Accounting Alert

This Accounting Alert is issued to circulate Bangko Sentral ng Pilipinas (BSP) Circular No. 1194 dated May 29, 2024.

Introduction

The Monetary Board, in its Resolution No. 552 dated May 16, 2024, approved amendments to the regulations governing the derivatives activities of banks under Section 613 of the Manual of Regulations for Banks (MORB) and of quasi-banks and of trust corporations under Section 613-Q of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). The amended provisions will likewise apply to trust corporations by virtue of Section 302-T of the MORNBFI.

The Amendments

Some of the major amendments are as follows:

Amendment to Section 613 of the MORB (as amended by BSP Circular Nos. 1119 and 1154 dated June 07, 2021 and September 14, 2022, respectively)

Definition of terms

Credit derivative - a contract wherein one party called the protection buyer or credit risk seller transfer the credit risk of a reference asset or assets issued by a reference entity or entities, which it may or may not own, to another party called the protection seller of credit risk buyer. In return, the protection buyer pays a premium or interest-related payments of the protection seller reflecting the underlying credit risk of the reference asset/s. Under these regulations, credit default swaps and total return swaps are considered credit derivatives.

FX options - refers to a contract that gives one party the right but not the obligation to buy or sell one currency against another by a certain time for a certain price.

Non-deliverable swap - refers to a variation of an FX swap agreement wherein there is no exchange of the two currency cash flows; instead, the net difference between the contracted rate in the swap contract and the spot rate is paid by one party to the other.

ROP's Paired Warrants Program - refers to instruments that gives the holders the right to convert or exchange their Republic of the Philippines (ROP) Global Bond holdings into Peso GS at pre-determined tenors and exchange prices (par for par) at pre-agreed coupons. This right can only be exercised upon a ROP Event of Default on its foreign currency debt.

Total return swaps (TRS) - refers to a credit derivative wherein the parties agree to exchange cash flows on interest payments and capital gains/losses at certain times in the future according to an agreed upon formula.

Generally authorized derivatives activities

As a dealer, a UB or KB may originate, distribute or act as market maker for the following financial derivatives: Provided that the UB or KB complies with applicable market conventions and mechanisms for transparency and disclosure

(a) Deliverable FX forwards and FX swaps;
(b) Non-deliverable FX forwards and FX swaps;
(c) Currency swaps;
(d) Interest rate swaps and forward rate agreements;
(e) Interest rate and currency futures; and
(f) Any financial derivative that is traded in an organized market where the UB or KB is recognized as a dealing participant or member. For this purpose, an organized market refers to an exchange or a Bangko Sentral-recognized over-the-counter market governed by transparent and binding market conventions on price transparency, trade reporting, market surveillance and orderly conduct/operations.

A trust department of a UB or KB may transact as an institutional counterparty in the following financial derivatives instruments on behalf of its trustor/principal/s as may be authorized by such trustors/principal/s: Provided, that the trust department observes the relevant provisions of Appendix 22 and Appendix 86:

(1) xxx
(2) xxx
(3) xxx
(4) Principal-protected foreign currency-denominated SPs, the revenue streams of which are linked to interest rate indices, interest rate instruments, listed equity shares or indices, FX rates, credit rating or index, or gold: Provided, that the maximum contractual maturity shall be 5 years; and

(5) Plain vanilla single-name CLNs where the reference asset is an obligation issued or guaranteed by the ROP.

Provided, that the total carrying value of investment in SPs and CLNs, including those held under the trust department's Type 3 authority, shall not exceed 20% of the assets being managed by the trust department.

Activities requiring notification

(a) xxx
(b) A structure or combination of (i) two or more separate stand-alone derivatives contracts, or (ii) stand-alone derivatives contract/s and a plain vanilla cash instrument, where the instruments are offered or distributed together, and where (all of) the derivative(s) is (are) either part of a UB/KB's Generally authorized derivatives activities as dealer or a bank's existing type 2 or type 3 additional derivatives authority, or part of a trust department's Generally authorized derivatives activities or its existing type 3 additional derivatives authority; and
(c) A structured product where the embedded derivative/s differs from that of the product approved under a bank's existing type 2, type 3, or type 4 additional derivatives authority or a trust department's existing type 3 additional derivatives authority.

Amendment to Section 613-Q of the MORNBFI (as amended by BSP Circular No. 1119 dated June 07, 2021)

Activities requiring notification

(a) xxx
(b) xxx
(c) A structured product where the embedded derivative/s differs from that of the product approved under a QB's existing type 2 or type 3 additional derivatives authority or a trust department's existing type 3 additional derivatives authority.

Effectivity

This Circular shall take fifteen (15) days after its publication in two (2) newspapers of general circulation.

Please see attached circular for further information including the remaining sections.