MANILA, Philippines — The enhanced PESO interest rate swap (IRS) market is now operational, marking a significant step toward advancing capital market development and providing market participants with improved tools for managing interest rate risks.
In a statement, the Bankers Association of the Philippines (BAP) said this development follows the publication of the updated International Swaps and Derivatives Association definitions on Nov. 15.
The updated rates include the Philippine Overnight Reference Rate (ORR), which serves as a key benchmark for the enhanced PESO IRS market.
The BAP developed the Philippine ORR, which was based on the variable overnight repurchase rate of the Bangko Sentral ng Pilipinas.
BSP Governor Eli Remolona Jr. said the central bank is excited for the PESO IRS to go live to help boost transactions, create a benchmark yield curve and deepen the capital markets.
“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,” he said.
Aside from PESO IRS, the government, Philippine banks as well as foreign partners are collaborating on various initiatives, including streamlining tax procedures. This month, the Bureau of the Treasury (BTr) set guidelines allowing residents of 43 countries covered by tax treaties with the Philippines to directly pay the treaty rates, eliminating the need to pay the full tax upfront and apply for a refund.
The BTr is also creating more liquid benchmarks by concentrating issuance and bond reopenings in a few selected maturities.
The central bank said it plans to adopt Global Master Repurchase Agreement (GMRA) contracts, enabling it to transfer Treasury bonds directly to banks during repo transactions in its monetary policy operations. This move is anticipated to strengthen the government securities repo market, which is currently dominated by interbank activity, by providing banks access to BSP-held Treasuries that they can further repo for additional earnings.
The BSP may start engaging in other repo transactions as it shifts to introduce some banks to GMRA. The expanded repo market will provide a strong alternative benchmark alongside the PESO IRS.
Meanwhile, the Department of Finance has pushed for legislation that will simplify tax rates for passive income and financial intermediaries and deepen the capital market. It has also said that the government is working on more ways to make Philippine bond markets more competitive in terms of taxation.
“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 Favila, chairman of the BAP Open Market Committee, said.
To boost market accessibility, 16 BAP member-banks will act as market-makers that will quote two-way prices for the short- and long-term swaps against the Philippine ORR.
These banks include BDO Unibank Inc., Bank of the Philippine Islands, China Banking Corp., EastWest Banking Corp., Metropolitan Bank & Trust Co., Philippine National Bank, Security Bank Corp., Rizal Commercial Banking Corp. and Union Bank of the Philippines.
There are also foreign banks that will serve as market-makers. These are ANZ Banking Group, Citibank, Deutsche Bank, HSBC, ING Bank, JP Morgan Chase as well as Standard Chartered Bank.
In addition to these market makers, BDO Private Bank, Maybank, Mizuho,
Enchanced From B1
MUFG and SMBC will serve as regular participants. Bloomberg will facilitate trading in the enhanced PESO IRS market as its platform.
According to the BAP, active participation from market players will support the development of improved benchmarks, enabling loan pricing that better aligns with market demands.
“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 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.
Creating an enhanced PESO IRS market is one of the two initiatives of the BSP and the BAP intended to create a smooth yield curve that would reflect market consensus and help in pricing credit instruments of different maturities.