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Philippines Develops Enhanced Peso Interest Rate Swap Market

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Finance News

Financial Markets,Philippines,Banking

The Bangko Sentral ng Pilipinas (BSP) and Bankers Association of the Philippines (BAP) are launching an improved peso interest rate swap market to enhance benchmark yield curves used in pricing loans and bonds. The new system will utilize the Peso Interest Rate Swap (IRS) overnight reference rate (ORR), derived from the BSP’s variable overnight reverse repurchase or ORRP rate.

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The BAP will create the Peso Interest Rate Swap overnight reference rate , which is derived from the BSP’s variable overnight reverse repurchase or ORRP rate. The ORRP rate is actively set in daily auctions by the BSP and reflects short-term borrowing costs for banks. The ORR is yet to be formally recognized by the International Swaps and Derivatives Association, though this endorsement may be secured before the end of 2024. Despite this, the BSP sees the development as an improvement over current practices, where loan pricing is “unevenly based on the yields of thinly traded government securities.”

“These benchmarks are expected to provide market participants with a better avenue to price interest rates for bonds and loans. By better management of relevant risks, the overall Philippine market will benefit due to greater confidence from both local and foreign investors and financial institutions — thus leading to more robust market activity in the future,” BAP president Jose Teodoro Limcaoco also said on Monday.

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