Gov’t bond forward market coming to PH on Feb. 3
Philippine Dealing and Exchange Corp. (PDEx) will launch on Feb. 3 the country’s first peso interest rate hedge in an effort to help strengthen the local capital market.
Antonino Nakpil, president and CEO of the Philippine Dealing System Holdings Corp.’s bond trading arm, told reporters on Monday that the Securities and Exchange Commission had already approved PDEx’s proposal to offer the trading of government bond forward contracts, confirming an earlier Bloomberg report.
These are essentially agreements to buy or sell a specific government bonds at a fixed rate on a future date.
This type of instrument is seen as a way to hedge against interest rate risks, especially since bond prices decline when interest rates increase. This way, investors can lock in gains when interest rates are projected to increase.
Government bond forward contracts are also considered derivatives, as its value is derived from an underlying asset.
“It’s a new thing. It will be settled in a way that’s unique,” Nakpil said. He did not provide further details.
However, the CEO noted that the market would be initially available only to banks and “qualified investors.”
“Basically, [it’s for] professionals only. This is not meant for retail investors … because some contracts are not meant for retail investors,” he pointed out, adding that the process could become “complicated” for other investors.
“We’ll see if it works,” Nakpil said.
This comes amid the country’s push to improve its capital market, primarily through bonds.
In November, the Bangko Sentral ng Pilipinas and Bankers Association of the Philippines launched the enhanced peso interest rate swap (IRS) market. This is seen to provide a new benchmark yield curve that can be used in pricing short-term loans and bonds.
The IRS likewise allows borrowers to sell bonds to creditors using the most attractive rates. The borrowers can then repay the principal amount and borrowing costs under their desired financing schedule.
