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 executed either directly through the Philippine Dealing System (PDS), which is an electronic trading system, or through brokers. The PDS is an electronic-based network and is connected by communication systems provided by the Telerate. Trading through the PDS allows nearly instantaneous transmission of price information and trade confirmations. 1 Commercial banks are allowed to engage in spot, outright forward, and swap transactions in Philippine peso/US dollar and other third currency transactions.2 Member banks of the PDS can also directly deal through the broker using telephone or other electronic system (i.e. Reuters Dealing). For third currency trading and other commodities (i.e. gold and silver), most Philippine banks use the Reuters Dealing screen and the Bloomberg Financial Services, as well as telephone lines.The US dollar and Philippine peso legs of the PDS transactions are settled in a delivery versus payment and real time gross settlement mode. Specifically, t he settlement of US dollar transactions in the PDS is done through the Philippine Domestic Dollar Transfer System (PDDTS). The PDDTS is a local clearing and electronic communications system operated by the BAP, the Philippine Clearing House Corporation (PCHC) and Citibank, Manila. This system allows online, real-time gross settlement of domestic i nterbank 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 Peso transfer instruction in a single screen. The US Dollar leg is settled via PDDTS while the Peso leg is transmitted to the Philippine Payments and Settlements System ( PhilPaSS ) for settlement by the BSP. 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 4:00 PM. A lunch break from 12:00 noon up to 2:30 PM is observed. The exchange rate of the peso vis-à-vis the dollar at the beginning of the trading day represents the weighted average of all done deals at the PDS during the preceding day, (i.e., the BSP's reference exchange rate). Currently, a summary of the results of the daily transactions done at the PDS is available at Moneyline Telerate page 2920, Reuters page PHPESO1 and Bloomberg page BAPH1. These pages contain the following information: open, high, 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 foreign exchange positions set by the BSP. Banks' long (overbought) foreign exchange position should not exceed 2.5 percent of their unimpaired capital or US$5 million, whichever is lower, or position). There is no limit on banks' short (oversold) positions.