widely used by financial institutions to hedge interest rate risks by exchanging floating rate with fixed rate.

The regulator said it will seek to boost the KORIBOR as the reference rate to the IRS, but doubts remained over whether market players may use the rate due to lack of its transparency and difficulties in settling the CD-linked IRS contracts signed in the past.

The IRS transactions are interconnected among various market players, including buyers and sellers, so it would be very hard to settle the existing contracts to move into the KORIBOR-linked IRS trading. The IRS, mostly with a maturity of more than 10 years, could cause losses to financial institutions, while jumping into the new type of transactions.

The KORIBOR is calculated based on reference rates offered by banks, not on the market price formed during the trading like the CD rate, so it may cause troubles in transparency as seen in the LIBOR rigging scandal. Endi