BSP, BAP Promote Capital Market Development by Improving Benchmarks for a Yield Curve

The Bangko Sentral ng Pilipinas (BSP) and the Bankers Association of the Philippines (BAP) are taking their capital market development work a step further with two complementary initiatives.

​These two initiatives are about creating an enhanced Peso Interest Rate Swaps (Peso IRS) market and enabling a repo market for government securities. These initiatives are intended to create a smooth yield curve that would reflect market consensus and help in pricing credit instruments of varying maturities. 

Peso IRS
 
At present, loan pricing is based unevenly on yields of thinly traded government securities. Given this challenge, the industry pursued initiatives to help build more robust benchmarks across maturities.

The BAP will create the enhanced Peso IRS overnight reference rate (ORR) based on the BSP’s variable overnight reverse repurchase rate (RRP), which is set in an active daily auction. Fifteen banks—BDO, BPI, China Bank, Metrobank, PNB, Security Bank, RCBC, Union Bank, ANZ, Citi, DB, HSBC, ING Bank, JP Morgan Chase, and Standard Chartered Bank—have committed to be market makers, quoting two-way prices for the one-, three-, and six-month swaps against the ORR. These market-based quotes from a large number of banks will form reliable benchmarks that banks and borrowers can use for pricing loans. It will also have longer tenors of one, two, three, four, five, seven and ten years.

Five more banks—BDO Private Bank, Maybank, Mizuho, MUFG, and SMBC—have committed to be regular participants.
​
BAP is seeking for its ORR to be a recognized overnight reference rate under the International Swaps and Derivatives Association. Bloomberg is expected to serve as the trading platform for the enhanced Peso IRS. The BSP will serve as the publisher of the daily variable reverse repurchase rate benchmark.

Repo Market for Government Securities
 
The BSP and BAP are working on expanding the GS repo market to increase GS trading and provide another alternative benchmark especially for short term loan rates.

Last year, BAP relaunched the interbank repo market. The central bank is working with BAP to expand the market. Currently, the BSP “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.

Aside from deepening liquidity in primary and secondary bond markets, the move would also facilitate price discovery and transparency of bond prices, develop hedging tools for better risk management, and attract local and foreign investors to the Philippine government securities market through the reduction of credit risks and financing costs.

It would also support capital market development by stimulating the trading of financial products. A deep capital market helps businesses raise funds aside from borrowing from banks and provides more options for Filipino investors. 

The BSP and BAP, long-term partners in Philippine capital market development, have stepped up the collaboration in recent years to advance the country’s banking and financial systems and the economy as a whole.

BSP Governor Eli M. Remolona, Jr. said, “A benchmark yield curve will help in the pricing of bank loans and corporate bonds, and thus strengthen the transmission mechanism for monetary policy.”
 
BAP President Jose Teodoro K. Limcaoco echoed these sentiments, stating “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.”

Limcaoco further noted, “Enhancement in the benchmarks will support the evolution and generation of financial products for hedging longer term exposures through the Philippine Peso Interest Rate Swap and government securities repo markets.”

BAP Open Market Committee Chairman Paul A. Favila explained, “This year, we are introducing an enhancement in the Peso IRS instrument and a repo market for GS – tools that will benefit the banking clients to better manage their risks and exposures and grow our market.”
 
“The enhanced Peso IRS facility addresses existing gaps in the market by providing a more relevant and reliable hedging option for market participants. It will help deepen the markets and generate a more robust long term funding market which are critical to help sustain long term investment and economic growth.  Having hedging tools will support the development of long-term capital much needed to support infrastructure build and energy transition,” Favila explained.