The Philippine central bank has officially launched an interest rate swaps (IRS) market tied to a newly established benchmark rate, the Overnight Reference Rate (ORR), aiming to boost liquidity and improve trading in the country’s bond market.
This development follows the recognition of the ORR by the International Swaps and Derivatives Association, which was created in collaboration with the Bankers Association of the Philippines.
Interest rate swaps, a common tool in advanced fixed-income markets, enable participants to manage interest rate risks or speculate on borrowing cost trends by exchanging fixed and floating interest rate payments.
The ORR, derived from the central bank’s daily reverse repurchase auctions, is anticipated to provide a more robust benchmark for loan pricing compared to the existing reliance on yields from sparsely traded government bonds.
“We are thrilled to see the PESO IRS go live. This initiative will support transactions, establish a benchmark yield curve, and deepen the capital markets,” said central bank Governor Eli Remolona. “A reliable benchmark curve is critical for banks and lenders to price loans across different maturities accurately.”
Sixteen banks have committed to act as market makers for ORR-based IRS, ensuring transparent pricing across maturities ranging from one month to ten years, the central bank announced.
Additionally, the Bangko Sentral ng Pilipinas (BSP) is working on adopting global master repurchase agreement contracts to facilitate treasury bond access for repo transactions. This move is expected to further strengthen the government securities repo market and enhance the country’s financial infrastructure.
