BSP eyes start of repo trade by November

The government will rollout the repo in November as part of the peso debt market development roadmap aimed at establishing an integrated financial market in the country, Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said.

“By November of this year, we also look forward to the first trade in the repo market,” Espenilla said in a speech at the Sixth Annual dbAccess Philippines Conference last Wednesday.

A repo, short for repurchase agreement, allows a dealer to sell and repurchase short-term government securities such as treasury bills to a lender at a specified future date and an agreed price.

Repos are said to provide lenders low risk and are usually used to raise short-term capital.

Espenilla had said the government’s “ambition” was to see an active repo market by 2019.

The launch of the repo forms part of the reforms to be introduced to develop the domestic capital market in line with the government’s plan to finance the wider budget deficit equivalent to 3 percent of gross domestic product until 2022 through a borrowing mix mostly reliant on local sources, with an 80-percent share.

In his speech, Espenilla said the reform package aimed to increase the volume of treasury bills, provide a transparent mechanism covering the issuance of government securities, establish a reliable yield curve, develop a set of obligations, rights and incentives of market makers, introduce an efficient repo market, as well as strengthen regulatory oversight over the repo and fixed income market.

According to Espenilla, “the initial phase will focus on improving benchmark markets as this is critical in pricing risk assets and other capital market instruments.”

“We will follow a coordinated and deliberate sequenced approach to ensure smooth implementation of these reforms. I am happy to report that to date, we have seen progress from these initiatives,” Espenilla said.

“For instance, since June, the Bureau of the Treasury has been sending ‘report cards’ to government securities eligible dealers (GSEDs) highlighting their performance in the primary and secondary markets. These will serve as basis for future recognition of market makers. We have seen performance of GSEDs improve following the release of these report cards and the unveiling of the roadmap, through improved subscriptions, higher participation in pre-auction surveys, and more GSEDs providing indicative bids. Bid submissions show tighter convergence and presence of outliers are now more limited.  From a difference between the highest and lowest bids of 190 basis points, spread is now around 25bps,” Espenilla added.

“Soon, the Treasury will announce the preliminary market makers and will launch the actual enhanced GSED program early next year,” according to Espenilla. /jpv