BSP scraps SDA term tenors

The Bangko Sentral ng Pilipinas (BSP) is scrapping the special deposit account (SDA) maturities to give way to the term deposit auction facility (TDF), which will be implemented next year.

BSP deputy governor Diwa C. Guinigundo said the SDA will then be purely overnight. “SDA’s longer-dated tenors will be absorbed by the term deposit facility,” he said. To be scrapped are 1-week, 2-weeks and 1-month SDA maturities.

The BSP has set two tenors for the term deposits, at 7-days and 28-days, but it is still finalizing market inputs before approving the TDF maturities.

Guinigundo said since market feedback seem to prefer an even longer term of 56 days, they would also consider this. “People are saying the longer the better (however) if we keep it longer it might conflict with the 91day Treasury Bill dealing and we don’t want that.”

The amount of auction or initial volume of liquidity will be announced accordingly, including the pricing, which will be determined by the market.

“It will depend on the liquidity condition obtaining on the time we launch the IRC (interest rate corridor). That’s why we have liquidity forecasting for that,” said Guinigundo. “Theoretically, it might be bigger than RRPs (reverse repurchase facility) because the expectation is there will be some migration from SDA to term auction facility.”

Guinigundo added that a purely overnight SDA – more than term deposit funds – will give investors more flexibility in terms placements with the BSP. “Overnight terms like SDA will give them sufficient flexibility or effective management of their liquidity.”

The current SDA volume is 970.8 billion while RRPs have 310.2 billion. SDAs are fixed-term deposits by banks and trust entities of BSP-supervised financial institutions with the BSP. RRPs, on the other hand, is the policy rate at which the BSP borrows from banks using government securities as collaterals.

The BSP is expected to implement the IRC in mid-2016. BSP Governor Amando M. Tetangco Jr. has said that the IRC is an important shift in the central bank’s open market operations.

Basically, as explained by BSP, the IRC will strengthen the signalling effect of policy rate and provide a system to allow easier price discovery in the money market. It will also reduce the reliance on blunt policy tools such as the reserve requirement for sterilization.

RRPs and SDAs are open market operations. The IRC will influence money market rates to closely follow the BSP rate which is the RRP rate.