The Philippine banking sector expects the interest rate swap (IRS) market to eventually overtake the foreign exchange (FX) market, potentially as early as this year, as part of broader efforts to deepen the country's financial system. Interest rate swaps are foundational instruments in mature financial markets worldwide, allowing businesses, lenders, and investors to manage exposure to rate movements on borrowings and investments — a function that becomes increasingly important as economies face fluctuating monetary policy cycles.

Paul Raymond A. Favila, Secretary and Open Market Committee Chair of the Bankers Association of the Philippines (BAP), who also serves as Citi Philippines' chief executive officer and banking head, said that broadening market participation beyond FX trading would strengthen the financial system. He noted that market players have been disproportionately concentrated on the FX market, resulting in an excessive fixation on the exchange rate as the dominant barometer of economic conditions.

"That's where everyone's focused. And we become overly fixated on the exchange rate. It's like it's what determines what happens tomorrow, which is not really the case," Mr. Favila told reporters on the sidelines of an event this week.

"We are on board with the (central bank) governor in wanting to spread out that interest, so that banks, participants, (and) stakeholders can express their views in something more than FX. Because you can express the same views using interest rates, either through a swap (or) a repo (repurchase agreement)," he added.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. previously reported that peso IRS transactions have continued to expand, with outstanding contracts now valued at approximately P114 billion — an increase of about 162.1% from the P43.5 billion recorded in January.

Industry stakeholders launched the peso IRS facility in November 2024, generating roughly P700 million in trading volume by the end of that year. Under the facility, Bloomberg functions as the trading platform, while the central bank serves as publisher of the daily variable reverse repurchase rate benchmark. The launch aligns with a broader regional push across Southeast Asia to develop local currency derivatives markets, reducing dependence on external pricing references and giving domestic participants tools to hedge local currency interest rate risk.

Mr. Remolona indicated that he sees the market growing further, with the IRS curve potentially replacing the Bloomberg Valuation Service (BVAL) curve currently used to establish official benchmark reference rates. A robust domestically generated IRS curve would give corporate treasurers and institutional investors a more localized and transparent tool for pricing peso-denominated debt instruments.

When asked whether he also anticipates the IRS market overtaking the FX market this year, BAP's Mr. Favila responded: "We hope, really. That would be ideal."

However, he emphasized that the country must establish a unified short-term interest rate and move away from bank-specific internal pricing to cultivate a transparent and competitive IRS environment.

"The real benchmark (rate) is all internal — whatever the cost of funds of the individual banks. We need to come to a point where we have a common language and that clients get priced with transparency," he said.

"It's similar to InstaPay (fees wherein) you have to unbundle the real cost so that you will have competition in terms of actual margins being charged by the banks. And the clients can now then choose which ones they want to take advantage of, depending on how they are viewed from a credit perspective by that respective bank or whatnot. Once you get to that point, then swapping becomes second nature," he explained.

Taking into account current market activity and ongoing discussions between the BSP and the industry, Mr. Favila expressed optimism about establishing that benchmark rate by year-end.

"The aggressive one in me will say, by the end of the year, we should have something happening," he said. "It's a live conversation with the BSP as well, because we also want them to focus on transitioning the market."

A significant challenge, he noted, is the absence of historical data needed to demonstrate how the new benchmark performs over time relative to the BVAL.

"The problem is if it doesn't move in sync with BVAL, which is what they're comfortable with, then they will need more time to see how this thing behaves. So, it's iterative," he said.

Mr. Favila also indicated that the industry has sufficient backing from the central bank to further advance the IRS market, even though some banks have yet to fully understand the concept.

"I think we have enough support coming from the regulators to drive this," he said. "But the banks themselves need to see that this is important."

Interest rate swaps are contracts between two parties that enable the exchange of interest payments based on fixed borrowing costs, providing protection against market volatility over a specified period.

The BAP manages the country's IRS market as part of initiatives to foster the development of yield curves, which support the pricing requirements of short-term credit instruments such as loans.

— Katherine K. Chan, BusinessWorld