BSP, BAP Enhance Benchmark To Advance Capital Market Development

Bangko Sentral ng Pilipinas (BSP) and the Bankers Association of the Philippines (BAP) are advancing their capital market development efforts with two key initiatives: an enhanced Peso Interest Rate Swaps (Peso IRS) market and a government securities repo market.

The development of a deep capital market will provide businesses with alternatives to bank loans and offer more investment options for Filipinos.

These initiatives aim to establish a smooth yield curve that reflects market consensus, aiding in the pricing of credit instruments across varying maturities.

Currently, loan pricing is unevenly based on yields from thinly traded government securities, which creates challenges in developing robust benchmarks.

To address this, the BAP will introduce an enhanced Peso IRS overnight reference rate (ORR), derived from the BSP's variable overnight reverse repurchase rate (RRP), which is set through daily auctions.

Fifteen banks—including BDO, BPI, China Bank, Metrobank, PNB, Security Bank, RCBC, Union Bank, ANZ, Citi, Deutsche Bank, HSBC, ING Bank, JP Morgan Chase, and Standard Chartered Bank—have committed to serve as market makers, quoting two-way prices for swaps with tenors of one, three, and six months, as well as longer durations of up to ten years.

An additional five banks—BDO Private Bank, Maybank, Mizuho, MUFG, and SMBC—will participate regularly. These market-based quotes will create reliable benchmarks for loan pricing.

The BAP is seeking recognition of its ORR under the International Swaps and Derivatives Association (ISDA), with Bloomberg expected to serve as the trading platform, while the BSP will publish the daily RRP benchmark.

The BSP and BAP are also working on expanding the government securities (GS) repo market, which will increase GS trading and provide an additional benchmark, especially for short-term loans.

Last year, the BAP relaunched the interbank repo market, and the BSP is now shifting from tagging to full delivery of securities in line with global practices, allowing more trading flexibility and liquidity in the market.

These initiatives are expected to improve price discovery, transparency, risk management, and attract both local and foreign investors by reducing credit risks and financing costs.

Additionally, the development of a deep capital market will provide businesses with alternatives to bank loans and offer more investment options for Filipinos.

BSP Governor Eli M. Remolona, Jr. emphasized that a benchmark yield curve will aid in the pricing of bank loans and corporate bonds, thus strengthening the transmission mechanism of monetary policy.

BAP President Jose Teodoro K. Limcaoco added that these benchmarks will enhance risk management and foster confidence in the Philippine market, benefiting market activity and generating more robust financial products for hedging long-term exposures.

BAP Open Market Committee Chairman Paul A. Favila highlighted that these new tools, the enhanced Peso IRS instrument and the GS repo market, will benefit banking clients by providing better risk management options and supporting long-term funding critical to infrastructure and energy transition efforts.