THE BANGKO SENTRAL ng Pilipinas (BSP) and Bankers Association of the Philippines (BAP) will improve the interest rate swap market and the government bond repo market to improve benchmarks for a smoother yield curve.
“This year, we are introducing an enhancement to the Philippine Interest Rate Swap (Peso IRS) instrument and the Government Securities (GS) repo market – instruments that will benefitFIt is up to banking customers to better manage their risks and exposures and ultimately grow our market,” Paul, Chairman of the BAP Open Market Committee Raymond A. Favila said this at an event on Monday.
These initiatives will improve short-term benchmarks and further deepen the country’s capital markets, he said.
“A benchmark yield curve will help in the pricing of bank loans and corporate bonds, thus strengthening the monetary policy transmission mechanism,” BSP Governor Eli M. Remolona Jr. added.
Mr Remolona previously said he planned to revive the domestic swap market.
A swap is a derivative contract in which one party exchanges the values or cash flows of one asset for another. Interest rate, equity, credit default and currency swaps are the most common types of swaps.
The BAP will create the enhanced Peso IRS overnight reference rate (ORR), based on the BSP’s variable overnight reverse repurchase rate (ORRP), which is determined in an active daily auction.
The BSP launched the ORRP in September last year.
“Not only did it support the BSP’s monetary instrument, but it also provided a solution to the sector’s Peso IRS reference rate,” Mr. Favila said. “The enhanced Peso IRS facility addresses existing gaps in the market by providing a more relevant, robust hedging option for market participants.”
The swap market would also generate “a more robust long-term financing market that is critical to supporting long-term investment and economic growth,” he added.
Mr. Favila said the IRS will not replace other tools.
“We don’t necessarily expect a replacement. In each jurisdiction, the determination of the benchmark is actually determined by the users themselves. So what we’re trying to do is provide options – hopefully deeper, better options – and let the market evolve accordingly.”
Mr Remolona said the PHP Bloomberg Valuation Service (BVAL) yield curve is “choppy” and the IRS curve will help improve it.
“Ultimately, like in other markets, I think there will be a small spread between BVAL and the swap curve,” he said. “The swaps curve will be slightly higher than the government curve, if I can call it BVAL. That spread will represent counterparty risk among dealers in the swap market.”
There are fifteen BAP member banks that have committed to being market makers in the IRS market: BDO Unibank, Inc.; Bank of the Philippine Islands; China Banking Corp.; Metropolitan Bank & Trust Co.; Philippine National Bank; Security Bank Corp.; Rizal Commercial Banking Corp.; Union Bank of the Philippines, Inc.; ANZ bank; Citigroup, Inc.; Deutsche Bank; HSBC; ING Bank; JPMorgan Chase; and Standard Chartered Bank.
“These market makers are committed to quoting May 2nd prices for the one-, three- and six-month Peso IRS,” Mr. Favila said. “These market-based quotes from large and active member banks will provide a more robust short-term benchmark that banks and borrowers can use to price loans.”
Tenors range from one, two, three, four, five, seven and 10 years, he added.
In the meantime, five banks have registered as permanent participants: BDO Private Bank, Inc.; Maybank Investment Banking group; Mizuho Bank, Ltd.; Mitsubishi UFJ Financial Group; and Sumitomo Mitsui Banking Corp.
The IRS could be operational as early as this year, Mr. Favila said, once the International Swaps and Derivatives Association (ISDA) recognizes the ORR. The BAP aims to have the ORR approved by ISDA by November.
“Once we get positive confirmation that the ORR is already recognized by ISDA… the market is ready to start trading,” he said.
Bloomberg is expected to serve as the trading platform for the swap market, while the BSP will be the issuer of the daily floating reverse repo rate benchmark.
Meanwhile, the BSP and BAP are also working to expand the GS repo market to boost trading and provide an alternative benchmark for short-term lending.
“Currently, the BSP ‘tags’ securities to banks that place cash on them through the reverse repo window. The central bank is now working to shift from tagging to full delivery of these securities, in line with global market practices. This will enable banks to trade these securities, vastly expanding the market,” the BSP and BAP said in a statement.
This will increase liquidity in the primary and secondary bond markets, they said, facilitate bond price discovery and transparency, develop hedging instruments and help reduce credit risks and costs, which could help attract more investors to the Philippine GS market .
“These benchmarks are expected to provide market participants with a better opportunity to determine bond and loan interest rates. Through better management of relevant risks, the overall Philippine market will benefit from the increased scamsFidentity of both local and foreign investors and financial institutions – which will lead to more robust market activity in the future,” said BAP President Jose Teodoro K. Limcaoco.
“Improving the benchmarks will accelerate the evolution and generation of Ffinancial products for hedging longer-term exposures through the Philippine Peso Interest Rate Swap and government bond repo markets,” he added.
DERIVATIVES
Meanwhile, the Securities and Exchange Commission (SEC) is seeking to develop a futures market in the Philippines, it said on Monday.
The corporate regulator held a Derivative Market Oversight and Regulatory Scheme Training at the United States Commodity Futures Trading Commission (CFTC) from August 12 to 16 in preparation for the possible establishment of a local derivatives market, a statement said.
“The Derivative Market Oversight and Regulatory Scheme… complements our ongoing eFWe aim to develop regulatory frameworks for commodity futures and an electricity derivatives market, continuing our mandate to deepen capital markets,” said SEC Commissioner McJill Bryant T. Fernandez.
“The developments in the derivatives market as a whole have contributed to a more complete whole Ffinancial markets, improved market liquidity and increased the capacity of the Ffinancial system to praise and bear risk eFfectively – ultimately, heralding stronger economic growth over time,” he added.
Derivatives are types of investments where an investor does not own the underlying asset, but instead makes a bet on the direction of the price movement of the underlying asset through an agreement with another party. These include options and futures contracts.
The training with CTFC covered the legal frameworks and regulatory elements of derivatives, investor protection and regulation, and contract design and transaction clearing mechanisms, the SEC said.
“The SEC remains committed to finding new and innovative solutions to further develop the capital market to provide companies with more accessible financing for their growth, as well as more investment options that meet the different risk profiles of the investing public,” said SEC Chairman Emilio B. Aquino said.
Juan Paolo E. Colet, chief executive of China Bank Capital Corp., said having a derivatives market would allow the “sophistication and profession of ours Ffinancial markets.”
“The establishment of a local derivatives market is long overdue as many of our neighbors already have their own organized derivatives or futures markets,” Mr Colet said in a Viber message.
However, such a market may not be “suitable for all types of investors, given the level of risk,” he said.
“Sophisticated investors will most likely be the primary users and traders of derivatives. A lot of investor education will be needed to prepare the domestic retail market for derivatives,” said Colet. “An immediate challenge for regulators is to design a robust, market-friendly and cost-efficient framework for the origination, trading and settlement of derivatives. If it is too burdensome, it could discourage investors and hinder the development of the derivatives market.”
“They have good intentions. Having more products is better than less. However, there is no guarantee that it will be a popular product,” COL Financial Group, Inc. added. Chief Equity Strategist April Lynn Lee-Tan added in a Viber message. — Luisa Maria Jacinta C. Jocson And Revin Mikhael D. Ochave