Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the central bank will have to do more improvements and enhancements to its overnight reverse repurchase (RRP) facility to “strengthen the link between monetary policy and short-term rates.”

“(It) is good that people know market rates for at least a few tenors. As they say, you need at least three points because you usually do not have a straight line. If everything is a straight line, then all you need are two points,” said Medalla during a recent meeting with bankers and market participants.

Medalla, who will retire on July 2 as BSP’s fifth governor under the New Central Bank Act of 1993, emphasized the need for further enhancements to BSP’s open market operations (OMO) and the establishment of benchmark risk prices. The RRP facility is one of BSP's main OMO where the BSP sells government securities to influence market liquidity.

Medalla also stressed a more pressing need for a credible yield curve that is tenor-based, transactable, and transparent.

“We also want to build the yield curve, which will, hopefully, contribute to the development of the capital markets,” he said. For the BSP, a credible yield curve “must arise from active trading of marketable securities, provide yields for various tenors, make these yields usable to all parties, and can be replicated as needed.”

Medalla said that to effectively do this, the benchmark rate should be tenor-based and could be negotiated or transactable and clear to all. “We have to pick which buckets do we want to focus on. I think, it is only sensible that it is overnight, 28 days, and maybe five years, at the very least, because those are the biggest buckets,” he said.

The BSP will peg a new overnight or ON rate by translating the 28-day BSP bill rate to its ON equivalent. The new ON rate as reference rate will replace the London Interbank Offered Rate (LIBOR) which will expire on June 30.

Medalla said the BSP and the market agreed that by January 2024, there should be a credible yield curve in place.

Meanwhile, Medalla clarified tenor-based, transactable, and transparent as “anybody can compute it all by himself, and he will know the inputs.”

“The problem is [that] some of the things being used for valuation are proprietary, and the formula is secret. We want transparency. We want people to know exactly how it is generated, and we want the yield curve to reflect spot rates so that the true costs of funds are known. We discover [prices] from market activity,” he said.

The outgoing BSP chief is hoping that BSP and the market, for both pricing and revaluation, will eliminate arbitrage since a transparent price discovery “is extremely important.”

The ON reference rate will take effect on or before June 30 in time for the global deadline on the cessation of LIBOR.

Since December 2021, the BSP has required all banks to submit quarterly reports of their remaining LIBOR-related exposures until the end of 2023.

This was part of the BSP and banks’ LIBOR transition plan.

Besides the overnight RRP facility, the BSP's other OMOs include the issuance of BSP securities and term deposit facility. The BSP also offers standing liquidity windows for lending and deposit for banks' liquidity positions.