MANILA (Reuters) – The Philippine central bank on Monday announced the launch of an interest rate swap market anchored to a newly set benchmark rate to improve bond market trading and liquidity.
The start of IRS transactions follows the International Swaps and Derivatives Association’s recognition of the benchmark – the overnight reference rate (ORR) – that the Bankers Association of the Philippines helped establish.
A staple of developed fixed income markets, IRS allows parties to manage interest rate risk or bet on the direction of financing costs by exchanging fixed and variable interest streams.
The ORR, which will be based on the central bank’s daily reverse repo auctions, is expected to provide a better benchmark for loan pricing, now based on yields on thinly traded government bonds.
“We are pleased that PESO IRS is going live to stimulate transactions, create a benchmark yield curve and deepen our capital markets,” central bank Governor Eli Remolona said in a statement. “A benchmark curve will help banks and other lenders price loans with different maturities.”
Sixteen banks have committed to be market makers for the ORR-based IRS, guaranteeing prices over maturities from one month to 10 years and increasing interest rate transparency, the central bank said.
Bangko Sentral ng Pilipinas also said it is working on adopting global master repurchase agreements that will allow banks to access government bonds for repo transactions to boost the government bond repo market.
(Reporting by Karen Lema; Editing by William Mallard)
