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BSP Amends Derivatives Regulations for Quasi-Banks


The BSP Monetary Board has approved the amendments to BSP regulations governing the derivatives activities of Non-Bank Financial Institutions (NBFI) with quasi-banking authority.  The new regulation is consistent with existing regulations over derivatives activities of Banks provided under Section X602 of the Manual of Regulations for Banks (MORB) as amended by BSP Circular No. 594 dated 8 January 2008.

The amendments seek to support the development of the Philippine financial market by providing Quasi-banks (QBs) and their clients with expanded opportunities for financial risk management and investment diversification through the prudent use of derivatives.  The amendment allows QBs and trust departments of QBs to engage in derivatives activities without need for prior BSP approval (Generally Authorized Derivatives Activity).

Under the revised guidelines, all QBs and their trust department are allowed to engage in any financial derivatives for hedging purposes with BSP authorized dealers and brokers without need of prior BSP approval, subject to Philippine Accounting Standards (PAS) 39.  Under previous regulations, QBs, their subsidiaries and affiliates are only allowed to engage in any derivatives activities only upon prior approval of the BSP.  The general derivatives authority granted to QBs is similar to that allowed for thrift, rural and cooperative banks.  The new regulations also removes the BSP approval requirements for derivatives transactions with subsidiaries/affiliates so long as the QB complies with the minimum risk management standards for related-party transactions outlined in Appendix Q-15 as part of the QB’s internal control procedures. 

For derivatives activities other than hedging, QBs may apply for additional derivatives authority, taking into consideration the role performed in a derivatives transaction and level of sophistication of derivatives activities.  The new additional authority structure veers away from imposing “one-size-fits-all” licensing requirements under the previous regulations which grants only one type of additional authority.  The type of license is similar to the additional authority allowed for Banks.  However, the Type 1 license which is an Expanded Dealer Authority is only made available for UBs/KBs.  QBs and/or their trust department may apply for the following additional derivatives authority:

  • Type 2- Limited Dealer - allows a QB to operate as a dealer in specific types of derivative products with specific underlying reference as applied for
  • Type 3 – Limited User - allows a QB or its trust department to transact as end-user in specific types of derivatives
  • Type 4 – Special Broker - allows a QB to facilitate a derivatives transaction between a BSP-authorized dealer and end-user clients.

The amendments also streamline the derivatives licensing process.  Annual renewal of the license, which was required under previous regulations, has been lifted and in lieu thereof, assessment of risk management capabilities for derivative activities shall be included during regular examination.  Holders of additional authorities that do not comply with provisions of the Circular, including risk management guidelines, shall be subject to appropriate sanctions, including curtailment of derivatives authority, which may be equivalent to the non-renewal of license.  The requirements on the submission of product manuals and bank certifications have likewise been scrapped.  Moreover, application for additional authorities has been centralized in a single unit within the BSP-SES to ensure consistent implementation of the requirements.

The new appendix on risk management (Q-15) provides a general framework for the comprehensive management of all relevant risks arising from derivative activities to ensure the prudent uses of derivatives.  The Appendix shifts to a principles-based supervision on risk management and veers from the usual enumeration/checklist of requirements.  It also places responsibility of compliance with risk management standards on the QB’s board of directors and senior management.  

Likewise, the revised guidelines introduced Sales and Marketing Guidelines (Appendix Q-16) that superseded the previous Appendix Q-16 which merely provides a sample disclosure statement for derivatives activities.  The amendments seek to protect the investing public by prescribing minimum sales and marketing guidelines, including client suitability procedures and risk disclosure requirements for QBs acting as dealers or brokers of derivatives.  Further, the QB’s board of directors and senior management are made liable for acts committed by sales and marketing personnel.

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