The Market Monitor Minding the Nation's Business
By Riza Lozada
The Bangko Sentral ng Pilipinas (BSP) said rules on the trading of derivatives will be improved as part of measures to increase the capacity of the domestic financial system. BSP Deputy Governor Nestor Espenilla Jr., in a speech during the Philippine International Banking Convention at Shang-ri La last Friday, said the BSP is continuously doing its best to help investors manage their risks.
He said the enhanced framework will be unveiled “soon” this year and will include reforms in the over-the-counter (OTC) derivatives market, specifically on currency.
“Although there are processes, the regulations are almost done so there will be an exclusion period and internal policies,” he said.
Derivatives are securities priced based on one or more underlying assets. Among the more common form of derivatives are futures contracts which is used as a hedge against risk; forward contracts which unlike futures are not traded on an exchange, but are traded over-the-counter; swaps which are most often a contract between two parties agreeing to trade loan terms; options which is an agreement between two parties granting one the opportunity to buy or sell a security from or to the other party at a predetermined future date; a credit derivative which is a loan sold to a speculator at a discount to its true value.
Another form of derivative is a mortgage-backed security, which has mortgages as underlying asset to the derivative.
Espenilla said BSP officials are also enhancing rules on capital, leverage, short-term liquidity and systematically important banks to address impact of external developments on the domestic financial system.
Other measures lined up are the longer-term liquidity framework for net stable funding ratio, amendments to the market risk guidelines, the counterparty risk framework, an OTC derivatives approach that is coordinated with other countries, and specific focus on the management of intraday liquidity, he said.
Espenilla said the Philippines, being a small open economy, is very prone to volatilities in the global financial system.
These volatilties are the main factor for the current weakness of the local currency, which is now trading at P48 per dollar.
The peso has depreciated by about four percent to date but Espenilla said this should be expected given the BSP’s market-determined foreign exchange rate policy.
He said the BSP’s exchange rate policy is “no longer a one-way bet because this is also bad from a risk management standpoint.” “If it is a one-way bet then people will just do nothing but speculate and potentially create financial