The new region covers about the same area as the Autonomous Region in Muslim Mindanao, which Philippine President Benigno Aquino said is a "failed experiment."
An elected government to administer the new region -- whose "Basic Law" will be based on Islamic Sharia law -- should be in place sometime in 2016, the detailed framework agreement available on the presidential website stated.
In a long and conciliatory speech at the presidential palace, Aquino announced the framework agreement with the Moro Islamic Liberation Front.
Aquino said it "paves the way for a final and enduring peace in Mindanao," the second largest and easternmost island in the Philippines.
Davao City is the largest city in Mindanao, which is the only Muslim-majority area an otherwise Catholic-majority country.
"We have counted two generations since conflict began in Mindanao, a cycle of violence that has claimed the lives of more than a hundred thousand Filipinos -- soldiers, warriors and innocent civilians who all needlessly shed their blood," Aquino said.
He said a "culture of impunity and injustice set in" where people lost their trust in the system and some pushed to secede from the Philippines.
"This agreement creates a new political entity. It deserves a name that symbolizes and honors the struggles of our forebears in Mindanao and celebrates the history and character of that part of our nation. That name will be Bangsamoro."
Aquino said he wanted to see equal opportunities for everyone in the new region, including for schooling, healthcare and business investment.
"The time is near when any foreigner visiting the Philippines will surely have the provinces of Bangsamoro in his itinerary," he said.
he Manila government's powers include defense, foreign policy, coinage and citizenship while the Bangsamoro government will have tax-raising powers, more say over foreign investment and, importantly for the MILF rebels, much more authority over natural resource development.
The MILF also welcomed the agreement, reported the Mindanao Express newspaper, published in Zamboanga City in Mindanao.
"There is an increasing chance now, more than ever, that the Moros in Mindanao will get a better deal with the Manila government," the MILF said in a written statement.
"It is time for every Moro, irrespective of group affiliations, to show selflessness by supporting this negotiation. Even a mere endorsement is a great boost to this undertaking. This is the best time for the current Moro leaders, in and outside of government, to do a "Mandela" for our people."
The MILF came into existence in 1981 when a group split from the Moro National Liberation Front which has been fighting for an independent Muslim homeland for around 40 years.
Some of the fiercest fighting between government troops and security forces has taken place between the MILF and other armed rebels, notably the Abu Sayyaf group.
In July 2007, 14 marines died -- 10 by beheading -- in fighting on Mindanao's Basilan Island. It remains unknown which group was responsible for the beheadings.
The exact area of the "sub-state" Bangsamoro isn't clear, the Mindanao Express report said. But it likely would cover more than the five provinces that make up the ARMM – Basilan, Sulu, Tawi-Tawi, Maguindanao and Lanao del Sur, including Marawi and Lamitan cities.
The next step is to set up a 15-member Transition Commission composed entirely of Moro people. The central government in Manila will appoint seven members and the MILF will appoint eight, including the chairman.
Malaysia, which hosted and helped broker initial talks between Aquino's government and MILF rebels in early 2011, will oversee the process leading up to the creation of Bangsamoro.
The agreement completes one of the major tasks that Aquino set out for himself publicly during his inauguration in early 2010 -- he challenged rebel groups to call a cease-fire and sit down for peace talks.
"Are you prepared to put forth concrete solutions rather than pure criticism and finger-pointing? If it is peace you truly desire, then we are ready to call for an immediate cease-fire. Let us go back to the table and begin talking again," Aquino said at the time.
Aquino's first term as president expires in 2016 -- the same year as Bangsamoro is scheduled to be created. He has been acting as if he already in the campaign trail, a report by The Wall Street Journal said earlier this month.