BSP and BAP set to enhance swap, GS repo markets

The Bangko Sentral ng Pilipinas (BSP) and Bankers Association of the Philippines (BAP) will enhance the interest rate swap market and the repurchase agreement (repo) market for government debt to improve benchmarks for a smoother yield curve.

“This year, we are introducing an enhancement in the Philippine Interest Rate Swap (Peso IRS) instrument and the repo market for government securities (GS) — tools that will benefit the banking clients to better manage their risks and exposures and eventually grow our market,” BAP Open Market Committee Chairman Paul Raymond A. Favila said at an event on Monday.

These initiatives will enhance 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, and thus strengthen the transmission mechanism for monetary policy,” BSP Governor Eli M. Remolona, Jr. added.

Mr. Remolona earlier said that he planned to revive the domestic swap market.

A swap is a derivative contract where 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) that is set in an active daily auction.

The BSP launched the ORRP in September last year.

“Not only did it support the monetary tool of the BSP, but it provided a solution to the industry’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 funding market which is critical to help sustain long-term investment and economic growth,” he added.

Mr. Favila said the IRS will not be replacing other instruments.

“We are not anticipating necessarily a replacement. In any jurisdiction, the determination of the benchmark is actually determined by the users themselves. So, what we are trying to do is to 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 enhance it.

“Ultimately, I think, as has happened in other markets, there will be a small spread between BVAL and the swaps curve,” he said. “The swaps curve will be a bit higher than the government curve, if I may call BVAL that. That spread will represent counter-party risk among the dealers in the swaps market.”

There are 15 BAP-member banks that have committed to be 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 quote two-may prices for the one-month, three-month, and six-month Peso IRS,” Mr. Favila said. “These market-based quotes from large and active member banks will form a more robust short-term benchmark that banks and borrowers can use for pricing loans.”

Tenors will range from one, two, three, four, five, seven, and 10 years, he added.

Meanwhile, five banks signed up as regular participants: BDO Private Bank, Inc.; Maybank Investment Banking Group; Mizuho Bank, Ltd.; Mitsubishi UFJ Financial Group; and Sumitomo Mitsui Banking Corp.

The IRS can be up and running as soon as this year, Mr. Favila said, once the International Swaps and Derivatives Association (ISDA) acknowledges the ORR. The BAP is looking to have the ORR approved by ISDA by November.

“As soon as we get positive confirmation that the ORR is already recognized by ISDA… the market is ready to begin trading,” he said.

Bloomberg is expected to serve as the trading platform for the swap market, while the BSP will be the publisher of the daily variable reverse repurchase 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 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 statement.

This will boost liquidity in the primary and secondary bond markets, they said, facilitate bond price discovery and transparency, develop hedging tools, 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 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 K. Limcaoco said.

“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,” he added.

DERIVATIVES

Meanwhile, the Securities and Exchange Commission (SEC) is looking to develop a futures market in the Philippines, it said on Monday.

The corporate regulator held a Derivative Market Oversight and Regulatory Scheme Training with the United States Commodity Futures Trading Commission (CFTC) on Aug. 12-16 in preparation for the possible creation of a local derivatives market, it said in a statement.

“The Derivative Market Oversight and Regulatory Scheme… complements our ongoing efforts to develop regulatory frameworks for commodity futures and an electricity derivatives market, in pursuit of our mandate to deepen capital markets,” SEC Commissioner McJill Bryant T. Fernandez said.

“Developments in the derivatives market as a whole have contributed to more complete financial markets, improved market liquidity, and increased the capacity of the financial system to price and bear risk effectively — ultimately, ushering in stronger economic growth over time,” he added.

Derivatives are types of investments wherein 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 in order to provide businesses more accessible funding for their growth, as well as more investment options that cater to the different risk profiles of the investing public,” SEC Chairperson Emilio B. Aquino said.

China Bank Capital Corp. Managing Director Juan Paolo E. Colet said the having a derivatives market will boost the “sophistication and appeal of our financial markets.”

“The creation 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 “appropriate for all types of investors given the level of risk involved,” he said.

“Sophisticated investors will most likely be the primary users and traders of derivatives. It will take a lot of investor education to make the domestic retail market ready for derivatives,” Mr. Colet said. “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 onerous, then it might discourage investors and stunt the development of the derivatives market.”

“They have good intentions. Having more products is better than less. However, there’s no guarantee it will be a popular product,” COL Financial Group, Inc. Chief Equity Strategist April Lynn Lee-Tan added in a Viber message. — Luisa Maria Jacinta C. Jocson and Revin Mikhael D. Ochave