The Bangko Sentral ng Pilipinas (BSP) is currently reviewing its foreign exchange (FX) swap facility in light of the London Inter-Bank Offered Rate (LIBOR) transition and replacement by end-2021 as benchmark reference rate.
For three months or from November 2020 to January this year, the BSP has zero FX swaps after releasing $3.51 billion into the FX market last November.
The last transactions were October last year with $980 million 1-month maturity in long positions, from $4.49 billion in September.
FX swaps or BSP’s unfiltered US dollar source, as one of its open market operations which involves the actual exchange of two currencies – in principal amount -- on a specific date at a rate agreed on the deal date or the first leg, and a reverse exchange of the same two currencies at a date further in the future or the second leg at a rate different from the rate applied to the first leg, as agreed on deal date.
The FX swaps is used by banks to increase its peso liquidity while the central bank utilizes FX swaps to intervene in the US dollar-peso market, as well as to manage and redistribute currency risks. By unwinding FX swaps, the BSP is defending the peso or it is further strengthening the local currency vis-à-vis other currencies.
The FX swaps were inactive for some time when the BSP-managed reserves were on a standstill. Last year, in the middle of the pandemic when the reserves were boosted by COVID-related foreign loans, there was a revivial of swaps activity with the BSP’s US-dollar buying.
LIBOR, the rate that banks in London offer Eurodollars in the placement market, will no longer be in use after December 31 this year, as announced by the United Kingdom’s Financial Conduct Authority in 2017.
In November last year, the BSP issued a memo instructing all banks and non-banks with LIBOR-related exposures such as derivatives, assets and liabilities to have a viable transition plan in place to “ensure that the cessation of LIBOR does not disrupt its operations and the efficient provision of services to its clients and other market counterparties” after the discontinuation of the benchmark.
Counting from September 30, 2020 until reference date March 31, 2020, all BSP supervised financial instutions are required to submit quarterly reports detailing their remaining LIBOR-related exposures. Derivatives includes FX swaps, interest rate swaps and cross-currency swaps.
Last week, the BSP issued a new memo on the quarterly reporting of the remaining LIBOR-related exposures, detailing more issues in the newly-released Frequently Asked Questions.
The BSP said the reference rates that the report focuses on is the data entry on LIBOR exposures for short-term interest rates in five currencies as calculated by the Intercontinental Exchange from estimates submitted by leading banks in London, and the exposures to the Philippine Interbank Reference Rate (PHIREF) which it noted is the “implied peso interest rate derived from done deals in the interbank FX swap market” and it is “used as the benchmark for the reset value for the peso. floating leg of an interest rate swap.”
The BSP said this is LIBOR-related because the rate is computed using US dollar LIBOR. “As such, PHIREF in its current iteration will also be discontinued when US dollar LIBOR ceases,” it added.