The Bangko Sentral ng Pilipinas expects financial institutions to eventually be able to use their holdings of privately issued bonds to generate short term liquidity, once the so-called “repo” market for government securities is firmly established.
Speaking to reporters on Monday, BSP Gov. Nestor Espenilla Jr. said the reintroduction of repurchase agreements in the local market would pave the way for other securities to be used as collateral for borrowing and lending activities among banks.
Regulators clamped down on “repos” in the early 2000s — known locally as “buybacks,” because one bank would sell debt securities to another and agree to buy them back at a future date for a pre-agreed price — for being a threat to the stability of the financial system because most firms used them without fully factoring in the contingent risks on their books.
“What we’re building today is the repo market for government securities. That’s foundational,” he said. “All other instruments are priced off the risk-free government securities market from the overnight rate all the way to 20 [years] and beyond.”
With a fully functioning repo market for Treasury bills and bonds, financial institutions or creditors holding these private debts will now have a guide on how to price their holdings by tacking on a risk or price premium on top of the government debt of comparable tenor.
“Once you have that, commercial paper can be priced off that as a ‘risk plus,’” he said. “Commercial paper can be properly priced, infrastructure bonds can be properly priced, and corporate bonds can be properly priced.”
“Since it’s properly priced, investors — you and I — can also [liquidate securities holdings] easier,” Espenilla said. “It creates a virtuous cycle.”
Asked about regulators’ 180-policy shift regarding repos, the central bank chief explained the new formal repo scheme was always a good feature to have for the Philippine financial system, provided all the concerned stakeholders could agree on ground rules to prevent potential abuses.
“Repo has always been a good thing to do, but they had difficulty executing it because the stars weren’t aligned,” he said.
For one, the Bureau of the Treasury had to commit to a transparent and regular schedule for issuing short- and long-term debt to provide the market with a steady supply of collateral.
“In the past, there were a lot of [auction] rejections, and [debt] issuance was opportunistic rather than systematic,” he said. “That’s a big element.”
The BTr also had to better manage its network of accredited repo dealers to make sure that two-way quotes are available for any market player who may want to buy or sell debt securities at any given time.
Espenilla also explained that BSP is now willing to remove heavy reserve requirements on repos to facilitate the development of this market because all stakeholders have committed to play by established rules.
“BSP introduced reserve requirements because people used undocumented buyback agreements in the past,” he said. “But if we’re all sitting here agreeing on well documented repos based on international standards, then we’re happy to remove our reserve requirements.”
Finally, the BSP chief pointed out that the Money Market Association of the Philippines (Mart) — a private organization of bank treasurers and traders — volunteered to take the lead in developing the local repo market.
“Mart stepped up and accepted the responsibility to become a self-regulating organization, and be governed by Securities and Exchange Commission rules,” he said. “Without these elements coming together, it’s hard to do repo that won’t introduce instability in the system.” /je