MANILA -The Bangko Sentral ng Pilipinas (BSP) has started publishing on its website an overnight rate “which can serve as a market reference” after the global use of the London Interbank Offered Rate (Libor) ended on June 30.
The Libor was abandoned partly due to scandals about rate-setting banks manipulating the benchmark.
The provisional overnight rate that the BSP publishes will be made available in the meantime, while a permanent replacement for the Libor that is based on the BSP’s overnight reverse repurchase (RRP) facility is being developed.
Meanwhile, the overnight reference rate uses the secondary market rate on the 28-day BSP bill to compute an overnight equivalent.
An RRP transaction, in which the central bank sells government securities to banks, has an effect of reducing money supply circulating in the financial market. For regulators like the BSP, lessening the quantity of money is a way to hold down inflation.
Related to this, the BSP said it would start on July 14 accepting all bids in the auction for the overnight RRP facility as part of efforts toward a more flexible approach to managing liquidity in the financial system.
As Libor nears end, BSP tells banks to start transition to other benchmarks
“In pursuit of its statutory mandates, the BSP either siphons excesses or augments shortfalls in market liquidity via open market operations,” the regulator said. “The main tool is the overnight RRP facility which is based on the BSP policy rate.”
Broader initiative
Also, the publication of the reference rate starts a broader initiative to enhance the BSP overnight RRP Agreement facility.
“Once the enhancements are fully completed, the new rate from the RRP facility will become the overnight reference rate,” the BSP added.
“The expected result of these improvements is a variable rate from the overnight RRP facility that would be more responsive to changing market conditions,” it said.
When the plan to use an overnight reference rate was announced in June, the Bankers Association of the Philippines (BAP) welcomed the BSP’s initiative to enhance the benchmarks.
However, the BAP also hinted that the industry group preferred that the overnight rate be based instead on the Bloomberg Valuation Service benchmarks, which it described as globally recognized and used in over 100 jurisdictions. INQ
-CSN
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