The Bangko Sentral ng Pilipinas (BSP) teamed up with the Bankers Association of the Philippines (BAP) to enhance the country’s capital market through two key initiatives.
These initiatives aim to establish a more robust peso interest rate swaps (peso IRS) market and introduce a repo market for government securities.
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They seek to create a smoother yield curve that accurately reflects market consensus and facilitates the pricing of credit instruments with varying maturities.
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—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—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.
“A benchmark yield curve will help in the pricing of bank loans and corporate bonds, and thus strengthen the transmission mechanism for monetary policy,” BSP Governor Eli Remolona, Jr. said.
BAP president Jose Teodoro Limcaoco said 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 said.
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