BSP chief mulls revival of interest rate swaps

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) chief is looking at reviving the interest rate swap (IRS) market in the next two years, in hopes that players will be active enough to produce a  curve that can eventually become a good benchmark yield curve.

During the membership meeting of the Financial Executives Institute of the Philippines (FINEX), BSP Governor Eli Remolona Jr. said financial market players in the Philippines used to do more swap transactions, but these have disappeared.

“So I would like to revive the swaps market, the IRS 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. Maybe that will work,” he said.

According to Remolona, a good benchmark yield curve is crucial in deepening the capital markets, as there has been a lack of liquidity in the yield curve.

He then proposed to do what Europe did in the late 1990s, wherein the swaps curve emerged as the pre-eminent benchmark yield curve in euro financial markets, making the euro IRS market one of the largest and most liquid financial markets globally.

“Just use the swaps curve,” Remolona said. “You’re not as exposed when you have a swap. You’re not as exposed to price changes the way you would be exposed if you’re holding government security.”

An interest rate swap is a contract between two parties to exchange streams of interest payments. Typically, one stream of payments is based on a fixed rate of interest and the other stream on a floating rate of interest.

The BSP chief said building a benchmark yield curve, possibly by using the swaps curve, is one of his three wishes for the capital markets.

He also wishes to open the corporate bond market to lower-rated issuers and to have the Philippines join the global shift to equity index and emerging market bond exchange traded funds.

At the sidelines, Remolona told reporters that reviving the swaps market should be easy and possible in two years, or within his term.

“Then people can price against that curve. You can price corporate bonds, you can price mortgages, against that curve. So that’s maybe one thing we haven’t tried,” he said.

In June last year, the Bankers Association of the Philippines (BAP) launched the dollar-peso cross-currency swap (USD-PHP CCS) market, which allowed members to better manage foreign exchange and interest rate risks