I am deeply honored and am very grateful to the Philippine Dealing System Group of companies – PDEx, PDTC and PSSC – for holding this testimonial dinner. As a professional, one cannot find a greater honour than for his work to be recognized and appreciated by market stakeholders.
I fully understand that as market conditions frequently change and because of the so-called “zero sum” nature of financial transactions, the policy stance taken by market regulators such as myself will be welcomed by some but not by others.
I would like to see tonight then as an indication that my 43 years of public service, including the last 12 years as the Governor of the Bangko Sentral ng Pilipinas, is viewed by the market as a net positive.
For this, I sincerely and humbly thank you all.
Truth be told, it has really been a collective journey for all of us, one where our market had not been as positive before as we see it today. As I look around this room, I see at least a few familiar faces who were there in the late 1990s moving and making markets. Then crisis came. I remember the series of meetings between BSP and BAP officers as we tried to calm our market when the Asian Financial Crisis unfolded.
Our younger market professionals would not have any recollection of the difficult market conditions back then. In particular, I recall how the peso traded versus the USD at the height of the crisis. I was newly assigned to be in-charge of BSP Treasury when the AFC broke. The trading volumes then were small relative to today’s market. At the peak of the crisis, markets thinned out even more -- causing very sharp, discrete jumps in the exchange rate. The BSP had to provide liquidity directly into the market. As the days passed, it became clear that such a situation was going to be untenable. Thus, in subsequent BAP discussions with regulators, the concept of a USDPhp NDF market was born. The NDF helped to calm the market.
Moreover, the economy was growing but the AFC put break to that momentum. Further credit growth was equally curtailed because loans had to be re-priced at the much higher interest rate levels. It was not uncommon for mortgage rates to be repriced from 14% to 32% per annum back then.
Some of these loans were actually USD-denominated and thus faced the twin problems of repricing and cross-currency revaluation.
While it was not uncommon at that time to include the phenomenon of “boom and bust cycles” in our discussions, hardly anyone anticipated that systemic risks would actually materialize.
The dislocations from the 1997 crisis were severe and swift but one can very well argue that our capital market today has actually been defined by the difficulties faced by the investment house industry just before the turn of the millennium. It was a crisis of a purely bilateral market which instilled in us fundamental lessons about the consequences of the lack of price discovery, a failure in governance, and the absence of proper disclosure.
We now understand that without transparent and publicly accessible secondary price for securities, an investor would have no clear benchmark for the fair value of such assets.
We also now know that without an independent 3rd party depository, the market function of maintaining the “integrity of a securities issue” 1 could not be pursued. This allowed those with illicit motives to conduct multiple sales of the same underlying instrument, at the expense of the unsuspecting investor.
We now appreciate that without Delivery-versus-Payment as the norm, security sellers would only know by 4pm if buyers had the cash to settle the transaction. Although the transfer of securities had already been effected intra-day, the unavailability of funding would trigger an unwinding only on the next trading day. This was certainly not without ramifications.
In effect, without price discovery, an active secondary market, the necessary financial market infrastructures and appropriate market conventions particularly on disclosures, conflicts of interest as well as on payments and settlements, there is no truly vibrant market to speak of.
While institutional investors could manage the information asymmetries, retail investors were effectively estopped to dealing only with their own bank. This could not have created a holistic market but encouraged fragmented trading that was highly dependent on the inventory of securities held by one’s own bank.
Thankfully, we have moved forward together with a more organized market. The BSP supported the initiative of the BAP to develop an exchange for fixed income instruments. This exchange puts a premium on price discovery, adhering to global standards on the determination of fair market value. In turn, by making these prices known to all wholesale and retail investors, the financial consumer is better off as he can then make well-informed decisions.
We have developed the discipline of segregation so that tradable securities are duly ring-fenced and can be settled within an RTGS environment. Guidelines from the BSP defined how fair market value would be determined for tradable securities and more recently, we have also asked banks to separate the funds used for settlement from the core deposits they hold, which instills operational efficiency and nurtures better governance.
Literally starting from an illiquid, price-opaque market at the onset of the new millennium, we now have Php645 billion worth of corporate bonds listed on the exchange. Interestingly, a solid 18% of this outstanding amount (i.e. Php115 billion) is infrastructure-related, certainly the type of longer-term undertaking that one ideally hopes to see on an exchange.
In 2016 alone, we saw 27 corporate issuances amounting to just under Php137 billion. Between 2010 and 2016 – the period immediately after the Global Financial Crisis – the volume of securities serviced by the registry and the depository increased by 23% and 16% per annum, respectively.
While these are positive developments, our journey is far from complete. Corporate bonds still represent a paltry portion (i.e. 1%) of trading volume. A robust pricing benchmark from trades in government securities is still very much work-in-progress.
Ladies and gentlemen, we are able to gather tonight because we made the decision and exerted efforts to be better. We need to appreciate today’s market relative to where we came from and why we have taken this path thus far. This gives us a balanced perspective and foundation as we define the character and structure of our capital market going forward.
It is important that we remain cognizant that overcoming the instabilities in 1997 and 1999 brought us to this point. Thus, it must be our continuing pursuit of financial stability that will keep us off the path of instability.
Friends, I have been fortunate to have had a front row seat, not only in the difficulties we have faced but more so for our collective efforts to be better. As I step down in 40 days, I am very much comforted that, together, we have done well.
I am excited for the new leadership at the BSP as I am sure that everyone will continue to strive to be better-than-well. In my forthcoming “unstructured days”, I will eagerly learn of how this market takes many steps forward.
Let me again reiterate my appreciation for this testimonial but ladies and gentlemen, with the wisdom of hindsight and the promises of a better future, certainly the collective journey must continue.
Thank you very much.
1 This is a formal term that is a function of securities depositories. It is the result of legal requirements and securities accounting procedures ensuring that the number of securities issued is, at all times, equal to the total number of securities in circulation.