With the stock market in the doldrums, there’s been some recent renewed interest in fixed-income instruments such as bonds, money market instruments, or preferred stocks. A memorandum of understanding was signed by the Philippine Stock Exchange and the Bankers Association of the Philippines on 29 January which contains their plans to establish a fixed-income exchange.

How It All Started
As early as 2001, BAP was already planning to put up an exchange to centralize market transactions for fixed-income securities. The principal goal was to aid government in selling short-term treasury bills and security bonds. Following the 11 September World Trade Center terrorist attacks and impending global slowdown, many were doubtful of BAP’s ambitious plans as it could lead to even greater deficits for the government. The wheels were, however, set into motion.

Skeptics and Supporters
A poll conducted in March 2001 pointed to skepticism among dealers and bankers. According to the poll, dealers were concerned about “issues such as the lack of real-time delivery versus payment system for government securities, taxes on trading debt papers, the lack of liquidity mechanism for trading securities and the lack of physical infrastructure to create such an exchange.” Investors were daunted by the high taxes imposed by the trading of government securities, which accounted for the low volume of fixed-income securities sold.

By mid-2002, however, more market players were eager to get into the act. The enthusiasm was triggered when the Bangko Sentral ng Pilipinas gave the BAP initiative a thumbs-up sign. The Monetary Board issued Circular 338 which paved the way for banks to shore up the money needed for the exchange. According to BSP governor Rafael Buenaventura, the fixed-income exchange would help finance the funding requirements of local firms and help develop the domestic capital markets. He believes that industry players should start lining up the money for the exchange so they only have to set it up as soon as Congress approves the regulatory framework. Other groups including the Investment Houses Association of the Philippines, the Asian Development Bank, International Finance Corporation, and life insurance companies expressed interest in investing in the exchange.

By September 2002, other players such as the Money Market Association of the Philippines (MART) wanted to be involved in the formulation of the rules and guidelines for the fixed-income exchange. MART president Juanchito T. Dispo said, “If they (brokers) are ill-trained, at the end of the day, the investing public will be at the losing end. What we’re harping for here is to increase the level of professionalism in the area of government securities trading…It cannot be prevented that a cross-border transaction between brokers and government security dealers may occur. We need to harmonize the trading system the dealers and brokers are using. There’s also a need to look at counterparty settlement and the securities delivery mechanism so as to ensure a seamless government securities transaction between those two different sectors.”

The Bottomline
A memorandum of understanding between the BAP and PSE is a start. There is still a long way to go before the actual implementation of the fixed-income exchange. This project requires ample deliberation, and all parties must ensure that certain requirements are met such as the physical structure, training for brokers and dealers, a sound trading system, and a well-developed structure for clearing, settlement, depository and custodianship. Moreover, pertinent guidelines and regulations must be in place to safeguard investor interests, to be approved by Congress. Lastly, an information campaign must be launched to increase awareness for the general public. It seems like a daunting task but those involved must remain optimistic. The development of a fixed income exchange may be a step towards the revitalization of the economy by providing medium to long-term funding and stimulating investors, all in an atmosphere of transparency and professionalism.