BSP chief sees ‘long journey’ for local currency debt market

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. is expecting a “long journey” in the government efforts to build up the local currency debt market where the reforms will deepen the market.

During the launch of the Government Securities Repo Program this week, Espenilla said implementing these market reforms will be fraught with challenges.

“It is a long journey… there is still much work to be done,” said Espenilla. “There are further refinements in operational rules, data access, and monitoring processes. Other aspects of the roadmap need to be implemented,” he added.

The repo program is one of the key, and the first, initiative under the Local Currency Debt Market Development Reform package, said Espenilla. “The BSP strongly believes that the establishment of an organized repo market is a key element in developing and deepening the domestic financial market.”

Espenilla said the organized interdealer repo market will “boost market liquidity and enhance price discovery as it gives GSEDs the ability to quote two-way prices.”

“Further, the ‘deliver-out, true sale basis’ feature of this instrument is expected to provide market makers the ability to take positions and provide them greater flexibility in managing their portfolios,” he told participants attending the repo program launch.

“We recognize, however, that the reuse of underlying government securities without appropriate safeguards can contribute to increased counterparty and settlement risks, as well as the build-up of excessive leverage in the financial system,” Espenilla added. “The establishment of an organized repo market therefore addresses these concerns through appropriate financial market infrastructure, regulatory oversight, and prudent governance standards.”

The BSP has prepared for the eventual implementation of market reforms, such as revising the reporting requirements on repo transactions to improve the monitoring and to better capture “timely and comprehensive transaction-level data.”

“This will strengthen our financial surveillance, particularly in monitoring market trends and vulnerabilities in the repo market. In turn, this will enable the BSP to formulate effective policy responses to ensure continued stability of the financial system,” according to Espenilla.

The most recent central bank amendments is when it removed the reserve requirement on eligible repurchase or repo transactions under the government’s repo program.

The BSP’s Monetary Board approved the new circular (Circular No. 983 or the Reduction of Reserve Requirement on Repurchase Trasactions) to minimize the friction cost on repo transactions and to grant zero percent reserve requirement on eligible transactions under the repo program.

The BSP reiterated that 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.”

There will still be required reserves on big banks’ demand deposits, NOW accounts and deposits substitutes of of 20 percent, as well as on savings deposits and time deposits.

Thrift banks, for example, will still 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.