The Bangko Sentral ng Pilipinas (BSP) announced the launch of a new PESO interest rate swap market (PESO IRS) today, marking a significant step toward boosting trading and liquidity in the domestic bond market.
This is part of a plan to deepen the local capital markets. A deeper capital market is expected to enhance savings and investment in the Philippines. As a side benefit, it will also strengthen the transmission of monetary policy.
The Bankers Association of the Philippines’ (BAP) PESO IRS follows last week’s announcement by the International Swaps and Derivatives Association (ISDA) recognizing BAP’s Philippine Overnight Reference Rate (ORR), on which the swaps will be anchored at the short end.
They will 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.
The ORR, in turn, is based on the variable overnight reverse repurchase rate (RRP), to which the BSP shifted last year.
“We are excited for PESO IRS to go live to help boost transactions, create a benchmark yield curve, and deepen our capital markets,” BSP Governor Eli M. Remolona said.
“A benchmark curve will help banks and other lenders 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.”
“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,” Remolona said.
“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.”
“The enhanced PESO IRS market aims to promote development of yield curves to further support the pricing requirements of short-termcredit instruments, such as loans, in the market,” according to Paul A. Favila, Chairman of the BAP Open Market Committee.
“Now that the enhanced PESO IRS market has gone live, it is time to work together and ensure that the reforms we have pursued will fulfill their goals,” Jose Teodoro K. Limcaoco, President of the BAP, said.
“The launch of the enhanced PESO IRS market, together with the creation of a repo market for government securities, are valuable steps towards growing our Philippine capital market,” Limcaoco added.
To promote accessibility to the market, sixteen BAP member-banks will serve as market-makers that will quote two-way prices for the short- and long-term swaps against the Philippine ORR.
These are: BDO, BPI, China Bank, EastWest Bank. Metrobank, PNB, Security Bank, RCBC, Union Bank of Australia and New Zealand Banking Group, Citi, Deutsche Bank, HSBC, ING Bank, JP Morgan Chase and Standard Chartered Bank
In addition to these market makers, five banks will serve as regular participants: BDO Private Bank, Maybank, Mizuho, MUFG and SMBC
Bloomberg will serve as the trading platform for the enhanced PESO IRS market.
Aside from PESO IRS, the National Government, BSP, Philippine banks and foreign partners are also working on the following, among others:
This month, the Bureau of the Treasury set 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 Bureau of the Treasury is creating more liquid benchmarks by concentrating issuance and bond reopenings in a few selected maturities.
The BSP is working on adopting Global Master Repurchase Agreement (GMRA) contracts, allowing it to actually deliver Treasury bonds to banks when they enter into repos as part of monetary policy operations. This is expected to boost the government securities repo market, currently mostly interbank, as banks gain access to BSP’s Treasuries, which they can repo as well for added 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.
The Department of Finance (DOF) has pushed for legislation that would simplify tax rates for passive income, financial intermediaries, and deepen the capital market. It said the government is working on more ways to make Philippine bond markets more competitive in terms of taxation.
Officials are engaged with credit rating agencies, financial market index providers, and other stakeholders in pursuit of making Philippine assets more accessible to local and foreign investors. Philippine USD bonds are rated BBB+ by S&P Global, and Baa2 and BBB by Moody’s and Fitch. In October, 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.
