Foreign Exchange Market
The Bangko Sentral ng Pilipinas (BSP) maintains a floating exchange rate system. Exchange rates are determined on the basis of supply and demand in the foreign exchange market. The role of the BSP in the foreign exchange market is principally to ensure orderly conditions in the market. The market-determination of the exchange rate is consistent with the Government’s commitment to market-oriented reforms and outward-looking strategies of achieving competitiveness through price stability and efficiency.
In the Philippines, peso-dollar trading among Bankers Association of the Philippines (BAP) member-banks and between these banks and the BSP are done through the Philippine Dealing System (PDS). Most of the BAP-member banks which participate in the peso-dollar trading use an electronic platform called the Philippine Dealing and Exchange Corp. (PDEx). The BAP appointed PDEx as the official service provider for the USD/PHP spot trading (which involve the purchase or sale of the US dollar for immediate delivery, i.e., within one day for US dollars), and Reuters, as the exclusive distributor of all PDEx data. Trading through the PDEx allows nearly instantaneous transmission of price information and trade confirmations. 1Meanwhile, banks which do not subscribe to PDEx can continue to deal peso-dollar spot transactions via their Reuters Dealing screens.
Commercial banks in the Philippines are allowed to engage in spot, outright forward, and swap transactions in Philippine pesos/US dollar and other third currency transactions. 2 Interbank trading is conducted among member-banks of the BAP, and between these banks and the BSP. Member-banks of the PDS can also deal through brokers. At present, there are four foreign exchange brokers in the Philippines, Tulett Prebon Philippines, Inc., AFS Philippines Inc., Tradition Financial Services Philippines Inc. and ICAP Philippines Inc. For third currency trading, most commercial banks use the Reuters Dealing and the Bloomberg Financial Services.
The US dollar and Philippine peso legs of the PDS transactions are settled in a Payment-versus-Payment (PvP) electronic system for the local interbank spot and forward foreign exchange market. 3 The PvP links two real-time gross settlements systems– the BSP’s Philippine Payments and Settlements System (PhilPaSS) for the peso transactions and the Philippine Domestic Dollar Transfer System (PDDTS) for dollar transactions–with the Philippine Depository and Trust Corporation (PDTC) as designated clearing entity for peso-dollar transactions of commercial banks under the BAP. The PDDTS is a local clearing and electronic communications system operated by the BAP, the Philippine Clearing House Corporation (PCHC), Philippine Securities and Settlements Corp. (PSSC) and Citibank, Manila. The PDDTS provides the banking industry with a facility to move US dollar funds from one Philippine bank to another on the same day without having to go through correspondent banks in the US. The system allows online, real-time gross settlement of domestic interbank US dollar transfer and third party account-to-account US dollar transfers. In addition, it provides a facility for online inquiry and settlement of foreign exchange transactions, where the PDDTS participants enter interbank US dollar and Philippine peso transfer instruction in a single screen.
The PDS has both on-line, real time and end-of-day batch netting transfer capabilities with final settlement on the same day. This compares favorably with the most sophisticated domestic funds transfer systems around the world in terms of speed/flexibility of delivery and settlement finality.
Trading at the PDS starts at 9:00 AM and ends at 4:00PM. A lunch break from 12:00 noon up to 2:00 PM is observed. The BSP reference dollar exchange rate (included in the foreign exchange rate bulletin) for the day represents the weighted average of all done deals at the PDS during the preceding day. Currently a summary of the results of the daily transactions done at the PDS is available at the FX summary page of the website of PDEx (www.PDEx.com.ph), Reuters page PHPES01 and Bloomberg BAPH1. These pages contain the following information: open, high, low, close, weighted average rates and volume.
1 The idea behind the PDS is the development of a market-determined exchange rate. Banks are encouraged to always give two-way quotes with the normal interbank bid-offer spread at 0.005 peso. Identities of quoting banks remain anonymous, except the transacting banks.
2 Banks trade for their clients, as well as for commercial requirements and their own account. When they trade for their own accounts, banks are guided by the allowable overbought and oversold foreign exchange positions set by the BSP. Per Circular No. 561 issued on 8 March 2007, Banks’ long (overbought) and short (oversold) foreign exchange position should not exceed 20 percent of their unimpaired capital or US$50 million, whichever is lower.
3 Under the Payment-versus-Payment (PvP), final transfer in one currency takes place only if a final transfer in the other currency occurs.