BSP readies repo auction facility
Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. yesterday said the monetary authorities are laying the groundwork for an interbank repurchase agreement or repo auction facility which they will implement in phases in the next 18 months.
Espenilla said he is currently in discussion with various government agencies such as the Department of Finance, the Bureau of the Treasury and the Securities and Exchange Commission to iron out the roadmap for a “definite game plan to accelerate the development of the local currency debt market.”
These talks include the establishment of an effective regulatory framework for the auction of the repo market which the BSP has been trying to launch for years. The roadmap proposals also include bond market reforms to increase supply of short term debt securities and the creation of a reliable financial benchmarks and valuation of financial instruments. Plus, the four agencies would also work on the establishment of an integrated financial market infrastructure that promotes price discovery and orderly financial transactions.
The repo market is important in creating liquidity for government securities, said Espenilla. “We will put together a roadmap to engage the industry, to get their comments and finalize the roadmap to proceed the implementation phases in 18 months.”
After 18 months, Espenilla said expect to see an active repo market if “plans do not miscarry … that’s our ambition.”
When all measures are in place, the BSP chief said: “You want to see more regular issuances in the primary auctions of government securities in all maturities. You also want to see a full yield curve that’s relatively smooth and predictable and we want to see volume already in repo transactions actually happening.”
The BSP’s role in the three priority areas of local currency debt market development is since many market players are BSP-regulated, Espenilla said they will make sure players have the capacity to manage risks – “so it doesn’t lead to financial instability.”
The BSP has had to think up policy changes to tweak the repo market for transparency and better liquidity management.
The BSP controls the level of domestic liquidity through various monetary tools such as the open market operation or OMO. Repo agreements are one of the OMO instruments where the BSP buys government securities from a bank with a commitment to sell it back at a predetermined rate. A repo transaction increases a bank’s reserves.
The industry definition of a repo is that it is "a contract whereby the seller of securities agrees to buy them back at a specified future date and price usually on a short-term basis."