BSP Launches New Interest Rate Swap Market To Deepen PH Capital Markets

The Bangko Sentral ng Pilipinas (BSP) has announced the launch of a new interest rate swap (IRS) market aimed at boosting trading activity and liquidity in the domestic bond market.

The introduction of the PESO IRS and complementary reforms underline the government’s commitment to fostering a robust and dynamic capital market in the Philippines.

This initiative is part of a broader effort to deepen the Philippines’ capital markets, enhance savings and investments, and strengthen the transmission of monetary policy.

The Bankers Association of the Philippines (BAP) unveiled its enhanced PESO Interest Rate Swap Market (PESO IRS), marking a significant milestone. This follows last week’s recognition of the BAP’s Philippine Overnight Reference Rate (ORR) by the International Swaps and Derivatives Association (ISDA).

The ORR serves as the benchmark for short-end swaps and is anchored on the BSP's variable overnight reverse repurchase rate (RRP), adopted last year.

Key Features of the PESO IRS

• 16 banks committed as market makers: These institutions will provide pricing for swaps across various maturities, ranging from one month to ten years.

  
  

• Hedging and investment opportunities: The new IRS market offers participants tools to hedge risks or take positions more effectively.

  
  

• Benchmark yield curve creation: A benchmark curve will aid banks and lenders in pricing loans across maturities, supporting the growth of the local economy.

BSP Governor Eli M. Remolona expressed optimism about the initiative: “We are excited for PESO IRS to go live to help boost transactions, create a benchmark yield curve, and deepen our capital markets,” BSP Governor Eli M. Remolona said.

“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.”

Additional Measures to Strengthen the Capital Market

Alongside PESO IRS, the National Government, BSP, and their partners are working on several complementary initiatives:

1. Simplified Tax Procedures: The Bureau of the Treasury recently streamlined tax payments for residents of 43 countries covered by tax treaties, allowing them to pay agreed treaty rates directly instead of seeking refunds.

   
   

2. Liquid Benchmark Bonds: The Bureau of the Treasury is concentrating bond issuance and reopenings in select maturities to enhance liquidity and create more reliable benchmarks.

   
   

3. Global Master Repurchase Agreement (GMRA): The BSP is adopting GMRA contracts to enable Treasury bond delivery during repo operations. This move aims to expand the repo market, providing banks with greater access to Treasury securities for profitable transactions.

   
   

4. Tax Simplification for Financial Instruments: The Department of Finance (DOF) is pursuing legislation to simplify tax rates on passive income and financial intermediaries, making the Philippine bond market more competitive internationally.

Progress on Global Recognition

Officials are actively engaging with credit rating agencies and financial index providers to elevate the global visibility of Philippine assets. Notably, Philippine USD bonds hold strong credit ratings (BBB+ by S&P, Baa2 by Moody’s, and BBB by Fitch).

In October, JPMorgan highlighted the Philippines as a contender for inclusion in its Government Bond Index-Emerging Markets (GBI-EM) index.

Implications for Monetary Policy and Economic Growth

Governor Remolona emphasized the broader economic benefits, stating, “For the central bank, this will make it easier for the BSP to transmit monetary policy, maintain price stability, and promote sustainable growth and job creation."

“This means interest rates will be more transparent, making it easier for SMEs and consumers who are shopping for a loan to expand their business or make an important investment or purchase.”

The introduction of the PESO IRS and complementary reforms underline the government’s commitment to fostering a robust and dynamic capital market in the Philippines.