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MB Approves New Regulations on Treasury Activities of BSP-Supervised Financial Institutions, Enhancements to Fit and Proper Rules

10.19.2015

The Monetary Board, in its meeting on 15 October 2015, approved the regulations on the treasury activities of BSP supervised financial institutions (BSFIs), as well as changes to the fit and proper rules.

The new regulations set the BSP’s expectations on BSFIs’ management of operational risk arising from their treasury activities, as lapses may bring about significant losses and exposures to compliance and reputational risks. Owing to the significant role played by the treasury function in the pursuit of a BSFI’s strategic objectives, the guidance underscores the need for BSFIs to act ethically and with utmost integrity, especially in the context of their active participation in financial markets.

Consistent with existing guidelines on the corporate governance of BSFIs, the new regulations highlight the key role played by the Board of Directors and Senior Management in setting the tone at the top and establishing standards of good behavior, including adherence to market conduct rules. BSFIs are expected to have codes of conduct specific to the treasury unit, in addition to any institution- or industry-wide codes that personnel adhere to, and policies and procedures to ensure that the provisions of the code are upheld.

The regulations set out a requirement to distinguish between the different functions performed by a treasury unit and to segregate conflicting duties, for instance, risk-taking and recording, and reconciliation and settlement, in line with internal control principles. The BSP likewise expects BSFIs’ control functions, namely risk management, compliance and audit, to regularly and actively participate in the oversight of treasury activities.

Non-compliance with the regulations will lead the BSP to deploy the appropriate supervisory enforcement actions, in the manner set out in the BSP Supervisory Enforcement Policy under Circular No. 875 dated 15 April 2015.

In order to support the principle of upholding market integrity and professionalism at the highest level of governance of a BSFI, the qualifications for directors and officers are being amended to explicitly relate the assessment of a person’s integrity and probity to his reputation in the market, as well as his ability to comply with market conduct rules and the requirements of other regulatory bodies beyond the BSP. The regulator also deems it timely to introduce a new perspective in the overall evaluation of a person’s fitness and propriety to assume a directorship or officership by giving more importance to displayed behaviors rather than a checklist of requirements. In this regard, the existing criteria have been supplemented by skills and, for directors, independence of mind and sufficiency of time. These requirements are set out in the Basel Committee on Banking Supervision’s recent guidance, “Corporate governance principles for banks.”

 The issuance of these regulations forms part of the BSP’s initiatives to update its supervisory approach to suit current industry practices and align with international standards. The issuance of a broader set of guidelines on operational risk management is in the pipeline.

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