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BSP Supervisory Frameworkon Hedging Activities
Conference on Gearing Up for External Competitiveness13
September 2010
Marco Polo Hotel, Davao City
ANNALIZA G. TAN-CIMAFRANCA, CIA, FRM
Head, Capital Markets Specialist Group
Supervision and Examination Sector
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Presentation OutlinePresentation Outline
Overview of Philippine derivatives market
Regulations governing Hedging Instruments
BSP Risk Management and Sales and Marketing Guidelines on
Hedging Instruments
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10
20
30
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60
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 1. Derivatives Volume (USD Billions)
Philippine Banks Philippine Banks Outstanding
DerivativesOutstanding Derivatives
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Overview of Philippine Derivatives MarketOverview of Philippine
Derivatives Market
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Figure 2b. Derivatives by Product Type (2000)
92%
8%0%
FX Forw ards & Sw aps Options IRS
Figure 2a. Derivatives by Product Type (2009)
60%
16%5%
19%
FX Sw aps FX Forw ards IRS Options, etc
Philippine Banks Philippine Banks Outstanding
DerivativesOutstanding Derivatives(Dec. 2000 vs. Dec. 2009)(Dec.
2000 vs. Dec. 2009)
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Regulation Governing Hedging InstrumentsRegulation Governing
Hedging Instruments
BSP Circular No. 594 - Guidelines on derivatives activitiesof
Banks
BSP Circular No. 668 - Guidelines on derivatives activitiesof
Non-Bank Financial Institutions with Quasi-BankingAuthority
Authority of Banks to offer hedging instruments
Risk management guidelines
Sales and marketing guidelines
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What are the allowed hedging instruments?What are the allowed
hedging instruments?(Cir. 594)(Cir. 594)
Universal banks and commercial banks cangenerally offer, among
others, the followinginstruments without prior BSP approval:
FX forwards, swaps, currency swaps up to 3
years
Interest Rate Swaps and Forward Rate
Agreement up to 10 years
Universal banks and commercial banks withappropriate derivatives
licenses can offerother derivatives/hedging instruments
Additional authority are granted upon on-site
validation of banks capacity
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Risk Management GuidelinesRisk Management Guidelines
Ensure banks have capacity and ability to manage risks
arising from engaging in derivatives activities, including
offering hedging products to clients.
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Sales & Marketing GuidelinesSales & Marketing
Guidelines
Prescribe minimum standards on
sales and marketing practices to
protect clients.
Ensure banks implement sound and
ethical sales and marketing
practices.
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Responsibilities of Banks OfferingResponsibilities of Banks
OfferingHedging FacilitiesHedging Facilities
A bank should ensure that:
a client understands the nature of the transaction;
the transaction meets the clients objectives and risk tolerance;
and,
there is sufficient, accurate and comprehensible information
disclosure regarding products offered.
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Client Suitability ProcessClient Suitability Process
A bank should ensure that the derivatives are appropriatefor
clients hedging needs through a client suitabilityprocess.
Obtain client information about financial situation,experience,
and objectives relevant to desired hedgingproducts/services.
A bank should ensure that the clients objectives areclearly
identified.
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DisclosuresDisclosures
To ensure clients understand the nature, benefits and
risks/costs of products.
Banks must explain products they offer to enable clients to
make informed decision.
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DisclosuresDisclosures
Minimum disclosures should be in writing; clients to signthe
disclosure statement to affirm of their receipt
andunderstanding.
Product disclosures: Nature of the products, including
underlying (e.g. FX rate) Tenor of instrument Fees and charges
Benefits from the instrument Risks
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Sales and Marketing PersonnelSales and Marketing Personnel
Should be knowledgeable about
derivatives being sold.
Bank should implement, and maintain a
comprehensive system of training of
personnel geared at enhancing technical
knowledge to enable them to understand,
explain the nature and risks of a banks
derivatives products and ensure client
suitability.
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Responsibilities of Board andResponsibilities of Board andSenior
ManagementSenior Management
BOD and SM are made liable
for acts committed by sales
and marketing personnel
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To hedge or not to hedge?To hedge or not to hedge?Advantages
Disadvantages
Protection against price movements
Not necessarily maximizes revenue or minimizes cost
Operational efficiency Cash flow must be known with reasonable
certainty
Improve budget forecasts Some hedging instruments involve cost
(e.g. FX options)
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SummarySummary BSP regulations provide dealer banks general
authority to
sell hedging products to clients: (FX) Forwards and (FX,Interest
rate) swaps with tenor restrictions
(FX) options may likewise be offered by banks withappropriate
derivatives licenses.
Prudential regulations ensure:
Banks have capacity to offer hedging facilities.
Banks implement sound and ethical sales and marketing
practices
to promote customer protection.
The decision to hedge a particular exposure shouldconsider risk
appetite, economic implication and financialsophistication
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Thank you!Thank you!Thank you!Thank you!
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