SEACEN – World Bank Seminar on Strengthening the Development of Debt Securities Market

Country Paper by the BSP Delegation

I. THE PHILIPPINES – A Brief Backgrounder

•The Philippine Islands are located in Southeastern Asia, the archipelago between the Philippine Sea and the South China Sea, south of Taiwan.

• In 1521, Spanish explorer Ferdinand Magellan came upon the islands during the first round-the-world voyage. The islands were governed by Spain until 1898 .

• The nation became the only official overseas colony of the U.S., following a naval victory over a Spanish fleet in Manila Bay. A U.S.-Filipino war followed the Spanish-American War and ended only when Emilio Aguinaldo, the Filipino leader, was captured by U.S. troops while in the course of negotiations. Aguinaldo did, however, extract a promise for independence by 1946 - a promise that was kept in spite of an intervening war and occupation.

•Other information

- Population: Over 81 Mln.

- Ethnic Background:

Malay – 94.5%

Chinese – 1.5%

Others – 3%

- Official Languages: Pilipino and English

• The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was established on 3

July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993.  The BSP

took over from the Central Bank of Philippines, which was established on 3 January 1949, as the country’s central

monetary authority. The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its

mandated responsibilities.

II. RECENT DEVELOPMENTS IN THE DEBT SECURITIES

MARKET

A. Objectives

• Section 2 of the Securities Regulation Code (SRC) provides:

“The State shall establish a socially conscious free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, minimize if not totally eliminate insider trading and other means of fraud.”

• Philippine Economic Plan of 2001

B. Profile of Domestic Debt Securities Market

• The Philippines’ Debt Securities Market – synonymous with market

for (RP) government securities

• The Central Bank of the Phils. was, since 1949, the issuer of government securities.

• In 1993, this responsibility was transferred to the Department of Finance.

• Since the formal issuance of government securities through the BSP following its

creation in 1949, the yearly volume of primary sales had been in uptrend from an initial float of PHP200mln to PHP1,832.491bln in 2003.

Value of transactions

(in millions)

Year Volume of Txns Peso USD Equivalent

1997 n.a. 612,574.22 20,961.34

1998 n.a. 2,016,077.79 49,129.49

1999 n.a. 3,427,541.38 87,537.77

2000 n.a. 3,773,674.96 86,829.00

2001 n.a.

2002 n.a.

2003 133,286 4,759,017.52 87,718.97

•Volume:

C. Existence of Rating Agency

• Benefits

- For Issuers or Rated Institutions

- For Investors

- For Intermediaries

The Philippine Rating Services Corporation (Philratings)

- Set up in 1982 by SEC, CB and Finex

- Organized to serve as third-party, objective source of business and individual information

- Founding member of AFCRA and ACRAA

- BSP approved to be recognized as a domestic CRA for bank supervisory purposes

• SEC Credit Rating Requirement

- Securities which will be offered for sale to the public are required by the SEC to secure a

credit rating from a qualified rating agency.

• BSP Initiatives

- BSP Circular No. 404 dated 19 September 2003 outlining the rules and regulations that shall

govern the recognition/derecognition of domestic credit rating agencies for bank

supervisory purposes.

D. Important Changes/Developments in the Domestic Debt Securities Market

• The Special Purpose Vehicle Act of 2002

• Elimination of DST on Secondary-Traded Instruments

- on secondary issues of debt instruments

- establish a market environment conducive to the trading of financial instruments, to increase volume of transactions in the secondary market

• The Securitization Act of 2004

- RA 9267 sets the legal and regulatory framework for the sale of assets as new securities to raise

capital for a favorable secondary market environment.

• Establishment by the Private Sector of the Fixed Income Exchange

III. THE IMPLICATIONS OF DOMESTIC BOND MARKET

DEVELOPMENT FOR CENTRAL BANK POLICY

A. Objectives of Monetary Policy

- BSP’s monetary policy is to promote a low and stable inflation conducive to a balanced and

sustainable economic growth

B. Bond Market Development and Transmission Mechanism of

Monetary Policy

- BSP policy rates, set by the MB, influence the benchmark 91-day T-Bill rate, commercial bank lending rates and the whole spectrum of market interest rates

C. The Benchmark Yield Curve

C. The Benchmark Yield Curve- For Phil. Gov. securities, the Bankers Association of the

Phils has come up with a Bloomberg page (Mart1) where the market can view fixing rates for benchmark tenors. These fixing rates are derived from various bid

quotes submitted by selected contributor banks. Fixing rates are normally based on done transactions.

In the absence of done deals, the fixing rates are computed based on the average of the top 60% of bids

submitted.

D. Marketable Securities

- Section 92, RA 7653

- RA 265 (1970)

- Short Term CB Bills (1984 – 1987)

- Medium and Long Term CB Notes/Bonds

E. Fiscal and Monetary Policy

- DOF: Fiscal function of issuing T-bills and bonds

- Independence of BSP via RA 7653

- Coordination of fiscal, monetary and exchange rate policies through DBCC

F. Role of the BSP in Supporting Securities Market Development

• MB approval of EFCDUs of universal and commercial banks to undertake foreign denominated securities lending activities to the international market (August 2003)

• MB approval of revised MOA on CSSTs (August 2003)

• BSP relaxes rules on sales of NPAs under SPV act of 2002 (February

2004)

• BSP Circular No. 428 on the rules and regulations governing securities custodianship and sec. registry operations of banks and NBFIs under BSP supervision (April 2004)

• BSP Circular No. 433 on the conditions to be met to allow banks to engage in repurchase agreements involving FX-denominated government securities (May 2004)

G. Asset-Backed Securities

- Special Purpose Vehicle Act

- Securitization Act of 2004

IV. KEY CHALLENGES IN DEVELOPING THE DOMESTIC DEBT SECURITIES MARKET

Impediments- Limited understanding by issuers of ABS as fund

raising tool

- Absence of common origination documentation standard

- Inadequacy of customer records

- Burdensome legal infrastructure and procedures (foreclosures)

- Inadequate external credit rating capacity

Impediments- Limited available issues

- Lack of liquidity mechanism

- Lack of trading conventions for ABS

- Lack of specialized ABS market-maker

- Shallow secondary market for fixed-income securities

- Lack of custodianship, clearing and settlement systems

• Impediments- Income taxation

- Other friction costs (e.g., regulatory fees, etc.)

END