BSP to launch more market reforms next month

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is set to launch the repurchase and reverse repurchase (repo) market next month as part of additional game-changing financial sector reforms to be undertaken by the national government in the medium term.

“By November of this year, we also look forward to the first trade in the repo market,” BSP Governor Nestor Espenilla Jr. said in a speech before major stakeholders in the capital market.

The BSP implements monetary policy using various instruments to influence the level of liquidity in the market and steer inflation toward the target level. The direct instruments have a strong coercive element as in the case of reserve requirements and directed lending requirements, while indirect instruments include adjustments in short-term policy interest rates and the conduct of open market operations.

The conduct of open market operations is a monetary tool that involves the BSP publicly buying or selling government securities from banks and financial institutions in order to expand or contract the supply of money.

A repo transaction expands the level of money supply as it increases the bank’s level of reserves. Under a reverse repo, the BSP acts as the seller of government securities, thus, the bank’s payment reduces its reserve account resulting in a contraction in the system’s money supply.

Espenilla said the BSP, together with the Department of Finance (DOF), the Securities and Exchange Commission (SEC) and Bureau of the Treasury (BTr), presented the capital market roadmap last August to hasten the development of the domestic debt market. 

He said the initial phase would focus on improving benchmark markets as this is critical in pricing risk assets and other capital market instruments.

These include increasing the volume of treasury bills, providing a transparent mechanism covering the issuance of government securities, establishing a reliable yield curve as well as developing a set of obligations, rights and incentives of market makers.

Espenilla said an efficient repo market would be introduced, while the regulatory oversight over the repo and fixed income market would be strengthened.

“We will follow a coordinated and deliberate sequenced approach to ensure smooth implementation of these reforms,” he added.

According to Espenilla, the BTr has been sending “report cards” to Government Securities Eligible Dealers (GSEDs) since June highlighting their performance in the primary and secondary markets. 

This paved the way for the improved performance of GSEDs following the release of these report cards and the unveiling of the roadmap, through improved subscriptions, higher participation in pre-auction surveys, and more GSEDs providing indicative bids. 

Bid submissions show tighter convergence and presence of outliers are now more limited as difference between the highest and lowest bids of has been narrowed to 25 basis points from 190 basis points.

Espenilla said the treasury would announce the preliminary market makers and would launch the actual enhanced GSED program early next year. 

The BSP is also pursuing further liberalizing and rationalizing foreign exchange rules.