PHILIPPINE REGULATORS have given the green light for market structure services firm PDS Group to offer trading of government bond forward contracts as the nation works to deepen its capital market.
A market framework and infrastructure for the instruments was approved by the country鈥檚 Securities and Exchange Commission on Jan. 2, said Antonino A. Nakpil, president of Philippine Dealing & Exchange Corp. (PDEx).
PDEx, the trading-services arm of PDS, operates Manila鈥檚 bond exchange and will run the new mechanism.
The bond forward contracts 鈥 which set a fixed price for a debt security on a future date and allow market participants to hedge interest rate risks 鈥 will be traded, cleared and settled through the PDEx fixed-income market. The forward buyer and seller may choose to settle obligations by offsetting their purchase and sales contracts.
鈥淲e made it non-deliverable so you can just keep rolling,鈥 Mr. Nakpil said in an interview at a central bank event on Friday.
He said the mechanism will use a bilateral netting system 鈥 a legally enforceable arrangement between a bank and counterparty 鈥 rather than central clearing the way the US and some other markets do.
This will be the first Philippine peso interest rate hedge that mimics bond futures contracts, which trade on exchanges and are settled daily, Mr. Nakpil said. PDS is looking to launch it next month, he added, and trading will be in lots of P50 million ($853,000).
The Philippines is looking to bolster its capital market, preparing for increased demand in an economy posting one of Asia鈥檚 fastest growth rates. Bangko Sentral ng Pilipinas (BSP) last year expanded the list of derivatives products that banks may transact in to include forward contracts and any financial derivatives traded in an organized market.
The launch of the bond forward contracts will come just months after the Bankers Association of the Philippines, backed by the BSP, introduced a peso interest rate swap facility. Bond forwards will complement those to help firms manage rate risks, Mr. Nakpil said.
鈥淭he pieces of the puzzle are in place鈥 for the capital market to develop, he said. 鈥 Bloomberg
