Interview: Edna C Villa

The editor spoke with the senior assistant governor, Financial Markets, at the Central Bank of the Philippines on March 13, 2026. 

At the Central Bank of the Philippines (BSP), reserve management, monetary operations and foreign exchange intervention are handled by the financial markets (FM) department. How have these evolved at the BSP in recent years?

In our reserve management, we have prioritised risk-return, integrated sustainable investing and a more agile external fund management framework.

We continue to uphold three key objectives for holding FX reserves: liquidity, capital preservation and return. However, in implementing these, and in determining which assets and currencies become part of our investible universe, the most recent strategic asset allocation [SAA] framework has evolved from just using traditional measures and standards such as the International Monetary Fund’s Assessing Reserve Adequacy [ARA] metric and asset-liability matching. Instead, a sharper focus on risk-return has opened us up to new asset classes.

In addition, we have simplified tranching to improve efficiency and reduce cost in rebalancing within our operations. We have also further enhanced stress-testing of our portfolio to ensure the portfolios are robust and resilient. The SAA itself is reviewed annually.

Consistent with the BSP’s objective of upholding sustainability in our own operations, the central bank became a signatory to the United Nations-supported Principles for Responsible Investment [PRI] in 2023. The BSP has complied with the requirement to have a formal responsible investing framework and governance structure. A formal responsible investment committee has been created, with the head of FM as chair. Last year, we submitted our first PRI report reflecting all these developments. The central bank’s Responsible Investment Framework is published on our website.

Our external fund management framework was refined such that monitoring of fund manager suitability enables a more dynamic review based on established metrics and an incentive structure that will help align portfolio managers’ behaviour that supports sustainable benchmark outperformance.

In terms of reserve management operations, collaboration among the front-, middle- and back-office operating units has been strengthened through more structured meetings between the front and middle offices. We internalised a portion of our US inflation-linked bonds [USILB] mandate after training internal portfolio managers. Having the Treasury Portfolio Management System in place [since March 2022] enabled us to do this last year. We intend to internalise more mandates, as capacity-building and technology will allow.

The improvements in technology and the availability of our TPMS and trading platforms on secure sites have enabled front-, middle- and back-office staff and officers to perform their work safely and effectively, even remotely. This trade- and work-from-home arrangement has allowed us to accomplish our tasks even during work suspensions caused by local weather-related disturbances.

There have also been sustained and deliberate moves towards more market-based open-market operations to improve monetary policy transmission. Among the reforms toward this goal was the reduction of reserve requirements [RR] on deposit liabilities of our supervised entities from 9.5% to 5% during the June 2023 to March 2025 period – a blunt tool.

Our main policy tool, the overnight repo rate, is now a variable interest rate. Its value is determined by the weighted average of accepted bids in daily auctions. Prior to September 8, 2023, the overnight repo rate was fixed at the BSP policy rate. Under the variable overnight repo rate structure, the BSP policy rate now serves as a rate guide to banks as they bid for the repos.

The overnight reference rate [ORR], based on the BSP’s overnight RRP rate, was designated by the International Swaps and Derivatives Association as a reference rate in November 2024. This paved the way for the launch of the interest rate swap [IRS] market in the same month, with the ORR serving as the floating rate leg of the IRS market. Because the ORR is based on the BSP’s rates, we expect to see strong improvement in monetary policy transmission, as IRS gains traction.

The BSP also changed the documentation for open market operations from simple bilateral participation agreements to the Global Master Repurchase Agreement. This is significant as the GMRA allows for true sale arrangements, in terms of transfer of ownership, under the repo.

Liquidity forecasting improvements are now matched by more agile allocations in the liquidity facilities offered by FM. As we become better at calibrating the size and tenors of our facilities, the pass-through of policy actions will be more efficient.

The automation of auction operations for open market operations, as well as improvements in the real-time gross settlement system [RTGS], have allowed for alternative work arrangements during government shutdowns. These have allowed banks access to BSP facilities even when the government is closed.

As open market operations become more agile and market-based, the FX rate can more efficiently and effectively absorb external shocks and pressures.

How has the BSP revamped and integrated its technology platforms for reserve management and other financial operations?

The BSP has undertaken a multi-front technology overhaul across its core financial infrastructure in recent years, strengthening market operations and operational resilience.

As mentioned, the TPMS went live in March 2022, and enabled straight through processing from front- to back-office operations. Further, pre- and post-trade compliance features, a detailed audit trail and robust reporting have improved control and efficiency across operations.

The TPMS is also integrated with other core bank systems, enabling quick reconciliation and resolution. The system was further enhanced in 2025 to cover domestic operations, with the Monetary Operations System [MOS], PhilPaSS^plus – the BSP’s Peso RTGS – and the National Registry of Scripless Securities [NRoSS], serving as additional critical interfaces for domestic monetary operations.

The BSP’s Peso RTGS, which facilitates the delivery of Philippine pesos from FM’s monetary operations, was upgraded to PhilPaSS^plus in 2021, with plans to extend operations to near-24/7 availability by 2026, to better support round-the-clock payments and financial market activity. PhilPaSS^plus is integrated with the Bureau of the Treasury’s NRoSS for the settlement of government securities transactions, ensuring seamless, secure and timely delivery versus payment processing.

The BSP FM has successfully migrated to the ISO 20022 messaging standard. This transition aligns the BSP with global financial market practices, and supports more efficient, standardised and data-rich settlement operations.

The BSP introduced a new strategic asset allocation (SAA) in July 2025. Why did you update your SAA, what changes did you make and is it fully implemented?

The update in July 2025 was in line with the regular review cycle of the SAA based on our investment horizon. We revisited the currency composition of the internally managed portfolio with a risk-adjusted return perspective, increased allocation to US inflation linkers, and, specific to foreign investments, made new investments in USD-denominated investment-grade corporate bonds, expanding the traditional investment universe comprising sovereigns, supranationals and agencies.

What does the composition of the BSP’s reserves currently look like in terms of currencies and asset classes, and what plans do you have as to how these allocations will develop?

As of end‑December 2025, the BSP’s gross international reserves remain predominantly invested in US dollars. In terms of asset composition, the holdings are in the form of foreign investments, gold and special drawing rights with the IMF.

Is the BSP thinking about building operational capacity to incorporate tokenised or digital assets into its own reserves?

Not for the FX reserves of the BSP in the near term. Although the BSP recently concluded a proof of concept for a wholesale central bank digital currency [wCBDC]. A use case being developed at the moment is to support settlement for tokenised Treasury bills and bond issuance of the National Treasury.

In your time as a central banker, you have witnessed the Asian financial crisis, the global financial crisis and the Covid-19 pandemic. How has your reserve management approach changed in response to market volatility and risks related to these major events?

The approach to reserve management at the BSP used to be to hold only AAA government and supranational bonds in the major global currencies, with no benchmark – the only performance metric was liquidity – and processes were highly manual.

The present approach has a full SAA optimisation framework with multiple tranches, stress-testing scenarios, derivatives as part of our toolkit and straight-through processing. Over the years, the BSP has become more risk‑aware, data‑driven and liquidity‑focused, mirroring shifting global market volatility and increasing technological improvements.

The sophistication of our reserve management approach increased as the level of the reserves grew. Also, as reserves grew, we began to outsource part of reserve management to improve return and gain from knowledge transfer from our external fund managers.

The BSP combined its working capital and liquidity tranches into a single tranche. Why did you do this, how did your thinking about liquidity change beyond standard metrics, and what risk assessments resulted in you determining the new tranche needing to hold approximately 20% of your reserves?

The merger of the working capital and liquidity tranches was adopted because they share the same objective of meeting short‑term liquidity needs, and having a streamlined structure improves efficiency in reserve management. Our approach to liquidity has evolved towards an analysis of historical intervention activity and heightened domestic and global market volatility. These risk assessments indicated a need for a larger, more flexible buffer to support potential interventions.

What efforts has the BSP made over the years to bring trading and asset management capabilities in-house by training its staff and including capacity-building in contracts with external asset managers and other service providers?

The BSP has strengthened its in‑house trading and asset‑management capabilities through ongoing engagement with external fund managers, regularly calibrating and negotiating training provisions tailored to evolving institutional needs – such as study visits, externships and targeted workshops.

This needs-based approach facilitates skills transference, deepens expertise in market and portfolio management, and bolsters internal investment decision-making. Additionally, technology partners like SimCorp deliver online and on-site training to enhance staff proficiency in optimising system usage.

What stage are you at in terms of migrating your corporate bond management in-house? What size is your investment in the US dollar, global corporate bonds via exchange-traded funds (ETFs), and what is the next step in terms of developing more active strategies and the range of investable assets?

The BSP will start with an initial exposure of $100 million to dollar-denominated global corporate bonds via an ETF, to be managed passively by FM staff. This measured approach reflects our practice of starting with small allocations when entering new asset classes while building internal capacity and familiarity. We are currently in the implementation stage of setting up ETF trading, which includes testing and migration preparations. Looking ahead, the next steps involve more active strategies and a broader investable universe. This will be guided by periodic reviews of the investment policy, benchmarking against central bank peers and careful assessment of any new assets or strategies, to ensure continued alignment with the BSP’s objectives, risk appetite and policy requirements.

The BSP holds a local currency bond portfolio. Why do you hedge it in US dollars?

The goal was to broaden eligible markets and gain exposure to developed-market interest rates while limiting foreign exchange risk through currency hedging.

Can you explain your current inflation posture and how it has developed over the past year or so?

Our baseline scenario at the start of the year was that US inflation would gradually cool as the impact of tariff pass-through fades towards the end of the year, but still remain above target. Recent geopolitical developments involving the US, Israel and Iran, however, have added uncertainty to the disinflation outlook. Given these risks, we expect the Fed to take a more cautious approach to policy easing in 2026.

What role do you place on your physical gold holdings, worth around $20.7 billion as of end-Jan 2026, versus investing in inflation-linked securities and the use of inflation-linked derivatives?

Beyond its role as an inflation hedge, gold serves as an effective diversifier in a predominantly fixed income reserves portfolio. It also enhances portfolio security, as it is not a liability of any government. Moreover, gold functions as an insurance asset due to its safe-haven characteristics and can provide liquidity when needed. However, we continue to be mindful of gold’s proportion in our reserves, given storage costs, relative illiquidity and volatile returns.

The BSP buys gold from local producers, and, unusually for a central bank, is a London Bullion Market Association-accredited refiner. How important is your physical gold programme? How do you use gold as a backstop for immediate liquidity? Given that gold has storage costs, does the BSP engage in yield-enhancing strategies, such as trading in the spot and forward markets, and engaging in gold swaps?

The BSP’s physical gold buying programme is a meaningful part of our reserve management strategy. By buying gold from local producers and operating the country’s only refinery accredited under the LBMA Good Delivery List, we ensure that domestic gold, once refined, meets globally accepted standards. This strengthens the credibility and marketability of Philippine gold, and helps maintain a reserve asset that is liquid, internationally recognised and strategically valuable.

Gold plays an important role in our reserves. It is universally accepted, trades in global markets, and is free from credit and sovereign risk. These characteristics allow it to be mobilised across major financial centres, making it a dependable liquidity backstop – particularly during periods of market uncertainty or stress.

While holding physical gold entails storage and custody costs, central banks globally have access to a suite of established market instruments that enhance flexibility and support liquidity management. These include spot and forward transactions, gold deposits, options, and gold swaps. Location swaps are also standard tools used to position gold in major vaulting centres. These practices are part of the international bullion market, and help complement gold’s role as a long‑term, strategic reserve asset.

Given recent gold and reserve asset seizures, why are you comfortable with so much of your gold being stored in the UK and now France, versus at home in the Philippines?

We store part of our gold in the UK and France because they are two of the world’s established bullion centres, offering the liquidity and market access needed for reserve operations. Recent reserve‑asset freezes globally have underscored the importance of diversification, but these locations continue to provide market depth and operational readiness when gold needs to be mobilised quickly.

The BSP internalised a portion (around $2 billion) of its inflation-linked bond mandate. Can you provide details about why and how you did this, how the portfolio is performing, and your next steps in this area, including further insourcing and more active management?

The latest SAA review recommended increasing the allocation to US inflation‑linked bonds. To support this shift, the BSP decided to manage the additional allocation internally, building on insights gained from external fund managers. Ahead of internalisation, FM staff completed externships with these managers to deepen their understanding of USILB portfolio management. The portfolio is currently managed passively, with plans to transition to active management in the next 12–18 months. In preparation, the BSP will continue working closely with external fund managers, particularly to gain expertise in using interest rate and inflation swaps.

Looking ahead, FM also plans to internalise the Asian local currency bond mandate. Similar to the USILB approach, this will be a long‑term initiative that leverages the experience and best practices learned from external fund managers.

Overall, has the resurfacing of inflation, growing fiscal deficits, geostrategic fragmentation, the imposition of unilateral tariffs and attacks on Fed independence made it more pressing to diversify, and have active management related to sovereign, supranational and agency investments?

Yes – because risk now comes from different sources, with different impacts on different portfolios. Diversification and active security selection, if used prudently, can be a powerful tool to achieve the desired risk-return appetite.

Why did the BSP move away from limiting downside losses and an asset-liability management approach to reserve management towards a conditional value-at-risk (CVAR) optimisation for your three-year investment horizon? Why are you confident in CVAR, given the inherent calculation challenges?

With reserve levels stable and more than sufficient under traditional metrics, the BSP can optimise the strategic portfolio over a three‑year horizon, rather than prioritise asset-liability matching. In this context, CVAR provides a more appropriate risk measure than probability of no negative return, as it captures not only the likelihood of adverse outcomes, but also the expected severity of losses in the tail, which is essential for a multi‑year optimisation framework.

We view CVAR as more strongly aligned with the BSP’s risk objectives. Its broad use among peer central banks, despite the known challenges in estimating tail risk, adds additional confidence. Modelling sensitivities can be mitigated through conservative forward‑looking assumptions, annual model validation, and continuous backtesting and scenario analysis to ensure stability and robustness of risk estimates. This combination allows CVAR to serve as a decision‑useful metric for guiding the strategic asset allocation.

You recently introduced daily stress-testing scenarios. What was behind this decision, and what are some examples of scenarios? How have these daily tests, which are shared between middle-office and front-office portfolio managers, informed your reserve management?

Market movements today can be sharp, unpredictable and driven by multiple overlapping factors – such as shifts in monetary policy, geopolitical tensions or sudden changes in inflation expectations. Against this backdrop, more frequent, forward-looking stress-testing gives portfolio managers a view on how the portfolio would perform across a wider range of scenarios, generating timely insights into potential risks.

You are in the process of establishing a New York office. How will that add value to your reserve management? Have you received State Department approval yet?

Being present in the geographical location, where the largest portion of our reserves is most liquid, should significantly improve our ability to take advantage of price movements and reactions to market-moving news and data releases, instead of the current practice of leaving orders to be done during New York trading hours.

Also, being present where the key market-movers are will improve access to large asset houses, traders, analysts and their market research. The BSP’s plan to establish an overseas office in New York continues to progress. We are closely co-ordinating with the Department of Foreign Affairs, which advised that the Embassy of the Philippines in Washington, DC, has formally submitted to the US State Department the proposal for the BSP’s New York presence as a Miscellaneous Foreign Government Office [MFGO].

Is the BSP part of the New York Fed’s Foreign and International Monetary Authorities (Fima) Repo Facility? Are there any caps on the amount of Treasuries that can be swapped for cash via the facility? Have you used it? What charges are involved?

Yes, the BSP is part of the Fima Repo Facility. The Fed allows a maximum amount of $60 billion. We have done a small-value exercise to test operational readiness, which is required. Repo rate is based on the term of the agreement.

You employ more than 10 external asset managers to run a substantial portion of your assets. How have you modified your external asset manager guidelines in the past year? Have you managed to reduce fees overall while securing greater alpha?

The BSP strengthened its EFMP by institutionalising a structured annual assessment framework that ranks external fund managers using quantitative metrics covering relative performance, consistency, and downside risk, forming a more objective basis for reallocations and mandate reviews. These enhancements aim to better align incentives and encourage sustained outperformance by allowing assets under management to be shifted towards top‑ranking managers and enabling proactive action against persistently weak performers. In line with these refinements, the BSP also successfully negotiated lower management fees from EFMs that received additional allocations as top performers within their respective mandates, further enhancing cost-efficiency.

How has your socially responsible investing (SRI) strategy developed, and what are the next steps?

The BSP’s SRI strategy has evolved from a strategic decision made in 2020 to embed sustainability into the broader functions of central banking. It has since taken concrete shape through the gradual greening of the reserve portfolio, emphasising the integration of environmental, social and governance risks into investment decisions, rather than the use of exclusion lists. Throughout its development, the strategy has been guided by global central bank practices and anchored firmly in the BSP’s core mandates.

The next steps centre on deepening climate risk analysis, developing clearer metrics and targets, enhancing disclosures, and gradually strengthening SRI practices within a conservative, mandate-consistent reserve management framework.

What to your mind are the most important opportunities and risks facing you today as a reserve manager?

Reserve managers always need to balance emerging opportunities and evolving risks. This time, however, the balance is more difficult to achieve because the sources are fairly new and untested, and, to an extent, proprietary and controlled by a handful of entities.

Advances in market and financial analytics, artificial intelligence and digital infrastructure are improving how we manage risk, analyse markets and diversify. Climate awareness is coming into its own, leading to new asset classes.

These advantages, however, come with risks: cyber security that can put systems and crucial data at risk; hallucinations in AI that can lead to groupthink or herd trading; and algorithms that can trigger market crashes. These risks are all in addition to the more traditional sensitivities to geopolitical shocks and interest rate uncertainty.

Taken together, these dynamics underscore the core challenge for modern reserve management: preserving confidence, resilience and long-term value in a rapidly shifting financial, technological and environmental landscape – while remaining fully aligned with the BSP’s mandates of price and financial stability.