Philippine banks to start interest rate swaps

The enhanced interest rate swap market is set to open on Monday (Nov. 18), a move the Bangko Sentral ng Pilipinas (BSP) said will mark a “significant step toward boosting trading and liquidity in the domestic bond market.”

The Bankers Association of the Philippines (BAP) in a statement said it is launching the peso interest rate swap (IRS) market, following the release of the updated International Swaps and Derivatives Association (ISDA) on Nov. 15.

The Philippine Overnight Reference Rate (ORR) was included in the rates published by the ISDA.

“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,” BAP Open Market Committee Chairman Paul Raymond A. Favila said in a statement.

The BAP had developed the Philippine ORR, which is based on the BSP variable overnight repurchase rate.

The BSP said in a statement on Sunday that the IRS market will deepen the local capital markets, which would enhance savings and investments as well as strengthen the transmission of monetary policy.

“We are excited for PESO IRS to go live to help boost transactions, create a benchmark yield curve, and deepen our capital markets,” BSP Governor Eli M. Remolona, Jr. said.

“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.”

Sixteen BAP member banks will serve as market makers that will quote two-way prices for the short- and long-term swaps against the Philippine ORR.

These are BDO Unibank, Inc.; Bank of the Philippine Islands; China Banking Corp.; EastWest Bank Corp.; Metropolitan Bank & Trust Co.; Philippine National Bank; Security Bank Corp.; Rizal Commercial Banking Corp.; Union Bank of the Philippines, Inc.; Australia and New Zealand Banking Group; Citi; Deutsche Bank; HSBC; ING Bank; JPMorgan Chase; and Standard Chartered Bank.

“(The banks) 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,” the BSP said.

Five banks will also serve as regular participants: BDO Private Bank, Maybank, Mizuho, MUFG, and SMBC.

Bloomberg will serve as the trading platform for the swap market, while the BSP will be the publisher of the daily variable reverse repurchase rate benchmark.

“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,” BAP President Jose Teodoro K. Limcaoco 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.

Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said in a Viber message that the Peso IRS market will offer the investing public more hedging products and solutions, which would help develop the country’s markets.

“This would allow businesses, institutions, and individuals to better manage and hedge their interest rate risks to better adapt to global and market developments, at least mitigate the market risks, or could even become lucrative/profitable with the right market view,” he said.

“The investing public would be able to take positions in either a declining or even rising US and local interest rate environment, based on the cycles of the economy and monetary policy,” he added.

Meanwhile, the BSP said it is working on adopting Gobal 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,” it said.

An expanded repo market will offer a “strong alternative benchmark” alongside the PESO IRS. — Aaron Michael C. Sy