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‘These benchmarks are expected to provide market participants with a better avenue to price interest rates for bonds and loans,’ says Bankers Association of the Philippines president Jose Teodoro Limcaoco
MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) and Bankers Association of the Philippines (BAP) are creating an “enhanced” peso interest rate swap market to improve benchmark yield curves used in pricing loans and bonds.
The BAP will create the Peso Interest Rate Swap (IRS) overnight reference rate (ORR), which is derived from the BSP’s variable overnight reverse repurchase or ORRP rate. The ORRP rate is actively set in daily auctions by the BSP and reflects short-term borrowing costs for banks.
Fifteen banks — BDO, BPI, China Bank, Metrobank, PNB, Security Bank, RCBC, UnionBank, ANZ, Citi, DB, HSBC, ING Bank, JP Morgan Chase, and Standard Chartered Bank — will all serve as market makers. These institutions will quote both buying and selling prices for one-month, three-month, and six-month swaps against the ORR.
BDO Private Bank, Maybank, Mizuho, MUFG, and SMBC have also committed to be regular participants.
The ORR can be used as a benchmark for pricing loans and financial products, with tenors ranging up to 10 years. Financial institutions can use these benchmarks to offer more accurate, market-reflective pricing for loans, bonds, and other financial instruments.
Bloomberg will serve as the trading platform for the enhanced Peso IRS while the BSP will publish the daily variable RRP rate benchmark.
The ORR is yet to be formally recognized by the International Swaps and Derivatives Association, though this endorsement may be secured before the end of 2024. Despite this, the BSP sees the development as an improvement over current practices, where loan pricing is “unevenly based on the yields of thinly traded government securities.”
The new benchmark is not intended to replace the widely used Bloomberg Valuation Service, or BVAL, but will complement it.
“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 on Monday, September 30.
“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,” BAP president Jose Teodoro Limcaoco also said on Monday.
Beyond the Peso IRS, the BSP and BAP are also rolling out improvements in the repo market for government securities with the hope that this could serve as another alternative benchmark for short term loan rates.
“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,” the BSP and BAP said in a joint press release.
The repo market is a key component of short-term funding, where banks sell government securities with an agreement to repurchase them at a future date. – Rappler.com
