As an eternal student of the financial markets, the introduction of new financial products and platforms almost always captivates my interest. Currently, I am fascinated by the acronyms IRS and GMRA.

No, Virginia, IRS is not the Internal Revenue Service of the US federal government. In this context, it stands for the Interest Rate Swap curve—the current buzz in the marketplace. It serves as a benchmark for pricing derivatives and fixed-income products, specifically at the short end of the curve using repurchase agreements (repos).

And no, that is not a typographical error; I don’t mean GMRC or “Good Manners and Right Conduct.” I mean GMRA, the acronym for the Global Master Repurchase Agreement.

Even Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona is passionate about the IRS. In his remarks earlier this month at the inauguration of the new Bloomberg Manila office, Governor Eli expressed his anticipation for the adoption of an enhanced IRS.

In his own words: “Its base is repo. It’s an effective backdoor way to build a benchmark yield curve. Something our markets badly needed.” Alternatively, it is a more effective tool for monetary policy transmission.

An IRS is likened to a forward contract in that both are firm commitments with symmetric or linear payoffs; they offer equal opportunity for gains and losses, and no initial payment is exchanged at inception.

To drive his point home, Governor Eli recalled the “fragmented bond market” of some 26 years ago in the European Union. Following the switch to a single currency—the euro—the market eventually improved through the adoption of the swap curve as the benchmark.

The same could be said of the local fixed-income market following the demise of PhiRef (Philippine Interbank Reference Rate) more than two and a half years ago. The interest rate swap market was left in the doldrums after PhiRef’s exit, significantly affecting the hedging mechanisms available to corporations.

The latest I’ve heard from the banking community is that the BSP and the Bankers Association of the Philippines (BAP)—through its open-market operations committee and in close collaboration with Bloomberg—are drawing up the final details to make the IRS mechanism more acceptable and palatable.

The local fixed-income market will soon embrace the swap curve as the short-term benchmark, based on repo yields instead of government securities yields, specifically Treasury Bill (T-bill) rates.

Because they are auctioned electronically, T-bill rates are often not the best benchmarks and do not always reflect true market sentiment. Recently, the yield curves for three-month, six-month, and one-year tenors have moved far ahead of the BSP’s key policy rate. While offered rates for these three tenors have been aggressively bid down, the rest of the yield curve remains on the high side.

This prejudice at the short end of the curve is understandable. Risk aversion often stems from political conditions, uncertainty regarding government policy, and sluggish economic conditions exacerbated by unabated graft and corruption.

Considering there is a resurgence of appetite for the IRS—with trading volume jumping to ₱43.5 billion at the end of January from a measly ₱700 million when it was relaunched in November 2024—the nagging question remains: Will the market embrace these improved features in the same way the EU did?

The EU experience, as narrated by Governor Eli, showed that “it was the swap curve, not the bond market, that became the benchmark. Over time, the bond markets converged around it.”

Of course, it’s apples and oranges. There is no direct comparative analysis here, as EU market liquidity is deep and used by around 70 economies, while the Philippines is a single market.

Whether or not these much-improved IRS features prove acceptable to the market, the GMRA is now being routed to document repo transactions between banks and the BSP.

As they say: The proof of the pudding is in the eating.