BAP Launches U.S. Dollar-Peso Cross-Currency Swap Market

The Bankers Association of the Philippines (BAP) has announced the opening of a US dollar-peso cross-currency swap (USDPHP CCS) market for an initial seven banks as regular market makers.

Photo Insert: A cross-currency swap is a transaction between two authorized parties that involves an exchange of principal amounts and interest payments in one currency for principal and interest payments in another currency at an agreed-upon exchange rate and at an agreed schedule.

A cross-currency swap market allows banks to manage their exposures to exchange rate fluctuations.

The USDPHP CCS market will benchmark using the US-dollar Secured Overnight Financing Rate or SOFR, which replaced the London Interbank Offered Rate set to expire globally on Friday, June 30. It was created by the US Federal Reserve as an alternative risk-free rate or RFR in 2018 as an overnight rate.

According to the BAP, the cross-currency swap market has a fixed peso rate and a US dollar floating swap with seven tenors including 1-year, 2-year, 3-year, 4-year, 5-year, 7-year, and 10 years.

The BAP, through its Open Market Committee, said they set up a cross-currency swap market to enable banks to “utilize hedging instruments critical to them and in response to the needs and requirements of their customers to better manage foreign exchange and interest rate risks.”

Seven banks have signed up as regular participants in the USDPHP CCS, including local banks China Banking Corp., Rizal Commercial Banking Corp., Robinsons Bank Corp. and Union Bank of the Philippines. The foreign banks are Mizuho Bank Ltd., MUFG Bank Ltd. and the Australia and New Zealand Banking Group or ANZ.

Other market makers in the dollar-peso cross-currency swap market are BDO Unibank Inc., Metropolitan Bank and Trust Co., Bank of the Philippine Islands, Philippine National Bank, Security Bank Corp., Deutsche Bank AG, HSBC Philippines, ING Bank, JP Morgan Chase Bank, and Standard Chartered Bank.

Voice-broker participants or the matchmakers are Amstel, GFI, Tradition and Tullet Prebon. The BAP said the USDPHP CCS is also supported by the Money Market Association of the Philippines and ACI Philippines.

It assured the market that the USDPHP CCS will be guided by the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), as well as the adoption of the ISDA Master Agreement and Foreign Exchange Global Code.

“The USDPHP CCS market involves a Philippine peso fixed rate and a US dollar floating swap with standard tenors of 1 year, 2 years, 3 years, 4 years, 5 years, 7 years and 10 years.

This will use the US dollar Secured Overnight Financing Rate, or SOFR, as the floating rate benchmark for the US dollar leg,” said the BAP.

The USDPHP CCS market is supported by Bloomberg, a globally recognized trading platform provider for various financial products. The USDPHP CCS is traded in Bloomberg’s FIQ<GO>, said the BAP.

A cross-currency swap is a transaction between two authorized parties that involves an exchange of principal amounts and interest payments in one currency for principal and interest payments in another currency at an agreed-upon exchange rate and at an agreed schedule.

The BSP conducts its own foreign exchange or FX swaps to sterilize its reserves buying. As of the first quarter, BSP swaps reached $3.35 billion. These are long positions in forwards and futures in foreign currencies. Holding long positions is a signal that the BSP is buying more US dollars.

While the BSP uses its swaps as a market tool to build up reserves, it is also utilized as a spot market exchange rate intervention. A central bank source has said that the BSP conducts FX swaps when they need to intervene in the exchange market beyond the outright sale of FX.

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