BSP readies PH bond market reforms

THE BANGKO Sentral ng Pilipinas is set to implement a package of initiatives—touted as “legacy reforms” of Governor Amando M. Tetangco Jr. in his final year in office—that will boost the trading of local bonds and make it more attractive to raise capital from the local debt market.

Under the proposed rules, local banks will soon be able to monetize their idle inventory of securities as well as engage in legal short selling as part of the new scheme on repurchase agreements, known as “repos” in banking shorthand.

At the same time, the BSP is also finalizing guidelines for a so-called overnight index swap (OIS) system, which will result in more accurate and transparent interest rates for both borrowers and lenders.

“These items have long been on our agenda, but there’s a greater effort now between BSP, the Bureau of the Treasury and the Securities and Exchange Commission to implement,” Tetangco said.

In an interview with the Inquirer, Tetangco said the repo system would help deepen the local debt capital market by giving banks and other holders of bonds the ability to liquefy these holdings at better prices when faced with sudden cash requirements.

“It will provide greater liquidity to the market,” he said. “If you’re a holder of government securities, you can repo those for cash and deploy the cash. In short, you can use your GS [government securities] to generate liquidity.”

This scheme differs from the present practice where banks can only sell their securities on an outright basis without legally binding themselves to buying back the same securities at a future date.

Tetangco explained that the repo scheme would also open the door to the practice of short selling of securities, legally.

Short selling involves the sale of “borrowed” securities at a high price and buying the same number of securities back at a lower price, then pocketing the price difference before returning these same securities to their owner.

“The effect of repos will be similar to securities borrowing and lending or short selling,” Tetangco said. “This will also generate cash for banks. It can also generate securities, because some banks have cash and they may need securities. You can borrow when you need over the short term, in effect.”

The central bank chief—who ends his second and final term as governor in July 2017—explained that most of the reforms that would be implemented were meant to develop more reliable interest rate benchmarks for the Philippine financial system.

Present inefficiencies in pricing methods result in borrowers having to pay more for loans and lenders having to earn less on their funds, with banks pocketing the wide difference.

“Many of these reforms are meant to develop more reliable pricing benchmarks,” he said, explaining the rationale of BSP’s proposed OIS scheme. “This will also generate liquidity across the [interest rate] yield curve.”

Tetangco explained that, at present, some loans might be inaccurately priced because banks lacked an accurate pricing benchmark for certain tenors where there was a lack of trading activity.

“So how do you value those illiquid securities that fall between two actively traded tenors?” he asked. “That’s what we want the system to do.”

Ultimately, the reforms would redound to cheaper borrowing costs for consumers and better returns for investors in bonds, he said.