By Lee C. Chipongian The government plans to introduce the overnight index swap (OIS) system when it expands the repurchase (repo) market, which it has already initiated in November last year. Based on a Bangko Sentral ng Pilipinas (BSP) report, between April and September this year – about six to 12 months according to the sequence of reforms approved in late August, 2017 – the government will implement an expanded repo and securities lending program to non-banks and this lead to the development of the OIS market. The OIS is an interest rate swap and it would enable banks to set yields on an overnight rate to a fixed rate which is done by the central bank. Basically, it will achieve an acceptable single benchmark rate that banks can use. To support the recently-launched repo program of the Bureau of the Treasury (BTr), the BSP reduced the reserve requirements for repo transactions to zero percent last November, significantly lowering friction costs. BSP Governor Nestor A. Espenilla Jr. said that there is “much work to be done” to further develop the fixed income market and broaden the domestic debt market, particularly before introducing the OIS. He has said that it will be a “long journey” since they have to establish and do more refinements in their operational rules, improve data access, and to improve their monitoring processes. An organized repo market is the first key to achieving a bigger capital market. In Asia, the Philippines has one of the smallest debt market as a percentage to GDP. Japan has the largest government bond market, followed by Thailand, Malaysia, South Korea and Singapore. The Philippines is third smallest government bond market, after Vietnam and Indonesia. South Korea and Malaysia, Singapore and Hong Kong, on the other hand, leads the corporate bond market. The introduction of the OIS market is in the third and last list of agenda under the local currency debt market reforms, based on the report. There are 10 more reforms that needed to be implemented in the sequence set by the BSP et al, at least. The OIS is in the timeframe which includes the plan for the BSP and the BTr to work together to expand money market instruments, to have a “more ambitious” money-making targets, to review benchmark rules and finally, to review risk management rules for derivative trading. The BSP was already poised to implement the OIS in 2013 but they went with the interest rate corridor system first which they adopted in 2016. The BSP has always emphasized the importance of a single benchmark rate for banks which posts less risks. When it was first announced, the central bank had intended the OIS to set a benchmark rate since the 91-day Treasury bill rate was no longer reliable. The BSP is working with the BTr, the Securities and Exchange Commission and the Department of Finance to “expand market depth and breadth (and) to encourage active trading and drive quicker development of market-based benchmarks.” They will also increase the volume of treasury bills, provide a transparent mechanism covering the issuance of government securities, establish a reliable yield curve, develop a set of obligations, rights and incentives of market makers, and strengthen regulatory oversight over the repo and fixed income market. The government has had to accelerate capital market reforms because of the impending regional integration and to expand the funding source for state infrastructure spending. The Philippine Development Plan (2017-2022) would require P8 trillion to P9 trillion to spend on infrastructure development.