BSP outlines plan to reform gov’t debt market

By Melissa Luz T. Lopez, Senior Reporter

THE government has laid down its strategy to deepen the debt market, with agencies looking to attract bigger auction volumes for Treasury notes and put up a repurchase market by 2019.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said on Friday that the authorities have released an inter-agency blueprint for debt market reform to industry participants, which outlines a sequence of measures that would create more fund-raising platforms for the government and generate fresh money supply.

Such plans will be opened for comment and suggestions and will later on be implemented by the regulators.

The BSP, the Bureau of the Treasury, the Securities and Exchange Commission (SEC), and the Department of Finance met with banks and financial firms qualified as eligible securities dealers – those that can bid for government-issued debt paper – as they unveiled a three-phase plan for the local capital market.

First, Mr. Espenilla said the agencies want to deepen the bond market by “increasing the supply of short-term securities. The agencies are likewise looking to set rules on derivatives and repo markets, creating “reliable financial benchmarks” for valuation of debt instruments, and putting up an integrated financial market infrastructure that will govern orderly trading and settlement of such transactions.

Mr. Espenilla said these plans would take a series of carefully-sequenced steps which will be carried out “over the next 18 months,” to be completed by early 2019.

“Today, the supply of government securities is relatively fragmented and the market is illiquid in certain parts. That’s an important piece of the reform,” the central bank governor said during a forum hosted by the Economic Journalists Association of the Philippines at the Ayuntamiento in Manila.

“The government securities market in effect is the most important element because it sets the risk-free yield curve, which is the foundation for pricing all other kinds of instruments.”

At present, the government raises fresh funds through the issue of Treasury bills (T-bills) and bonds every week. However, volumes offered and tenders received for each tenor varies, with market participants showing stronger preference for short-dated notes.

The Treasury offers T-bills which come with maturities of three months, six months, and one year; while T-bonds range from two to 20-year issuances.

Mr. Espenilla added that he expects to see “more regular” Treasury auctions across all maturities, which would result in a “full yield curve that’s relatively smooth and predictable.” He noted that greater public borrowing activity would likewise spur more issuances from corporates, particularly for infrastructure projects.

Asked what other changes can be expected by then, Mr. Espenilla said: “If plans do not miscarry, we should be seeing an active repo market – at least that’s our ambition.”

Under a repo agreement, one party sells a security – such as Treasury bills and bonds – to another which it will buy back at a specified price and a future date, in the process providing the seller with short-term liquidity which it can use to issue loans and service additional client withdrawals.

Mr. Espenilla said the initial reforms will be led by the Treasury, while the SEC and the BSP will step up their watch over regulated entities to ensure financial stability even as they vie for government-issued papers.