The Bankers Association of the Philippines (BAP) has officially opened the enhanced PESO Interest Rate Swap (PESO IRS) market to the public as of November 18, 2024. This milestone aligns with the release of the updated International Swaps and Derivatives Association (ISDA) definitions on November 15, which included the Philippine Overnight Reference Rate (ORR) as a key benchmark.
The enhanced PESO IRS market aims to strengthen the domestic capital market by promoting the development of benchmark yield curves, which are essential for accurately pricing short-term credit instruments like loans.
According to Paul A. Avila, chairman of the BAP Open Market Committee, “The enhanced PESO IRS market aims to promote the development of yield curves to further support the pricing requirements of short-term credit instruments, such as loans, in the market.”
The BAP’s Philippine ORR, which underpins the PESO IRS market, is based on the variable overnight reverse repurchase rate (RRP) of the Bangko Sentral ng Pilipinas (BSP). To ensure accessibility and liquidity, 16 BAP-member banks have committed to serving as market makers. These banks will provide two-way price quotes for swaps of various maturities, ranging from one month to 10 years.
“Now that the enhanced PESO IRS market has gone live, it is time to work together and ensure that the reforms we have pursued will fulfil their goals,” said Teodoro K. Limcaoco, president of the BAP, in a press release. “The launch of the enhanced PESO IRS market, together with the creation of a repo market for government securities, are valuable steps towards growing our Philippine capital market.”
Earlier this year, both the BAP and the BSP have taken significant steps to further develop the country’s capital markets through two complementary initiatives — the creation of an enhanced Peso Interest Rate Swaps (Peso IRS) market and the enabling of a repo market for government securities (GS), both of which are aimed at strengthening the Philippines’ financial structure.
BAP: Supporting liquidity and market development
The BAP’s role in spearheading this initiative is a critical component of broader efforts to deepen the Philippine capital market.
By anchoring the enhanced PESO IRS market on the ORR and facilitating active market participation, the BAP is positioning itself as a vital player in enhancing financial stability and market efficiency.
The ORR-based swaps are expected to provide businesses and financial institutions with a reliable platform for hedging risks or taking strategic positions.
This development also supports the creation of a benchmark yield curve, which is instrumental in pricing loans and other credit instruments across various maturities.
Collaboration with key stakeholders
The BAP’s efforts complement initiatives by other stakeholders, including the BSP, the National Government, and foreign partners, all working toward the shared goal of capital market development.
- Recognition by ISDA — the inclusion of the Philippine ORR in the updated ISDA definitions underscores the global credibility of the benchmark rate, providing a strong foundation for the enhanced PESO IRS market.
- Market accessibility — by engaging 16 market-making banks, the BAP has ensured that participants have access to competitive and transparent pricing.
- Broader market reforms — these include the BSP’s work on adopting Global Master Repurchase Agreement (GMRA) contracts and the Department of Finance (DOF)’s push for tax reforms aimed at streamlining rates for financial instruments.
Implications for the financial ecosystem
With the launch of the enhanced PESO IRS market, the BAP has taken a significant step toward improving financial market transparency and efficiency.
This initiative is expected to help banks and other lenders accurately price loans while supporting the liquidity needed to fuel the country’s economic growth.
Avila highlighted that the effort to develop a comprehensive yield curve would also benefit borrowers, particularly SMEs, by making interest rates more predictable and competitive.
As the PESO IRS market gains traction, it is poised to serve as a cornerstone for the Philippine financial market, complementing other reforms and initiatives aimed at fostering a robust and globally competitive economy.
For inquiries regarding the PESO IRS market, please contact the Bankers Association of the Philippines at bapmail@bap.rg.ph or the Philippines’ Investor Relations Group at iro-pmiu@bsp.gov.ph.