BSP scraps reserve ratios on ‘repos’

Starting December 1

To remove “friction cost” on repurchase or repo transactions under the government’s repo program, the Bangko Sentral ng Pilipinas (BSP) has removed the reserve requirement on eligible deals starting next week, December 1.

The BSP’s Monetary Board approved the new circular (Circular No. 983 or the Reduction of Reserve Requirement on Repurchase Transactions) last Thursday during a regular board meeting in “support of the comprehensive initiative to develop the domestic local currency debt market.”

The central bank yesterday said they heeded the market’s request to minimize the friction cost on repo transactions and to grant zero percent reserve requirement on eligible transactions under the repo program.

These same transactions are already exempt documentary stamp tax as earlier decided by the Bureau of Internal Revenue. Also, again in support of the repo program, the Securities and Exchange Commission has granted provisional license to the Money Market Association of the Philippines as a self-regulatory organization of the repo market.

According to the BSP, “the establishment of an organized interdealer repo market will aid the development and deepening of the domestic financial market. In particular, this will provide eligible participants the ability to quote two-way prices, thereby enhancing price discovery and market liquidity.”

“At the same time, (BSP) strongly encourages industry participants to adopt prudent governance standards in line with international best practices pertaining to trading and settlement, documentation, accounting, and market and regulatory disclosures as well as to establish appropriate safeguards to address risks such as counterparty and settlement risks,” it added.

The circular effectively reduced the reserve requirement on repos and also detailed transactions that will enjoy zero-percent reserves.

There will still be required reserves on big banks’ demand deposits, new accounts and deposits substitutes of 20 percent, as well as on savings deposits and time deposits. Thrift banks will set aside eight percent of reserve ratios. In the meantime, long-term negotiable certificates of time deposits will have four percent to seven percent reserves for all banks.

BSP Governor Nestor A. Espenilla Jr. said earlier that they will launch the repo facility which will increase bank reserves – on November 27.

Last August, Espenilla announced reform package initiatives by the BSP, Department of Finance, Bureau of the Treasury and the SEC which will increase the volume of treasury bills, provide a transparent mechanism covering the issuance of government securities, establish a reliable yield curve, develop a set of obligations, rights and incentives of market makers, introduce an efficient repo market, and strengthen regulatory oversight over the repo and fixed income market.

Espenilla has said that the repo market is important in creating liquidity for government securities.