New swap market launched to create reliable interest rate benchmark

The Bangko Sentral ng Pilipinas (BSP) and Bankers Association of the Philippines (BAP) on Monday launched an “enhanced” peso interest rate swap (IRS) market in hopes of creating a new benchmark yield curve that is good enough in pricing short-term loans and bonds.

Under the plan, BAP will create the local IRS overnight reference rate (ORR) based on the BSP’s variable overnight reverse repurchase rate, which is set daily and changes depending on the needs of the banks.

IRS allows a borrower to sell bonds using the most attractive rates that can be offered to creditors at the time of the sale, then repay the principal amount and borrowing costs via a financing schedule they desire. This typically involves the exchange of a fixed interest rate for a floating rate—which changes periodically based on market conditions—or vice versa.

BAP wants the upcoming ORR to be acknowledged by the International Swaps and Derivatives Association (ISDA) by November.

Meanwhile, the BSP will publish the daily variable reverse repurchase rate benchmark, while Bloomberg will serve as the trading platform for the enhanced peso IRS.

So far, 15 banks have committed to be market makers, quoting two-way prices for one-, three- and six-month swaps against the ORR.

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BAP and the BSP said these “market-based quotes from a large number of banks will form

reliable benchmarks that banks and borrowers can use for pricing loans.” It will also have longer tenors of one, two, three, four, five, seven and 10 years.

As it is, the creation of a new and good benchmark yield curve is one of BSP Governor Eli Remolona Jr.’s three wishes for a deep and liquid capital market.