Why the Philippines is building its capital market

The The Philippines is reintroducing interest rate swaps and looking to boost the bond repurchase agreement market to create alternative benchmarks for pricing loans, as the country with some of Asia’s fastest growing rates braces for increased capital demands .

This would help finance projects such as a potential revival of a controversial nuclear facility, airports and infrastructure, while helping to develop industrial areas.

It remains to be seen how effective the tools could be, but financial authorities are pushing for changes they see as essential to maintaining economic momentum.

Why the push?

A deep capital market helps companies raise money apart from borrowing from banks and provides more options for investors. Bangko Sentral ng Pilipinas Governor Eli Remolona has led efforts to deepen the capital market that companies and businesses can use, 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 country director for Citibank, said in October that the Philippines will need $20 billion every year by 2050 just to transition to clean energy. He believes that the current funding system is not up to par.

what’s new

Seven years ago, banks reintroduced the buyback market for government securities with the support of regulators. It didn’t gain much traction due to a lack of players and a general reluctance to use the International Capital Association’s Master Redemption Agreement, which outlines various processes, including what happens in cases of default.

This time, more market participants are preparing to sign and use the standard contract. Another way to stimulate trading would be to allow fund managers to participate in the repo market.

In the case of interest rate swaps, the Bankers Association of the Philippines would create the IRS Peso overnight reference rate, which will be equal to the variable overnight reverse repo rate of the Philippine central bank, which is set daily in an auction.

A floating reference rate like this is essential to make interest rate swaps possible. Currently, Philippine bonds mostly carry interest rates that are fixed.

Bloomberg, the parent company of Bloomberg News, is expected to provide the trading platform for the renewed peso interest rate swap.

Who are the parties involved?

For Peso IRS, there are 15 banks:

• BDO, BPI, China Bank, Metrobank, PNB, Security Bank, RCBC, Union Bank, ANZ, Citi, DB, HSBC, ING Bank, JPMorgan Chase and Standard Chartered Bank

They are committed to being market makers, quoting two-way prices for one-month, three-month 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 to price loans.

Five others – BDO Private Bank, Maybank, Mizuho, ​​MUFG and SMBC – have pledged to be regular participants.

Fund managers and fiduciary entities are interested in becoming repo participants and asking the Bureau of Internal Revenue to similarly exempt them from the imposition of documentary stamp duty (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.

Bank repo offers are currently exempt from DST.

What’s next?

BAP expects the overnight reference rate to be the recognized rate for the IRS Peso under the International Swap and Derivatives Association.

In the case of repo, exempting fund managers from documentary stamp duty could help expand market participation. As short-term benchmarks are established, a smooth yield curve that reflects market consensus could evolve, helping to price debt instruments of different maturities. BLOOMBERG