Philippine Central Bank Introduces New Interest Rate Derivatives Market

The Bangko Sentral ng Pilipinas has established an interest rate swaps (IRS) market based on its new overnight reference rate (ORR), enhancing the country’s financial market infrastructure.

The ORR, which derives from daily reverse repo auctions and carries ISDA recognition, provides a more dependable benchmark for loan pricing than thinly-traded government securities yields.

Interest rate swaps, widely utilized in advanced markets, enable participants to either hedge interest rate exposure or take positions on rate movements through the exchange of fixed-for-floating rate obligations.

Central Bank Governor Eli Remolona highlighted the significance: “The PESO IRS launch represents a crucial step in capital market development. The benchmark yield curve will facilitate precise loan pricing across different tenors.”

The market debuts with sixteen participating banks serving as market makers, offering transparent pricing from one-month to 10-year durations. This development is poised to improve rate discovery and foster capital market growth.

The central bank is also developing global master repurchase agreements to strengthen the government securities repo market, aiming to improve banks’ access to treasury instruments and enhance market stability.

This ORR-linked IRS market represents a key advancement in bringing the Philippine financial sector closer to international standards.