(Bloomberg) — The Philippines wants to get a revamped market for interest rate swaps off the ground this year, as it seeks to enhance its capital market and grease the wheels for monetary policy.
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The step is one of two measures announced by Bangko Sentral ng Pilipinas and commercial banks in Manila, which officials said would help trading and price discovery. Developing the repo market for government securities is also on the agenda.
The country’s financial sector has been without viable benchmarks for pricing fixed income transactions since last year, when the scandal-plagued London interbank offered rate, or Libor, ceased publication. That’s a handicap for banks and limits the country’s ability to attract foreign capital. As it stands, the market for government bonds is fragmented, which impacts the yield curve. Pricing loans is difficult, because they’re based on securities in which there is little trading.
“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 said at a briefing on Monday. He said the measure will help shorten the period of monetary policy transmission by as much as one and a half years.
The BSP has already adjusted the way it conducts operations, switching to daily variable-rate tenders via auction and a target overnight reverse repurchase facility (RRP) rate to signal its monetary policy stance in September 2023. The operational “overnight RRP rate” was established to provide a barometer for liquidity conditions.
For the planned swaps reform, the Bankers Association of the Philippines will create an overnight peso reference rate (ORR) based on the BSP’s RRP. Fifteen banks — including Deutsche Bank AG, Citigroup Inc. and HSBC Holdings Plc. — will serve as market makers, quoting pricing for multiple tenors of swaps against the ORR.
Officials intend for the market to go live once the International Swaps and Derivatives Association recognizes the ORR in November.
Moreover, officials are also looking to develop the repo market, which was launched last year. The objective is to allow full delivery of securities in line with international practice, allowing market participants to trade them and increasing volumes. Funds — not just banks — would be allowed to participate.
“These benchmarks are expected to provide market participants with a better avenue to price interest rates for bonds and loans,” BAP President Jose Teodoro Limcaoco said. “By better management of relevant risks, the overall Philippine market will benefit due to greater confidence from both local and foreign investors.”
Bloomberg LP, the parent company of Bloomberg News, provides an evaluated pricing service through Bloomberg BVAL. Bloomberg LP is expected to serve as the trading platform for the revamped peso interest rate swap.
–With assistance from Manolo Serapio Jr..
(Updates with background, detail throughout)
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