By MAX ESTAYO

Bangko Sentral ng Pilipinas deputy governor Nestor Espenilla said yesterday the introduction of new benchmark interest rates that are more realistic and transparent will encourage the development of more derivative products.

The Bankers Association of the Philippines is now issuing interest rate benchmarks calculated from secondary market trades of government securities.

The rates are based on done deals and hence reflect the real prices of the securities, the BAP asserts.

It used to be that banks used to price their loans depending on the yields of three-month treasury bills.

Bank then tried to replace them with MART rates or the interest rates followed on the secondary trade of government securities.

These, however, were not seen to be transparent enough.

"We’ll see more kinds of products like interest rate derivatives," Espenilla said.

A derivative is a financial instrument that derives its value from other instruments such an underlying security, group of securities or an index.

Banks, Espenilla said, can use derivatives to mitigate interest rate risks such as in housing loans.

"Housing loans tend to be long maturing. Interest rates have variability, funding is different. If it’s deposits, that can be short term but the loans are long term, so there’s mismatch in interest rates," Espenilla said.

"So there are interest rate risks and you can correct those risks with a product such as interest rate derivative," he said.

With the benchmark rates as a clear basis for setting prices, Espenilla said banks will be able to develop financial products that address borrowers’ needs without the banks getting into interest rate troubles.

Borrowers, meanwhile, can avail of more fixed-rate loans, with the risks to be handled by banks doing derivative products.

After the reporting of done deals of secondary trades, Espenilla said the next direction for the capital market is the expansion of financial products.

"Currently, there are interest rate swaps but this is very shallow, there are only a few trades. We want that broadened," Espenilla said.

Banks, through the Philippine Dealing and Exchange Corp., set reference rates on 12 benchmark papers with tenors of one month to 25 years.

Espenilla said the system will capture all trades in the market, leading to price discovery, which will attract more investors and help deepen the domestic capital market.