Not just the lender of last resort, the Bangko Sentral ng Pilipinas (BSP) will also become “more serious” as market-maker of last resort to ensure liquidity at all times in the repurchase agreement or “repo” interbank market, according to BSP’s highest-ranking official.

As the BSP helps banks develop a credible yield curve for two maturities, the 5- and 10-year, BSP Governor Eli M. Remolona said they will fulfill their role as market-maker as well. A workable yield curve represents liquidity at different maturities.

A market-maker trades securities and other instruments and create a market for it by providing liquidity.

Remolona said that at the moment, market-makers or the banks are not really doing much market-making.

“We have our own role. We will enter the market when it gets too volatile (and we) will help in developing the repo market and securities lending,” he said.

“We’re a market-maker as a last resort. We’re going to do that more seriously,” he added.

Banks are voluntary market-makers. Right now, the BSP is monitoring their quotes and “if they are living up to their promises” of developing a yield curve based on the 5- and 10-year tenors. “It’s in their interest to do it,” said Remolona.

The BSP and the Bankers Association of the Philippines (BSP) have agreed to work together to deepen the repo interbank market. The BSP’s fighting target is to come up with a reliable yield curve by January 2024.

The central bank is working on establishing a credible yield curve that is tenor-based, transactable and transparent. If done correctly, this will deepen the domestic capital markets and provide yields for different tenors.

Based on initial talks with BAP, the banks have committed to do more “serious” market making for the 5- and 10-year maturities.

Remolona said at this point, the 5-year yield is unknown or not determined, and they would want to close the gap between the “bid and ask” quotations. However, banks have “promised” to discover a credible yield curve for at least two maturities “from across a whole range of maturities”.

Meanwhile, the BSP is also creating an interbank rate or a benchmark short rate which it hopes it can launch by early December this year, a month before the yield curve deadline.

Remolona said the interbank rate will be the peso equivalent of the Secured Overnight Financing Rate (SOFR) which is an average rate used by the US to replace the discontinued London Inter-Bank Offered Rate or LIBOR.

The BSP first announced the creation of an overnight or ON reference rate and a yield curve last June. It will also shift to an auction-based reverse repurchase (RRP) facility in September, which will be similar to the BSP securities facility.

Both benchmark short rate and credible yield curve provide extra mechanism for the transmission of monetary policy.

Since July 14, the BSP accepts all overnight RRP bids via auction as it transitions from a fixed-rate fixed-volume to a fixed-rate full-allotment auction, and later to a variable-rate auction next month.

All of these improvements will result to a variable rate from the overnight RRP which is considered more responsive to changing market conditions.

The RRP facility is part of BSP’s monetary operations to manage the amount of money circulating in the economy to achieve its inflation target. They do this by selling government securities with a commitment to buy them back at a later date.

Basically, the RRP is a liquidity-absorbing operation. The main tool is the overnight RRP facility which is based on the BSP policy rate.