The Philippine banking sector is on the cusp of a significant shift, with industry officials predicting that the interest rate swap (IRS) market will eventually overtake the foreign exchange (FX) market, potentially as early as this year.
Industry insiders believe that expanding interest rate market beyond FX will help deepen the financial system, leading to a more comprehensive understanding of economic conditions.
Market players have been overly focused on the FX market, which has led to a fixation on the exchange rate as the primary indicator of economic conditions, industry officials say.
The current state of affairs has led to a situation where everyone is fixated on the exchange rate, with many believing it determines what happens tomorrow, which is not the case, industry officials claim.
The Bangko Sentral ng Pilipinas (BSP) Governor earlier stated that peso IRS transactions in the country continued to grow, with outstanding contracts now valued at around P114 billion, more than double the P43.5 billion logged in January.
This growth has been driven by the launch of the peso IRS facility in November 2024, recording about P700 million in trading volume by the end of that year.
Under the facility, the central bank serves as the publisher of the daily variable reverse repurchase rate benchmark, while Bloomberg serves as the trading platform.
Industry stakeholders are optimistic that the IRS market will continue to expand, with the IRS curve potentially replacing the Bloomberg Valuation Service (BVAL) curve currently used to determine official benchmark reference rates.
To achieve this, the country needs to establish a unified short-term interest rate and veer away from internal pricing by banks to develop a transparent and competitive IRS environment, industry officials say.
This would involve coming to a point where there is a common language and clients are priced with transparency, allowing for competition in terms of actual margins being charged by the banks.
Industry officials are hopeful that this benchmark rate will be established by the end of the year, although a key obstacle is the lack of historical data that would allow them to show how the new benchmark performs over time compared with the BVAL.
Despite this challenge, industry officials are confident that they have adequate support from the central bank to advance the IRS market further, even as some banks have not fully grasped the concept.
Interest rate swaps involve a contract between two parties to allow the exchange of interest payments based on fixed borrowing costs, shielding parties against market volatility, over a set period of time.
BAP manages the country’s IRS market as part of efforts to promote the development of yield curves to further support the pricing requirements of short-term credit instruments such as loans.
