Starting with P20 billion

For the first time since the “JOBO” Bills in the 1980s, the Bangko Sentral ng Pilipinas (BSP) will issue P20 billion of 28-day BSP Bills on September 18 as an additional monetary instrument to manage market liquidity.

 The BSP said the initial offering will start small to feel out the market appetite. It will offer both BSP Bills and BSP Bonds under its Securities Facility (BSP-SF) but will initially offer only BSP Bills. It has an indicative offer volume of P20 billion which is still subject to confirmation on Wednesday next week or two days before the Friday auction.

  “The auction volumes will be small at the outset, to be gradually scaled up depending on market response and consistent with liquidity forecasts,” the BSP said in a statement. It also said that the issuance of securities will “add to the existing supply of risk-free financial instruments in the banking system, which in turn could help in the development of the local bond market.”

 The BSP will offer BSP Bills initially because of the market preference for shorter tenors. The bills will have the shorter segment of the yield curve, the BSP explained, while the BSP Bonds will have longer maturities. The offered tenors will also depend on liquidity conditions as the BSP closely coordinate with the Bureau of the Treasury to avoid tenors overlapping.

 The BSP securities will be beneficial for the BSP especially when there are “large structural liquidity surplus arising from capital flows or additional liquidity released from the reduction in the reserve requirement ratios of banks.” The BSP said  the securities will “add to the pool of risk-free assets in the financial system alongside the securities issued by the National Government which can be traded for liquidity purposes. Through the regular auction of BSP securities, the issuance (can) contribute to improved price discovery for debt instruments and support monetary policy transmission in the process.”

 The BSP’s Monetary Board approved the circular (BSP Circular No. 1095 “Bangko Sentral lssued Securities as an Additional Instrument of Monetary Operations under the Interest Rate Corridor (lRC) System”) on September 8. The circular memo, signed by BSP Governor Benjamin E. Diokno, said the BSP securities will be included as part of monetary operations under the IRC framework for liquidity management in the financial system. As part of IRC, it will help implement monetary policy but it will not change the policy stance.

 Diokno said the BSP securities will be offered to both big or universal and commercial banks, and thrift banks, as well as quasi-banks. The term of the securities --- initially 28-days for the BSP Bills – will be set by the BSP while the interest rates will be determined by the auction as per the BSP guidelines. The auction will be on a weekly basis until further notice.

 The BSP-SF guidelines include a buy-back/early redemption feature and the BSP will announce its intention to buy-back or redeem outsanding securities prior to its maturity date “at par and by lot”.

 Since the BSP securities are marketable and negotiable, it will also be available for secondary market trading via the Philippine Dealing and Exchange Corp.

 Similar with the term deposit facility and the overnight deposit facility, BSP-SF for the primary and secondary markets are subject to the prohibition against funds coming from non-residents.

“These facilities should not be made available for opportunistic investment activities funded from non-resident sources. Further, placements in the TDF, the ODF and the BSP-SF are contractual in nature and thus shall be governed by the intent of the contracting parties,” said Diokno in the circular.

 The BSP restored its authority to sell its own bonds and bills on February 14, 2019 when the amendments to the BSP Charter was signed into a new law or Republic Act No. 11211. Diokno was appointed the BSP’s fifth governor a month later.

 Issuing securities was an available monetary tool under the original charter of the central bank but it made it difficult to use this debt instrument and only in times of extraordinary movement in the price levels.

 The old central bank law used the Central Bank Certificates of Indebtedness or the “JOBO” Bills (named after central bank governor Jose B. Fernandez Jr.) to mop up excess liquidity in the 1980s by increasing the rates by as much 40 percent to bring down an inflation that was in the 30 percent-level.

 After 1993, under the new BSP Charter, the BSP was given limited collaterals in the form of government securities, and there was an agreement between the central bank and the Department of Finance that only the government will tap the bonds market. The BSP was limited and could only transact in the loans market.