MANILA (Reuters) – The Philippine central bank announced on Monday the launch of an interest rate swap market anchored to a newly established benchmark rate to improve bond market trading and liquidity.
The start of IRS trading comes following the International Swaps and Derivatives Association’s recognition of the benchmark – the Overnight Reference Rate (ORR) – that the Philippine Bankers Association helped establish.
The IRS, a fixture of developed fixed income markets, allows parties to manage rate risk or bet on the direction of borrowing costs by exchanging fixed and floating interest rate streams.
The ORR, which will be based on the central bank’s daily reverse repo auctions, is expected to provide a better benchmark for pricing loans, which are now based on yields on thinly traded government securities.
“We are excited to have PESO IRS go live to help boost 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 being market makers for the ORR-based IRS, ensuring pricing across all maturities from one month to 10 years and improving interest rate transparency, the central bank said.
Bangko Sentral ng Pilipinas also said it was working on the adoption of global master repurchase agreement contracts that will allow banks to access treasury bonds for repurchase transactions to boost the government securities repurchase market.
(Reporting by Karen Lema; Editing by William Mallard)