Parallel forex market easily trumps PDS

The Bangko Sentral ng Pilipinas (BSP) is appalled that far more people patronize the so-called parallel market for foreign exchange (forex) than they do the formal forex market known as the PDS, and vowed last Friday to liberalize the rules further to encourage consumers to keep clear of unregulated markets.

According to BSP Governor Nestor A. Espenilla Jr., they were evaluating data from the PDS and compared it against the parallel market and found that the volume of transactions alone staggers the mind.

He said that, while the formal market represented by the PDS is capable of handing $600 million worth of transactions daily, the parallel market, sometimes known as the black market, can easily process $1 billion or more. This market includes the various and unregulated money-service businesses.

“This is outrageous. For transactions to be happening in the unregulated parallel markets, this has got to change,” Espenilla said.

Espenilla vowed to take greater care of the formal forex market that represents a “very important focus” during his term as central bank governor. Espenilla assumed the top post at the BSP only on July 3 this year.

“Looking at the PDS…what’s being dealt…the order of the magnitude is about $600 million. But when we started collecting data [from] the money-service businesses, it’s in the order of more than $1 billion,” he said, scandalized.

Part of the reforms Espenilla is looking at include the liberalization of existing rules on forex transactions to make the exchange more risk-based but transparent.

“We recognize that the forex market today remains restrictive, difficult, opaque, shallow. It is a throwback to the time when forex was scarce and reserves were meager and market confidence was very low,” the governor said.

“Today, it’s an entirely different picture. To preserve those rules in a market that is rapidly growing is to impede the growth of the market itself. It simply adds to the cost of doing business and just creates a bigger and bigger black market,” he added.

The governor also said he will focus on reshaping the local financial system to respond quickly to the needs of the economy, particularly giving emphasis on evolving technological advances in the industry.

Key reforms to developing the local debt market is also expected from Espenilla, seeing this as a “crucial component” to sustain the economy’s growthmomentum.

“Our growth cannot be just founded on lending by banks, as bank regulator, I know how unstable that situation can be. Banks are inherently short-funded. To be funding these long-term assets creates strategic instability that is very uncomfortable for regulators,” Espenilla said.

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Bianca Cuaresma graduated cum laude from the University of Santo Tomas (UST) with a degree in AB Journalism. She was with the BusinessMirror during her internship in 2012 where she was assigned at the Department of Foreign Affairs (DFA) beat. She continued to be of service to the paper after she graduated in 2013. In 2014, she was awarded as the Reporter of the Year by the paper for her coverage in the Bangko Sentral ng Pilipinas (BSP). She is a BusinessMirror reporter for 3 years now, and has covered general assignments and agencies related to banking and finance in the country.