BSP proposes one benchmark for pricing fixed-income papers

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has forwarded to major players in the banking industry the proposed yield curve that would serve as a uniform benchmark for pricing fixed-income securities.

BSP managing director Johnny Noe Ravalo said the discussion paper for the adoption of a “zero” yield curve has been submitted to the Bankers Association of the Philippines (BAP) and the Money Market Association of the Philippines.

“The BSP is working with market players in developing a yield curve. The zero yield curve will now be the proposed benchmark for interest rate pricing for fixed income securities,” Ravalo said.

He pointed out that valuation – as represented graphically by a yield curve – is a necessary condition for a functioning capital market.

As part of the proposal, he explained that market players could decide whether to use overnight lending rate or the repurchase facility of the BSP or interbank rates.

“Between overnight to one year is what we call the cash market price, there are banks borrowing from banks or corporate borrowing from banks and it is not long term debt so the probability of default is smaller. We asked them what they want to use, whether the repo or interbank rates,” he said.

For instruments with longer tenor, Ravalo said the BSP proposed the use of rates of done deals in the secondary market.

“Beyond one year, our proposal is to use the rates in the market for the done deals. These deals are easier to verify since there are actual transactions,” he added.

Earlier, BSP Governor Amando Tetangco Jr. confirmed discussions with major players in the industry represented by the BAP to come up with an alternative loan pricing benchmark on grounds that Treasury bill (T-bill) rates have become too low and thus inappropriate for guiding lending rates.

“T-bill rates are no longer appropriate as benchmarks. There are certain proposals on how to address the matter, and the BSP is looking at those right now,” Tetangco said.

The latest 91-, 182- and 364-day T-bill rates are all below three percent and lower than the annual inflation rate, which averaged at 3.1 percent as of the first three months of the year.

Ravalo pointed out that part of the main agenda for the capital market reform is to define pricing benchmarks.

“We believe that we have a viable benchmark that addresses all the cited difficulties with prior benchmarks. The ball is now with the market nobody can complain anymore that there is no actual proposal on the table,” he explained.

According to him, the BSP intends to finalize discussions with major players in the industry within the month so that the guidelines that would involve a transition period could be issued soon.

“We will issue some guidelines with a transition period of three to six months to allow the market enough lead time to arrange for their transactions and deepen some submarkets,” he added.