Cross-currency swap market launched

To manage risks

MANILA, Philippines — The Bankers Association of the Philippines (BAP) has launched a new facility, allowing members and customers to better manage foreign exchange and interest rate risks.

In a statement, the group said that it has introduced the dollar-peso cross-currency swap (USDPHP CCS) market that would allow banks to utilize hedging instruments critical to them and in response to the needs and requirements of their customers.

A cross-currency swap is a transaction between two authorized parties that involves an exchange of principal amounts and interest payments in one currency for principal and interest payments in another currency at an agreed upon exchange rate and at an agreed schedule.

The Money Market Association of the Philippines (MART) and ACI Philippines support the initiative spearheaded by the BAP Open Market Committee to make sure that the USDPHP CCS market is guided by the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) as well as the adoption of the ISDA Master Agreement and Foreign Exchange Global Code.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp. (RCBC), said that the USDPHP CCS would allow banks and their clients to hedge foreign exchange and interest rate risks as part of the development of the financial and capital markets.

“The cross-currency swap transactions effectively eliminate the need to buy dollars outright from the market by hedging their foreign exchange risks for a given period,” he said.

Ricafort said the facility would benefit foreign banks and investors who use dollars as collateral to borrow pesos, without the need for conversion and just effectively paying the borrowing rate in pesos, net of its interest rate earnings in dollars under the cross-currency swap transaction.

At the other side of the cross-currency swap transaction, he explained, is the lender of the pesos and effectively the borrower of the dollars of the other party, getting an effective lending rate in pesos net of the dollar borrowing cost.

He added that the facility would be useful for those foreign portfolio investments or speculative funds that are shorter term in nature as there is no need to sell dollars in the market on day one and no need to buy back the dollar from the market at the end of the investment period.

Market makers in the dollar-peso cross-currency swap market include BDO Unibank, Bank of the Philippine Islands, Metropolitan Bank & Trust Co., Philippine National Bank, Security Bank, Citibank, Deutsche Bank, British banking giant HSBC, Dutch financial giant ING Bank, JP Morgan and Standard Chartered Bank.

Banks that have signed up as regular participants include China Bank, RCBC, Gokongwei-led Robinsons Bank, Union Bank of the Philippines, ANZ, Mizuho and MUFG.

Voice-broker participants in this market include Amstel, GFI, Tradition and Tullet Prebon.

The USDPHP CCS market involves a Philippine peso fixed rate and a dollar floating swap with standard tenors of one, two, three, four, five, seven and 10 years.