BANGKO SENTRAL ng Pilipinas Governor Benjamin E. Diokno said banks should find new benchmark rates. — PHILIPPINE STAR/ GEREMY PINTOLO
THE BANGKO SENTRAL ng Pilipinas (BSP) told financial institutions to shift from using the London Interbank Offered Rate (LIBOR) as a benchmark as it is due to be phased out soon.
“The inability to establish replacement rates for outstanding LIBOR-referencing contracts when LIBOR ceases will render financial institutions and their counter-parties or clients incapable of repricing and valuing their financial exposures,” BSP Governor Benjamin E. Diokno said at an online briefing on Thursday.
“Banks must ensure that necessary systems and infrastructure and implement appropriate contractual arrangements prior to the cessation of LIBOR are in place,” Mr. Diokno said.
The central bank chief said the BSP is not looking to impose alternative reference rates for the LIBOR, saying these choices are market-driven.
He added that the LIBOR’s phaseout will not have an impact on peso-dollar trading.
“The peso will continue to be market-determined and based on actual done trades in the dollar-peso spot market,” he said.
On March 5, the United Kingdom’s Financial Conduct Authority and the International Exchange Benchmark Administration, the administrator of LIBOR, said it will stop publishing rates for one-week and two-month tenors by Dec. 31 and for overnight, one-month, three-month, six-month and 12-month tenors by June 30, 2023.
The LIBOR is being phased out as a benchmark as rates submitted to set it are mostly based on estimates and not on actual transactions, making it vulnerable to manipulation. Reports said the change will affect more than $200 trillion in transactions and loans.
In the Philippines, the LIBOR is still used for some fixed-income securities available in the market, as well as interest rate and cross-currency swaps. The Philippine Interbank Reference Rate (PHIREF), which is used for interest rate swaps, cross-currency swaps and some peso corporate loans, is also computed using dollar LIBOR.
The central bank last year issued BSP Memorandum No. M-2020-083, which required financial institutions to report their LIBOR-related exposures.
The Alternative Reference Rates Committee convened by the US Federal Reserve Board and the New York Fed has been promoting the Secured Overnight Financing Rate (SOFR) as an alternative to the LIBOR. The SOFR is based on US Treasury repurchase market transactions, where banks can obtain overnight loans collateralized by Treasury holdings. — L.W.T. Noble