BAP plans fixed income assets exchange

Plans are underway for the establishment of a P500-million fixed income exchange, led by the Bankers Association of the Philippines (BAP) with support from the US Agency for International Development (USAID).

The BAP said it has started preparing the documentation for the proposed exchange and this would be presented to the Securities and Exchange Commission (SEC) prior to the issuance of an operating license.

According to Vicente Castillo, president-CEO of Banco Santander, Phils. and chairman of the BAP’s open market committee, the BAP has committed to put up the first 20 percent of the total investments required by the proposed exchange.

Castillo said the BAP is trying to convince the Philippine Stock Exchange (PSE) to acquire a similar 20 percent.

The BAP said it has developed the best practice manuals for the proposed exchange as well as the new price benchmark and professional development programs.

The project has already been approved by the Capital Market Development Council (CMDC) and it has also been presented to potential technology partners as well as potential shareholders.

By June, Castillo said the BAP will formally apply for a license with the SEC.

USAID mission director Patricia Buckles said the agency has agreed to see the proposal through to completion with the launching of an operational exchange.

"We will also work with the SEC to help ensure that it has the capacity to effectively regulate a fixed income exchange when this comes on stream," Buckles said.

Buckles declined to say how much the USAID would commit for the project but she said the assistance would come in the form of technical assistance mainly for the remuneration expenses of the people involved in the development of the exchange.

Buckles explained that at present, the secondary market for fixed income securities is being conducted over the counter, without formal structures to facilitate secondary trading.

"This inability to sell a fixed income asset, such as bonds, in advance of its maturity date, results in a significant lack of liquidity for this class of assets," she said. "This in turn discourages investors."

If there is not a reliable, liquid, transparent and efficient secondary market where investors could sell a security before its maturity, Buckles said they would demand higher interest rates to compensate for the lack of liquidity.

"In the absence of a broad base of investors, business must pay higher interest rates to compete for capital," she pointed out. "Higher interest rates make it more expensive for businesses to acquire the capital they need to grow."

According to Buckles, increasing the liquidity of assets and decreasing the cost of capital are the most compelling reasons to support the proposed fixed income exchange.

The exchange would facilitate price discovery and these prices would be disseminated widely to all market players. The market would have a reliable pricing mechanism and customer could be confident that they are receiving a fair price when they buy or sell a debt instrument, Buckles explained. – Des Ferriols