The Bangko Sentral ng Pilipinas (BSP) is currently working on adopting the Global Master Repurchase Agreement (GMRA) contracts to enable Philippine banks to transact more repo deals, part of capital market reforms after the live implementation of the peso interest rate swaps (PESO IRS) on Monday, Nov. 18.
The GMRA is one of five initiatives the BSP and other government agencies are engaging in to improve capital market liquidity.
BSP Governor Eli M. Remolona Jr. said Monday that the creation of a benchmark yield curve through the PESO IRS and the enhanced repo market will not only deepen the capital market by boosting trading, but also provide more liquidity in the local bond or securities market.
The BSP wants GMRA contracts adopted as soon as possible for the delivery of Treasury bonds to banks when they enter into repos as part of monetary policy operations.
The central bank said this will expand the government securities repo market, which is mostly interbank transactions, since banks will have access to BSP’s Treasuries for repo and additional profit.
“As the BSP’s shift introduces some banks to GMRA, they may start engaging in other repo transactions as well. The expanded repo market will provide a strong alternative benchmark alongside the PESO IRS,” said the BSP.
After implementing the IRS, the BSP, the government, domestic banks and foreign partners are also collaborating to introduce this month the Bureau of the Treasury’s issuance and bond reopenings in a some selected maturities for liquid benchmarks.
The BSP et al are also working on setting the procedures for residents of 43 countries covered by tax treaties with the Philippines “to only pay the rate agreed in these treaties, rather than paying the full tax then seeking a refund.”
The Department of Finance “has pushed for legislation that would simplify tax rates for passive income, financial intermediaries, and deepen the capital market,” said the BSP, adding that the government will make Philippine bond markets more competitive in terms of taxation.
Meanwhile, the BSP and other government officials are engaged with credit rating agencies and financial market index providers to make local assets more accessible to both foreign and domestic investors. Presently, Philippine US dollar bonds are rated “BBB+” by S&P Global, and “Baa2” and “BBB” by Moody’s and Fitch Ratings.
The BSP noted that last month, JPMorgan & Co. said the Philippines is one of two countries “on the radar” for inclusion in its Government Bond Index-Emerging Markets (GBI-EM) index.
“For the central bank, this will make it easier for the BSP to transmit monetary policy, maintain price stability, and promote sustainable growth and job creation,” according to Remolona. “This means interest rates will be more transparent, making it easier for SMEs and consumers who are shopping for a loan to expand their business or make an important investment or purchase,” he said.
As for the PESO IRS, Remolona said the benchmark curve it will create will help banks and other lenders to price loans at various maturities.
“This whole effort is just one of many steps the National Government, the BSP, and Philippine and foreign banks are working on very closely together to achieve these objectives. Foremost among these is to provide the liquidity investors need to invest in our fast-growing economy,” he said.
For the first time, 16 banks have committed to be market makers for the Philippine Overnight Reference Rate (ORR)-based IRS. The ORR was developed by the Bankers Association of the Philippines (BAP) on which the swaps will be anchored at the short end.
The 16 banks are expected to ensure there will be prices for swaps of various maturities, from one-month to 10-year, providing a new way to hedge or take positions, said the BSP. The ORR is based on the variable overnight reverse repurchase rate (RRP) of the BSP.
BAP President Jose Teodoro K. Limcaoco Jr. said over the weekend that the IRS market, together with the creation of a repo market for government securities, will grow the Philippine capital market to new levels.
The 16 market makers for transactions include: BDO Unibank Inc., BPI, Metropolitan Bank and Trust Co., China Banking Corp., Philippine National Bank, Security Banking Corp., Rizal Commercial Banking Corp., Union Bank of the Philippines and East West Banking Corp. Others are ANZ Banking Group, Citibank NA, Deutsch Bank AG, HSBC, ING Bank, JP Morgan Chase, and Standard Chartered Bank.
Five banks will serve as regular participants to the IRS market, such as: BDO Private Bank, Maybank Philippines, Mizuho Bank Ltd., MUFG Bank, and Sumitomo Mitsui Banking Corp.
Bloomberg will be the trading platform for the IRS market.