BSP eyes wider array of FX derivatives
The Bangko Sentral ng Pilipinas (BSP) is eyeing an expansion of the list of foreign exchange (FX) derivative instruments that may be used in hedging exposures involving the Philippine peso as part of Governor Eli Remolona Jr.’s vision for a deeper local capital market.
The BSP sought the feedback of stakeholders on a draft circular containing proposed amendments to regulations covering FX derivatives transactions. The deadline for comments ended on July 12.
Simply put, derivatives are financial instruments whose value is based on the price movement of an underlying asset that can be used by investors to manage risk in their portfolios. These include futures and forward contract, options contracts like “puts” and “calls,” and warrants.
Used properly, derivatives help investors hedge against risk of market fluctuations. They can also enhance transparency and liquidity in the market by providing market-based pricing information.
That said, the draft central bank circular expanded the list of FX derivatives instruments that banks and non-banks can use to hedge their FX exposures to include non-deliverable swap (NDS), cross currency swap (CCS), non-deliverable CCS and FX option.
The document also proposed a new item in the manual to include “other FX derivative instruments allowed under the MORB (Manual Regulations for Banks).”
As it is, the current version of the manual only includes FX obligation, FX swap, FX forward and non-deliverable forward on its list of FX derivatives.
“The proposed amendments… aim to provide greater flexibility to hedge users. We don’t wish to tell the market participants how to hedge,” the BSP said in response to questions from the Inquirer.
“The proposed amendment is part of the continuing efforts of the BSP to review the FX regulatory framework and foster a policy environment that promotes sustainable economic growth and development,” it added.
In his past speeches, Remolona expressed his three wishes for a deep and liquid capital market, one of which is to develop a “good” benchmark yield curve.
Under this plan, he specifically wants to “revive” the country’s interest rate swap market, arguing that having such a derivative contract would lessen a borrower’s exposure to fluctuations in interest rates.
Once the local swap market is active again, the BSP chief explains that a “swap curve” will eventually emerge that can replace the Philippine Bloomberg Valuation (BVAL), which he called a “choppy” curve that is “not a good reference for pricing instruments.”
Remolona’s two other wishes for a deep capital market are the development of a corporate bond market that is accessible to potentially lower rated borrowers; and for the Philippines to join the global exchange-traded funds (ETF) party.
