The Bangko Sentral ng Pilipinas (BSP) and the banking sector will establish an improved and better peso interest rate swaps (Peso IRS) and a repo market for government securities to enhance the benchmark yield curve.
BSP officials led by BSP Governor Eli M. Remolona Jr. announced this on Monday, Sept. 30, in a joint undertaking with the Bankers Association of the Philippines (BAP), to develop and enhance short-term benchmarks.
Remolona and the BSP said these two complementary initiatives will create a smooth yield curve to “reflect market consensus and help in pricing credit instruments of varying maturities.”
“A benchmark yield curve will help in the pricing of bank loans and corporate bonds, and thus strengthen the transmission mechanism for monetary policy,” said Remolona on Monday.
For his part, BAP President Jose Teodoro K. Limcaoco said these benchmarks “are expected to provide market participants with a better avenue to price interest rates for bonds and loans.”
“By better management of relevant risks, the overall Philippine market will benefit due to greater confidence from both local and foreign investors and financial institutions — thus leading to more robust market activity in the future,” he added. Limcaoco is also president of Ayala-led Bank of the Philippine Islands (BPI).
At the moment, loan pricing is based “unevenly on yields of thinly traded government securities” and it necessitated the revival of the Peso IRS.
Under the agreed undertaking, the BAP is creating an enhanced Peso IRS overnight reference rate (ORR) which will be based on the BSP’s variable overnight reverse repurchase rate (RRP). The RRP has an active daily auction.
There will be 15 market makers for transactions, among them: BDO Unibank Inc., BPI, Metropolitan Bank and Trust Co., China Banking Corp., Philippine National Bank, Security Banking Corp., Rizal Commercial Banking Corp., and Union Bank of the Philippines.
Others include ANZ Banking Group, Citibank NA, Deutsch Bank AG, HSBC, ING Bank, JP Morgan Chase, and Standard Chartered Bank.
The 15 banks have committed to be market makers and will quote two-way prices for the one-, three-, and six-month swaps against the ORR.
BDO Private Bank, Maybank Philippines, Mizuho Bank Ltd., MUFG Bank, and Sumitomo Mitsui Banking Corp. have also committed to be regular participants in Peso IRS.
The BSP explained that market-based quotes will create reliable benchmarks for banks and borrowers to use for pricing loans. The tenors will also be longer at one, two, three, four, five, seven and 10 years.
BAP wants its ORR to be a recognized overnight reference rate under the International Swaps and Derivatives Association.
Bloomberg, on the other hand, is expected to be the Peso IRS trading platform while the BSP will serve as the publisher of the daily variable reverse repurchase rate benchmark.
Meanwhile, the repo market for government securities is expected to expand the trading for government securities. The BSP and the BAP also intends to have it as alternative benchmark especially for short term loan rates.
The BAP relaunched the interbank repo market lat year. At the moment, the BSP is working with BAP to expand the market.
The BSP said it currently “tags” securities to banks “that place cash with it via the reverse repo window.”
“The central bank is now working on shifting from tagging to full delivery of these securities in line with global market practice. This will allow banks to trade these securities, vastly expanding the market,” it said.
The BSP said this move will encourage and facilitate price discovery and transparency of bond prices, as well as develop hedging tools for better risk management. It will also attract local and foreign investors through the reduction of credit risks and financing costs, it added.
Limcaoco said enhancement in the benchmarks will likewise “support the evolution and generation of financial products for hedging longer term exposures.” This will be made possible through the Peso IRS and government securities repo markets.
BAP Open Market Committee Chairman Paul A. Favila said the two initiatives will also benefit banking clients since it will enable them “to better manage their risks and exposures and grow our market.”
Favila further noted that the Peso IRS will plug the existing gaps in the market “by providing a more relevant and reliable hedging option for market participants.”