BSP seeks to revive swap market

The Philippine central bank wants to revive the swap market to deepen the country’s capital markets, its governor said last week.

“We used to do swaps quite a bit, but somehow, they disappeared,” Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. told a forum last week. “I would like to revive the swap market, the interest rate swap markets and insist on market making at least the five-year maturity, which is the sweet spot for fixed-income securities, for corporate bonds, for derivatives contracts so maybe that will work.”

He cited markets in Europe, where the swap curve emerged without regulatory intervention. “Without any government initiative, without any central bank taking the lead, the swap curve emerged as the benchmark curve. Maybe that’s the way to do it now.”

A swap is a derivative contract where one party exchanges the values or cash flows of one asset for another.

Swaps are traded over the counter, versus options and futures that are traded on a public exchange.

Interest rate, equity, credit default and currency swaps are the most common types of swaps.

“If we had a swap curve, maybe you need to make markets, maybe just one maturity, maybe the five-year,” Mr. Remolona said.

He said the country does not have a good repurchase market to tie down the short end.

“I don’t understand what the reason is because we have GMRA (Global Master Repurchase Agreement), which is supposed to be so simple and so acceptable that the whole world will use it,” he said. “Somehow, it hasn’t worked here.” — BMDC