The significant de-escalation of geopolitical tension with the signing of the peace agreement between the United States (US) and Iran will certainly improve market sentiment and lessen global uncertainty.

This relative calm in geopolitical volatility has stabilized energy prices, with crude oil dropping below $80 per barrel. In the Philippine context, the lingering optimism over the peace ‌deal underpins risk appetite, dampens demand for safe-haven assets, and could lower externally induced inflationary pressures.

That’s right, Virginia! The domestic market, mirroring international sentiment, is currently buoyed and intoxicated by the peace talks, providing a distinct comfort in doing business.

The relatively peaceful transition of power in the tumultuous Senate leadership on Wednesday also helped. It was a soothing balm, allowing the financial market to remain cool and placid after its prior unsettling state.

Moving forward, these positive developments could provide the much-needed boost to the country’s sagging economy and the local currency, both of which have taken a beating in the three months since the Middle East skirmishes erupted.

Consequently, this turnaround could impact a pending request from some members of the Bankers Association of the Philippines to reclassify their trading bond portfolios to hold-to-collect (HTC).

Yes, Virginia, there is such a move being put forward with the Bangko Sentral ng Pilipinas (BSP). It aims to provide relief to banks during periods of high interest rate volatility.

Reclassifying trading assets to the HTC category provides banks with financial flexibility by temporarily exempting them from the mandated mark-to-market (MTM) valuation of their trading bond portfolios.

MTM mandates that banks adjust the value of assets and liabilities on their balance sheets to match current market prices rather than their original purchase costs. It provides an immediate snapshot of the portfolio’s fair value if positions were liquidated today, and this daily revaluation directly hits the bottom line of banks and financial institutions.

In terms of profitability, this means changes in asset values are recorded as unrealized gains or losses, directly impacting a bank's reported income and equity for the period.

Simply put, if the market value of the bonds, loans, or securities a bank holds goes up, it records unrealized gains. These gains flow directly into net income, lifting the bank’s capital adequacy ratio.

Alternatively, if market conditions worsen—for instance, if interest rates rise rapidly and cause bond values to drop—the bank must record unrealized losses. MTM losses can heavily slash or completely wipe out net profitability.

The temporary MTM relief being sought would allow banks to avoid recognizing these paper losses on their income statements, helping preserve their capital ratios and reported earnings.

As one bank treasurer explained, MTM losses do not necessarily mean a bank has lost physical cash or will default. If a bank plans to hold a bond until maturity, it will eventually recoup the full face value despite interim price drops.

However, considering recent geopolitical developments, the latest buzz circulating along the banking corridors suggests this request may no longer be necessary. Critics argue it “could also reduce market transparency and the liquidity of those bonds, as fewer assets would be actively traded.”

This exposes banks—especially smaller players—to heightened MTM risk, right alongside a rising volume of souring loans. “For smaller banks, the lack of mark-to-market transparency can be risky because it might obscure the true economic value of their investments,” opined the president of a medium-sized bank.

From what I’ve heard along the hallowed halls of the BSP, monetary authorities are carefully studying the issue. They worry it could create a false sense of security, masking underlying problems like asset-liability mismatches or rising funding costs.

Let’s see how this plays out, especially since some economic observers believe this geopolitical calmness remains provisional.