The Philippines is reintroducing interest rate swaps and looking to boost the market for bond repurchase agreements to create alternative benchmarks for pricing loans, as the country posting some of the fastest growth rates in Asia prepares for increased capital demands.
This would aid in financing for projects such as a potential revival of a controversial nuclear facility, airports and infrastructure, while also helping develop areas for industrial use.
It remains to be seen how effective the tools could be, but financial authorities are pushing for changes they see as essential for keeping the economic momentum going.
Why the push?
A deep capital market helps businesses raise money aside from borrowing from banks and provides more options for investors. Bangko Sentral ng Pilipinas governor Eli Remolona has been spearheading efforts to deepen the capital market that companies and enterprises can tap, which could reduce their dependence on bank loans for funds.
Paul Favila, chairman of the open market committee of the Bankers Association of the Philippines and a country manager for Citibank, said in October the Philippines would need US$20 billion every year through 2050 just to transition to clean energy. He sees the current system of financing as not being up to the task.
What’s new?
Seven years ago, banks reintroduced the government securities repurchase market with regulators’ backing. It didn’t gain much traction due to a lack of players and a general reluctance to make use of the International Capital Market Association’s Global Master Repurchase Agreement, which outlines various processes, including what happens in cases of default.
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This time, more market participants are getting ready to sign on and use the standard contract. Another way to boost deals would be to allow fund managers to participate in the repo market.
On interest-rate swaps, the Bankers Association of the Philippines would create the Peso IRS overnight reference rate, which will be equal to the Philippine central bank’s variable overnight reverse repurchase rate that’s set daily in an auction.
A floating benchmark rate of this sort is crucial in making interest-rate swaps possible. At present, Philippine bonds are mostly bearing interest rates that are fixed.
Bloomberg, the parent company of Bloomberg News, is expected to provide the trading platform for the revamped peso interest rate swap.
Who are the parties involved?
For the Peso IRS, there are 15 banks:
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BDO, BPI, China Bank, Metrobank, PNB, Security Bank, RCBC, Union Bank, ANZ, Citi, DB, HSBC, ING Bank, JPMorgan Chase, and Standard Chartered Bank
They have committed to be market makers, quoting two-way prices for the one, three, and six-month swaps against the overnight reference rate. These market-based quotes from a large number of banks would form benchmarks that banks and borrowers can use for pricing loans.
Five others – BDO Private Bank, Maybank, Mizuho, MUFG, and SMBC – have committed to be regular participants.
Fund managers and trust entities are interested in becoming repo participants and asking the Bureau of Internal Revenue to similarly exempt them from the imposition of documentary stamp tax (DST) on their potential repo transactions, said Mari Toni Bautista, head of financial markets and financial markets sales for the Philippines at Standard Chartered Bank.
Banks’ repo deals are currently exempt from DST.
What’s next?
The BAP is waiting for its overnight reference rate to be the recognised rate for the Peso IRS under the International Swaps and Derivatives Association.
On repos, fund managers’ exemption from the documentary stamp tax could help expand market participation. As short-term benchmarks are established, a smooth yield curve that reflects market consensus could evolve, helping in pricing debt instruments of varying maturities. BLOOMBERG
