BSP wants forex mart overhauled

Amid radical moves to liberalize the Philippine banking system, regulators are getting ready to pry loose the local foreign exchange market from the control of the country’s largest financial institutions, the Inquirer learned.

In particular, the Bangko Sentral ng Pilipinas wants control over and accountability for the lucrative peso-dollar trade —where almost $1 billion is traded every day between both currencies—to shift away from the Bankers Association of the Philippines (BAP) to a more democratized though still-to-be-determined institution.

“The proposition for the industry is that, right now, the foreign exchange market is basically run by a club called the BAP,” BSP Governor Nestor Espenilla Jr. said. “If something happens, the expectation is that BAP is supposed to run after the erring party.”

“But it’s also difficult to run after them because trading is high frequency and it’s inside [their group],” he added.

At present, the peso-dollar foreign exchange market is, by convention and established tradition, run by the BAP, which is the umbrella organization of the country’s biggest banks. It works closely with the central bank, which can influence market policies, but Espenilla pointed out that the ultimate determinant of the market’s policies was the “club” itself with unclear lines of accountability to authorities, regulators and market players.

As such, the central bank recently circulated a proposal to the BAP and its members that would break up the foreign exchange “cartel” and shift its roles and responsibilities to so-called “multilateral” entities. Instead of the current “bilateral” agreements between bank members of the BAP, the new system would be composed of groups of banks and other market participants bound together by multilateral agreements.

The proposed scheme may also result in the dismantling of the newly created foreign exchange trading platform managed by Bloomberg for the BAP. Instead, the BSP proposal called for “market mechanisms that will satisfy the transparency requirements of market participants, the public and regulators.”

“We’re not letting it go,” Espenilla said, when asked about his set of reform plans for the foreign exchange regime. “The FX market is a systemically important piece of the pie.”

Espenilla justified the need for greater accountability in the local foreign exchange market by pointing to the so-called “Libor scandal” in overseas financial markets where some of the largest banks were found to have colluded to set interest rates on the closely followed London Interbank Offered Rate (Libor) scheme.

“The Libor scandal would not have been exposed if the government didn’t go in and examine all communications,” he said. “That can’t be done here [under the present system].”

“So the way we’re approaching it is [to say] ‘let’s have some accountability here,’” the BSP chief added. “Organize yourselves so that it’s clear that you acknowledge that you have responsibilities. First of all, you should adopt a code of conduct. You have rules, and if someone doesn’t follow it, you take disciplinary action against your own.”

“Run the place responsibly,” he added.