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Small businesses and consumers can now hope for greater transparency when loan shopping with the launch of the PESO interest rate swap market (PESO IRS), according to the Bangko Sentral ng Pilipinas (BSP).
The Bankers Association of the Philippines (BAP) said the International Swaps and Derivatives Association (ISDA) recognizing BAP’s Philippine Overnight Reference Rate (ORR), on which the swaps will be anchored at the short end.
This crucial announcement of the ISDA is the final step to opening the PESO IRS, envisioned to be one of the key steps in deepening the capital markets.
“This means interest rates will be more transparent, making it easier for SMEs and consumers who are shopping for a loan to expand their business or make an important investment or purchase,” BSP Governor Eli M. Remolona Jr. said in a statement.
“For the central bank, this will make it easier for the BSP to transmit monetary policy, maintain price stability, and promote sustainable growth and job
creation,” he added.
The BSP said the opening of the PESO IRS marks a significant step toward boosting trading and liquidity in the domestic bond market. This is part of a plan to deepen the local capital markets.
A deeper capital market is expected to enhance savings and investment in the Philippines. As a side benefit, it will also strengthen the transmission of monetary policy.
“The enhanced PESO IRS market aims to promote development of yield curves to further support the pricing requirements of short-term credit instruments, such as loans, in the market,” Paul A. Favila, Chairman of the BAP Open Market Committee said.
Under this market, the BAP said it developed the Philippine ORR, which is based on the BSP’s overnight reverse repurchase rate (RRP), to which the BSP shifted last year.
BSP said for the first time, some 16 banks have committed to be market makers for the ORR-based IRS.
The central bank said they will ensure there will be prices for swaps of various maturities, from one-month to 10-year, providing a new way to hedge or take positions.
“A benchmark curve will help banks and other lenders price loans at various maturities. This whole effort is just one of many steps the National Government, the BSP, and Philippine and foreign banks are working on very closely together to achieve these objectives. Foremost among these is to provide the liquidity investors need to invest in our fast-growing economy,” Remolona explained.
The 16 banks are BDO, BPI, China Bank, EastWest Bank, Metrobank, Philippine National Bank, Security Bank, Rizal Commercial Banking Corporation, and Union Bank.
The list also includes the Australia and New Zealand Banking Group, Citi, Deutsche Bank, HSBC, ING Bank, JP Morgan Chase, and Standard Chartered Bank.
BAP also said apart from these market makers, five banks will serve as regular participants. These are BDO Private Bank, Maybank, Mizuho, MUFG, and SMBC.
Bloomberg, BAP said, will serve as the trading platform for the enhanced PESO IRS market. Through widespread trading among market participants, the BAP said this would promote the creation of enhanced benchmarks — leading to the pricing of loans that reflect the needs of the market.
“Now that the enhanced PESO IRS market has gone live, it is time to work together and ensure that the reforms we have pursued will fulfill their goals,” Jose Teodoro K. Limcaoco, President of the BAP, said.
“The launch of the enhanced PESO IRS market, together with the creation of a repo market for government securities, are valuable steps towards growing our Philippine capital market,” he added.
BSP said aside from PESO IRS, the National Government, BSP, Philippine banks and foreign partners are also working on other efforts to deepen the capital market.
The central bank said this month, the Bureau of the Treasury (BTr) set the procedures for residents of 43 countries covered by tax treaties with the Philippines to only pay the rate agreed in these treaties, rather than paying the full tax then seeking a refund.
It added that the BTr is also creating more liquid benchmarks by concentrating issuance and bond reopenings in a few selected maturities.
The BSP also said it is working on adopting Global Master Repurchase Agreement (GMRA) contracts, allowing it to actually deliver Treasury bonds to banks when they enter into repos as part of monetary policy operations.
This is expected to boost the government securities repo market, currently mostly interbank, as banks gain access to BSP’s Treasuries, which they can repo as well for added profit. As the BSP’s shift introduces some banks to GMRA, they may start engaging in other repo transactions as well. The expanded repo market will provide a strong alternative benchmark alongside the PESO IRS.
Further, the Department of Finance (DOF) has pushed for legislation that would simplify tax rates for passive income, financial intermediaries, and deepen the capital market. BSP said the DOF is working on more ways to make Philippine bond markets more competitive in terms of taxation.###
The BSP also said officials are engaged with credit rating agencies, financial market index providers, and other stakeholders in pursuit of making Philippine assets more accessible to local and foreign investors.
Philippine USD bonds are rated BBB+ by S&P Global, and Baa2 and BBB by Moody’s and Fitch. In October, JPMorgan & Co. said the Philippines is one of two countries “on the radar” for inclusion in its Government Bond Index-Emerging Markets (GBI-EM) index.