The Bankers Association of the Philippines (BAP) and the Bangko Sentral ng Pilipinas (BSP) are taking significant steps to further develop the Philippine capital markets through two complementary initiatives.
These initiatives aim to strengthen the financial infrastructure by creating an enhanced Peso Interest Rate Swaps (Peso IRS) market and enabling a repo market for government securities (GS).
Both projects are designed to create a smoother yield curve, reflecting market consensus and supporting the pricing of credit instruments across varying maturities. In July last year, the BAP also introduced the Dollar-Peso cross-currency swap market to help better manage forex and interest rate risks.
BAP introduces enhanced Peso Interest Rate Swaps (Peso IRS)
Currently, loan pricing in the Philippines is based on the uneven yields of thinly traded government securities, posing a challenge for lenders and borrowers.
To address this, the BAP, in collaboration with the BSP, has launched the enhanced Peso IRS market. This initiative aims to provide more robust benchmarks across various maturities, offering a more stable reference for loan pricing.
The Peso IRS will use the BSP’s variable Overnight Reverse Repurchase Rate (RRP) as its overnight reference rate (ORR). The RRP is set through active daily auctions, making it a reliable indicator of market interest rates.
Fifteen major banks, including BDO, BPI, Metrobank, and Security Bank, have committed to serve as market makers. These institutions will quote two-way prices for one-, three-, and six-month swaps against the ORR, providing market-based quotes that can be used for loan pricing. Longer tenors of one, two, three, four, five, seven, and ten years will also be available, further expanding the utility of the IRS.
Five additional banks, such as BDO Private Bank and Maybank, will participate regularly, adding further liquidity to the market.
BAP is also working to have the ORR recognized as an official overnight reference rate under the International Swaps and Derivatives Association (ISDA), which will enhance its credibility and global acceptance. Bloomberg is expected to serve as the trading platform for the enhanced Peso IRS while the BSP will publish the daily variable reverse repurchase rate benchmark.
Repo market for government securities (GS)
In addition to the IRS initiative, the BAP and the BSP are collaborating to expand the government securities (GS) repo market. A robust repo market will boost GS trading activity and provide an alternative benchmark for short-term loan rates.
In 2023, the BAP relaunched the interbank repo market, but further expansion is necessary to fully develop the market. The central bank is working with BAP to shift from its current practice of “tagging” securities to banks, which place cash with the BSP via its reverse repo window. The plan is to transition to full delivery of these securities, in line with global standards. This shift will allow banks to trade these securities, significantly increasing liquidity in the market.
This move will also benefit the Philippine capital markets by facilitating price discovery, enhancing transparency in bond prices, and enabling the development of hedging tools. Such developments are expected to attract local and foreign investors, reduce credit risks, and lower financing costs.
By deepening liquidity in primary and secondary bond markets, the expanded repo market will provide an alternative funding source for businesses, enabling them to raise capital beyond traditional bank loans. Filipino investors will also gain more options for diversifying their investments.
Collaboration for capital market development
The partnership between BAP and the BSP is part of a broader effort to advance the Philippines’ banking and financial systems. These initiatives align with the government’s goal of promoting economic stability and growth by improving financial market infrastructure.
BSP Governor Eli M. Remolona, Jr. emphasized the importance of these initiatives, stating, “A benchmark yield curve will help in the pricing of bank loans and corporate bonds, and thus strengthen the transmission mechanism for monetary policy.”
BAP President Jose Teodoro K. Limcaoco echoed this sentiment, highlighting how these benchmarks will provide market participants with a better platform to price interest rates for bonds and loans. He added, “Greater confidence from both local and foreign investors will lead to more robust market activity in the future.”
BAP’s Open Market Committee Chairman Paul A. Favila also underscored the significance of these initiatives. He explained, “This year, we are introducing an enhancement in the Peso IRS instrument and a repo market for GS—tools that will benefit banking clients by helping them better manage their risks and exposures, ultimately fostering market growth.”
Favila added that the enhanced Peso IRS facility would help deepen the market by offering a more relevant and reliable hedging option, which is critical to sustaining long-term investments and promoting economic growth. These hedging tools will also support the development of long-term capital, which is crucial for financing infrastructure projects and advancing the energy transition.
By working together, the BSP and BAP will ensure that the Philippine financial system is better equipped to meet the demands of a growing and evolving economy.