On Wednesday, June 21, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla announced that the BSP will peg an overnight (ON) rate as a reference rate to replace LIBOR, which expires on June 30. | ManilaBulletin
Bangko Sentral ng Pilipinas Governor Felipe M. Medalla announced on Wednesday, June 21, that the BSP will peg an overnight rate as reference rate to replace the London Interbank Offered Rate which will expire on June 30.
Medalla also said the BSP has communicated to the market of an urgent need for a credible yield curve by January next year. The BSP chief added that these changes to the current benchmark or introducing a new yield curve “will require time and the full cooperation” of the market. “While there are several tasks that need to be undertaken, it was agreed at the end of the townhall discussion that the start of January 2024 will be our ‘fighting target’ to have a credible yield curve in place,” he told reporters in a press chat Wednesday. Meanwhile, the new ON rate will be generated by translating the 28-day BSP bill rate to its ON equivalent. This was in time as well to the introduction of a 56-day tenor on the same day. “The market agreed with the proposal of the BSP that creates an ON rate which can be used as reference for various transactions,” said Medalla. The ON reference rate will take effect on or before June 30, in time for the global deadline on the cessation of LIBOR. Medalla said the BSP also discussed with the market the “urgency of having a credible yield curve” since “macro-financial decisions are based on these benchmark risk prices, having a credible yield curve is in everyone's best interest.” He explained that, from the BSP's standpoint, “we believe that a credible yield curve must arise from active trading of marketable securities, provide yields for various tenors, make these yields usable to all parties, and can be replicated as needed.” The BSP and market participants such as banks have a long journey ahead in establishing a credible yield curve to guide money market prices which will affect stocks and bonds. Since December 2021, the BSP has required all banks to submit quarterly reports of their remaining LIBOR-related exposures until the end of 2023.The BSP wanted a proper identification of exposures to ensure that the cessation of LIBOR does not disrupt a bank's operations. The BSP also reminded banks that system and operational enhancements due to new data and valuation requirements arising from the shift from LIBOR to alternative rates should be implemented early “to ensure that technical issues will not adversely impact day-to-day operations.” “A bank’s effective management of the risk arising from LIBOR cessation necessarily involves strategies for actively reducing reliance on the benchmark sufficiently in advance of its discontinuation,” said the BSP earlier. LIBOR was used by local banks as a reference rate for its foreign currency-denominated transactions such as corporate and consumer loans, bank deposits, fixed income securities, interest rate swaps and cross currency swaps. LIBOR, which is the rate that banks in London offer Eurodollars in the placement market, was terminated due to allegations of LIBOR manipulation.
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