THE Philippines needs to enhance its benchmarks and form a credible yield curve based on actively traded securities to further develop its capital markets.
This as the Bangko Sentral ng Pilipinas (BSP) created a new overnight rate (ON) as reference rate amid the phaseout of the London Interbank Offered Rate (LIBOR) on June 30.
In a statement, the Bankers Association of the Philippines (BAP) has expressed support for the BSP’s latets initiative.
“We will continue to work actively with the regulators to ascertain that any foreseeable benchmark implementation undergoes system-wide testing, accreditation, and general acceptance by all market stakeholders,” it added.
BSP Senior Assistant Governor Office of Systemic Risk Management Johnny Noe E. Ravalo said the overnight rate is vital for decision makers.
“Whether you’re a regulator or ordinary investor, it’s important that the basis for prices you’re looking at is correct,” he told reporters in an ambush interview.
“The calculated overnight rate will represent a reference rate which can be used by the market to price its money, at the same time it will be used in reference to our reading of the policy rate,” he added.
In the Philippines, the LIBOR is still used for some fixed-income securities available in the market, as well as for interest rate and cross-currency swaps.
The Philippine Interbank Reference Rate, which is used for interest rate swaps, cross-currency swaps and some peso corporate loans, is also computed using dollar LIBOR.
Meanwhile, the BAP said that compared with other markets in the region, the Philippines still strives to have a “deeper and more vibrant securities market.”
The country has 5-year, 7-year and 10-year securities actively traded in the market — with the 12-year, 15-year, and 20-year bonds receiving strong interests from market participants and investors.
“These securities provide the banking industry sufficient support for pricing bank products such as loans, mortgages, investments, and marking-to-market of banks’ own portfolios,” the BAP said.
It also noted that the Philippine Bloomberg Valuation Service (BVAL) benchmarks that are currently being administered by the BAP are still credible and addresses scenarios of limited market activity.
“BVAL, as a benchmark, is accepted by Philippine financial and capital market participants. Market confidence in the use of BVAL is a result of rigorous back-testing and its ability to perform straight through processing — a critical element to deliver efficient and convenient services to bank customers,” it added.
The BVAL reference rates are solely calculated by Bloomberg Finance Singapore L.P. and its affiliates, under an agreement with the BAP.
Rizal Banking Corp. Chief Economist Michael L. Ricafort said the overnight rate should complement the Philippine BVAL tenors, as it lacks an overnight interest rate.
“This would increase the transparency and efficiency in the markets in terms of the real borrowing costs in the economy (not distorted nor manipulated), thereby increasing predictability with better/improved benchmarks, by curing the defects of LIBOR, which will be phased out this month,” Mr. Ricafort said.
He said that the LIBOR was manipulated by some market players before by managing borrowing costs favorable to their interest and detrimental to other parties in the market.
“The ideal is to have market rates that are fair for both borrowers and investors, as properly determined by market forces, and not manipulated/not distorted by any party,” Mr. Ricafort said.
“As the BSP fulfills its mandate of price stability and inflation-targeting and the National Government fulfills its mandate of getting the lowest borrowing costs possible, these reforms are important to further develop the country’s capital markets, especially long-term funding and investments,” he added.
Earlier in 2020, the central bank issued BSP Memorandum No. M-2020-083, which required financial institutions to report their LIBOR-related exposures.
The central bank wanted proper identification of exposures to ensure that the cessation of LIBOR does not disrupt banks’ operations. — Keisha B. Ta-asan
