BSP mulls relaxation of derivatives rule
THE Bangko Sentral ng Pilipinas (BSP) is looking to relax its rules on derivatives and similar instruments to boost the trust industry, while also prodding better portfolio management across financial firms.
BSP Deputy Governor Nestor A. Espenilla, Jr. said the regulator is lining up reforms on rules covering derivatives from unit investment trust funds (UITFs), in a bid to “invigorate” the local trust industry while improving overall risk management.
“Current BSP regulations on UITFs only allow investment in derivatives for purposes of hedging. We are studying a possible relaxation of this restriction to allow for a more efficient management of investment portfolios,” Mr. Espenilla said during a speech before the Fund Managers Association of the Philippines late Thursday.
UITFs are investment tools that can be tapped by clients, where funds are pooled and administered by fund managers, which may be invested in liquid investments and tradable financial instruments.
On the other hand, derivatives are contracts signed by parties to acquire an asset at a predetermined future date and price. Firms holding future deals are required to put up a hedge fund, or a margin should one of the parties decide to call off the deal and absorb the losses of the other and prevent a possible funding crunch.
Under current rules, trust companies can only tap derivatives to hedge risk exposures.
Separately, the BSP is also aiming to introduce fresh guidelines on investment management and better balance risk exposures among financial entities.
“We intend to issue regulations aimed at ensuring that BSP-supervised financial institutions exercise prudence on the conduct of investment management activities by setting up minimum expectations on the practices they should establish for managing and controlling the risks,” Mr. Espenilla added.
“This will lead to better-managed capital market issuances and greater benefits for all issuers.”
The proposed reforms will cover all financial firms, including holders of debt and equity securities, structured products, and hybrid instruments.
In February, the BSP also announced that local banks will be subject to tighter margin requirements for derivatives, in keeping with international standards under the Basel 3 framework. The guidelines seek to ensure that collateral is available to “offset losses caused by the default of a derivatives counterparty,” according to the Bank of International Settlements.