Interest rate swap market to take off in 2025

MANILA, Philippines —  The Philippine Interest Rate Swap (IRS) market is expected to pick up significant traction by the first quarter of 2025 as clients and banks increasingly explore its potential for dynamic benchmarking and financial interactivity.

Paul Favila, country officer at Citi Philippines and chairman of the Bankers Association of the Philippines (BAP) Open Market Committee, said that the PESO IRS market would gain traction in the first quarter next year after it went live last month.

“What’s important is for clients to ask what this is all about,” he told reporters. “The goal is really for clients to ask the banks, ‘price me based on the IRS,’ because we want a benchmark that is hopefully more dynamic.”

The IRS market is also expected to enhance transparency in the Philippine financial sector, allowing for a clearer understanding of cost components such as funding expenses or credit risks.

“This differentiation could lead to more precise industry comparisons, encouraging a more transparent and efficient market environment,” Favila said.

The improved clarity may also benefit publicly listed companies by simplifying peer-to-peer evaluations and potentially contributing to the development of deeper equity markets.

He also emphasized the unprecedented level of regulatory backing for the PESO IRS market, with the Bangko Sentral ng Pilipinas (BSP) and the Department of Finance (DOF) lending full support.

“For the first time in 20 years of pushing for this, the regulators are all giving full support. Even the DOF is very supportive,” Favila said. “Let’s wait and see; there may be a few changes they might consider.”

Favila also said there has been growing interest from local and foreign players.

Foreign banks, even those without local operations, have begun seeking insights into the IRS market, spurred by inquiries from their clients with Philippine interests.

The enhanced PESO IRS market went live last month, marking a significant step toward advancing capital market development and providing market participants with improved tools for managing interest rate risks.

The updated rates include the Philippine Overnight Reference Rate (ORR), which serves as a key benchmark for the enhanced PESO IRS market.

The BAP developed the Philippine ORR, which was based on the variable overnight repurchase rate of the BSP.

Creating an enhanced PESO IRS market is one of the two initiatives of the BSP and the BAP intended to create a smooth yield curve that would reflect market consensus and help in pricing credit instruments of different maturities.