The Monetary Board (MB) approved the exemption of government securities booked in the Held to Maturity (HTM) category that are offered and accepted in tender offers pursuant to liability management transactions of the Republic of the Philippines from the “tainting” rule under Philippine Accounting Standards (PAS) 39 for prudential reporting purposes.
The “tainting” rule under PAS 39 requires the reclassification of the entire HTM portfolio to the Available-for-Sale category and prohibits a bank/financial institution (FI) from using the HTM category during the reporting year and for the succeeding two (2) full financial years, whenever it sells or reclassifies more than an insignificant amount of HTM investments before maturity, other than for reasons permissible under PAS 39.
The “tainting” rule aims to discourage banks/FIs from manipulating their earnings/capital by shifting from cost-based accounting (e.g., accounting for HTM) to fair value accounting (e.g., accounting for Held for Trading and Available for Sale securities) and vice versa to take advantage of price movements.
In recognition of the significance of the National Government’s (NG’s) liability management programs to the promotion of domestic capital markets and fiscal management, the BSP earlier granted banks/FIs exemption from the “tainting” rule for prudential reporting purposes, in respect of securities that are offered and accepted in debt exchange offerings of the NG. Debt exchange offerings primarily involve the exchange by banks/FIs of their investments in existing government bond securities for new government bond issues.
The recent exemption granted by the MB expands the scope of the BSP’s earlier regulatory relief to encompass all types of liability management transactions of the NG in addition to debt exchange offerings.
In order to be granted exemption from the tainting rule, banks/FIs are required to maintain appropriate documentation on their liability management transactions with the NG. This will ensure that only those eligible bondholders who participate in the NG’s initiative shall be able to benefit from the regulatory relief.
The grant of the recent regulatory relief by the MB is expected to promote the participation of banks/FIs in liability management initiatives of the NG.