BSP, Banks boost capital market with new benchmarks

By Francis Allan L. Angelo

The Bangko Sentral ng Pilipinas (BSP) and the Bankers Association of the Philippines (BAP) have launched two major initiatives aimed at advancing the country’s capital markets.

The initiatives, which focus on enhancing the Peso Interest Rate Swaps (IRS) market and expanding the repo market for government securities, are designed to create a more reliable and efficient yield curve, improving the pricing of loans and other financial products, according to a BSP report.

The collaboration is seen as a critical step in providing the financial industry with better tools to manage risk, price credit more accurately, and boost overall market confidence.

Creating a Stronger Benchmark for Loan Pricing

Currently, loan pricing in the Philippines is based on yields from a relatively thin market for government securities, making it difficult to establish reliable benchmarks across different maturities.

To address this, the BAP is working on establishing an enhanced Peso IRS market with new benchmarks based on the BSP’s variable overnight reverse repurchase (RRP) rate.

This overnight reference rate (ORR) will serve as a more consistent and market-driven benchmark for pricing loans and financial products.

Several of the country’s largest banks, including BDO, BPI, Metrobank, and Union Bank, have committed to act as market makers, quoting prices for swaps ranging from one month to ten years.

“These benchmarks will provide market participants with a better avenue to price interest rates for bonds and loans,” said BAP President Jose Teodoro K. Limcaoco.

The enhanced Peso IRS is expected to be recognized by the International Swaps and Derivatives Association, and trading will be facilitated through the Bloomberg platform.

The BSP will publish the daily reverse repurchase rate benchmark, ensuring transparency and consistency in the market.

Expanding the Repo Market for Government Securities

Another key component of this initiative is the expansion of the repo market for government securities (GS).

A repo, or repurchase agreement, is a financial transaction where securities are sold with the agreement to buy them back later. This market allows banks to borrow short-term funds by selling government securities, providing liquidity and a benchmark for short-term interest rates.

The BSP and BAP relaunched the interbank repo market last year, and now they are taking steps to further expand it. This includes shifting from the current practice of “tagging” securities (which limits their tradability) to full delivery of these securities.

According to BSP Governor Eli M. Remolona, Jr., this shift will make the market more efficient by aligning it with global practices.

“By deepening liquidity in the bond markets, we not only improve transparency and price discovery, but we also make the market more attractive to local and foreign investors,” Remolona said.

The expanded repo market is expected to reduce credit risks and financing costs, benefiting the broader capital market and helping businesses raise funds more efficiently.

Boosting Economic Growth and Investment

These reforms are part of a larger strategy to foster the development of the Philippine capital market, which plays a crucial role in financing long-term projects such as infrastructure and energy transitions.

The capital market refers to a marketplace where buyers and sellers trade financial securities like stocks and bonds.

A deep capital market provides businesses with alternatives to borrowing from banks, allowing them to raise funds by selling bonds or shares to investors.

BAP Open Market Committee Chairman Paul A. Favila emphasized that the improved IRS and repo markets will help businesses manage their financial risks better.

“These tools will benefit the banking clients to better manage their risks and exposures and grow our market,” he explained.

In technical terms, the Peso IRS is a financial instrument that allows banks and other entities to swap interest rate payments based on a fixed rate for a floating rate, helping them hedge against fluctuations in interest rates.

The repo market, on the other hand, allows banks to trade government securities, which enhances liquidity and creates a benchmark for short-term loan rates.

Limcaoco further noted that the initiatives would help in creating long-term capital, which is crucial for sustainable growth.

“By better management of relevant risks, the overall Philippine market will benefit due to greater confidence from both local and foreign investors,” he added.

Supporting Long-Term Investments

In the long run, these developments are expected to support infrastructure projects, business expansion, and the government’s efforts toward energy transitions by providing more robust funding options and tools to hedge against financial risks.

The enhanced yield curve will help in more accurately pricing bank loans and corporate bonds, which, as Governor Remolona explained, “strengthens the transmission mechanism for monetary policy.”