The Bangko Sentral ng Pilipinas is conducting a probe of the operations of the country’s bond exchange after it had admitted to posting erroneous interest rates for key benchmarks used by banks to price their short term loans and securities.
BSP Deputy Governor Nestor Espenilla told the Inquirer that “an investigation [of Philippine Dealing System Holdings Corp.] is on going.” PDS earlier confessed to incorrectly pricing so-called “benchmark tenors”—11 benchmarks in total—from as short as three months to one year in duration.
The errors occurred from June 3 to July 18, 2016, potentially affecting short term securities, placements and loans during this period which were priced based on the published rates of Philippine Dealing and Exchange Corp., a subsidiary of the PDS Group.
The Bankers Association of the Philippines, which is the majority owner of the PDS Group and the primary client of the PDEx data, is also investigating the incident with an eye toward preventing a repeat of the pricing errors and ensure the integrity of the system going forward
“The BAP open market committee is reviewing the matter to establish if there is any impact to the market and will recommend to the BAP board and president corresponding actions necessary,” the group’s open market committee chair and HSBC country chief Wick Veloso said.
In a letter to the BAP last last month, the PDS said it had discovered an error in the interest rate used as the basis for interpolating short-term rates. Instead of being set at 3 percent —which was the rate established on June 3, 2016 when the central bank started implementing its interest rate corridor—the old rate of 4 percent was retained in its system.
As a result, three-month benchmarks were priced at 3.7939 percent instead of 2.9186 percent. This means that a 90-day borrower during this period would have paid 0.8753 percent more while the lender would have earned the same amount less.
The pricing of six-month funds during the period was also off by anywhere half a percentage point to 0.7521 percent, while those of one-year funds were also off by about half a percentage point.
“We most humbly apologize for this incident and the inconvenience caused,” PDS Holdings Corp. president and COO Antonino Nakpil said in his letter to the BAP, adding that the firm was implementing stricter procedures to prevent its repeat which was attributed to a manual error.
Market sources told the Inquirer that a preliminary investigation showed that no material impact to the market and its participants had so far been uncovered. “However, a corresponding disciplinary action or sanction is being prepared against PDEx,” said one banking official.
Espenilla pointed out that the central bank was just one of a number of stakeholders with an interest in getting to the bottom of the PDEx mispricing incident. Apart from the banking industry, he said that PDEx—due to the nature of its business as an exchange—also reports to its direct regulator, the Securities and Exchange Commission.