Treasury Handbook 5-26-2014

Basic Handbook | Currencies, Interest Rates, Derivatives & Fixed Income Securities vii

Foreword

The Basic Currencies, Interest Rates, Derivatives and Fixed Income Securities Handbook is intended to introduce Treasury and Fixed Income products in a simplified manner to our most valued clients. This Basic Handbook aims to familiarize the reader with some of the more common terminologies, pricing metrics and market conventions used by foreign exchange and fixed income dealers and sales officers. Part I focuses on FX, Interest Rates and Derivative Hedging. A section discussing settlement lines and transactional documents required by the Bangko Sentral ng Pilipinas (BSP) is also included. Part I concludes with Frequently Asked Questions (FAQ) encountered by our sales team when inter-phasing with clients. Part II introduces various fixed income securities available to both institutional and retail clients. Part II also concludes with an FAQ section.

The Treasury Sales (FX & Rates Hedging) and Fixed Income Securities Distribution team of Security Bank would like to thank you for all your support and we look forward to solidifying and building a long lasting relationship!

Welcome to Security Bank.

Basic Handbook | Currencies, Interest Rates, Derivatives & Fixed Income Securities ix

Security Bank Corporations record of excellence continues to grow with the series of international acclaim the Bank consistently receives from prestigious organizations:

Awards and Distinctions

No. 1 in Asia Pacific for 2010 - Highest Return on Assets

Top Three Strongest Bank in the Philippines and 28th in Asia PacificThe Asian Banker 500 2011

Best Banking Group in the PhilippinesThe World Finance Banking Awards 2011

Best Managed Companies of the Philippines Mid-Cap Category, Finance Asia 2012 Annual Poll

Best Domestic Debt House in the Philippines for two consecutive yearsAsiamoney Best Bank Awards 2012

Best Performing Government Securities Eligible Dealer for six consecutive yearsBureau of Treasury 2011

Corporate Governance Asia Annual Recognition AwardsAmong the Best of Asia among publicly listed companies in the region for three consecutive years

Best Securities House for seven consecutive yearsPhilippine Dealing System (PDS) Cesar E.A. Virata Award 2011Top Rank in Four Categories:- Top Fixed-Income Cash Settlement Bank 2011- Top Fixed-Income Brokering Participant 2011- Top 5 Spot Foreign Exchange Dealer 2011 (ranking 3rd)- Top 5 Fixed-Income Dealing Participant 2011 (ranking 3rd)

Top Bank in the Secondary Market for Government Bonds, PhilippinesThe Asset Best Bond House 2012

Best Credit SalesAsiamoney 2012 FI Poll

Note: Awards and Distinctions as of January 2013

Bank of the Year - Philippines 2012 Bank of the Year Awards, The Banker Magazine

Strongest Bank in the PhilippinesThe Asian Banker 2012

Best Domestic Provider of Foreign Exchange (FX) Products and Services in the Philippines No. 1 in Four Categories:- Best Domestic Provider of FX Services as voted by Financial Institutions - Best Domestic Provider of FX Services as voted by Corporates - Best for FX Products and Services - Best for FX Research and Market Coverage in the PhilippinesAsiamoney 2012 FX Poll

Basic Handbook | Currencies, Interest Rates, Derivatives & Fixed Income Securities 01

Contents Page

Part IFX & Rates Hedging 03Frequently Asked Questions 49

Part IIFixed Income Securities 53Frequently Asked Questions 67

Glossary 73


FX & Rates Hedging

Treasury SalesFX and Rates Hedging Division


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Sale of Foreign Exchange (FX) to Residents for Non-Trade Transactions1. Non-Trade transactions shall refer to all foreign exchange transactions excluding

export and import transactions. These shall include foreign currency loans and foreign investments.

2. Resident shall refer to:

3. Non-resident shall refer to an individual, a corporation or other judicial person not included in the definition of resident.

4. For sale of FX to residents to cover payments to non-resident beneficiaries for NON-TRADE CURRENT ACCOUNT PURPOSE (e.g. educational expenses, medical expenses, travel expenses and salaries of foreign expatriates), the following documents shall be required:

4. 1 For sale not exceeding USD120,000.00 or its equivalent in other foreign currency

An individual citizen of the Philippines residing therein; or

An individual who is not a citizen of the Philippines but is permanently residing therein (resided in the Philippines for a year or more); or

A corporation or other juridical person organized person organized under the laws of the Philippines; or

A branch subsidiary, affiliate, extension office or any other unit of corporations or judicial persons which are organized under the laws of any country and operating in the Philippines, except Offshore Banking Units

a. Duly Accomplished Application to Purchase Foreign Exchange form (indicating specific purpose of the purchase of FX)

b. If the client is not an accountholder of the servicing branch:

Duly accomplished Application to Purchase Foreign Exchange (indicating specific purpose of the purchase of FX).

For individual client, presentation of the original and submission of clear copy of at least one (1) valid photo bearing identification document (ID) issued by an official authority. Branch personnel may require additional IDs to further establish the clients identity. For Corporation or a business entity, existing documentary requirements on account opening for business shall apply.

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4. 2 For sale of exceeding USD120,000.00 or its equivalent in other foreign currency

a. If client is an accountholder of the servicing branch:

Duly accomplished Application to Purchase Foreign Exchange form (indication the specific purpose of the purchase of FX).

Supporting documents as stated in the Appendix 1 of BSP Circular 645, as amended by Circular 742 and Circular 794, Item A

BSP CIRCULAR NO. 794Series of 2013Appendix 1

Minimum Documentation Requirements * for the Sale of Foreign Exchange (FX) **for Non-Trade Purposes by Authorized Agent Banks (AABs)/AAB-Forex Corps

A. Sale of FX for Non-trade Current Account Purposes under Section 2 of the Manual of Regulations on FX Transactions (FX Manual) 1

Purposes:Documents Required(All originals except as indicated)

1. Foreign travel funds Applicants passport and ticket

2. Educational expenses/student maintenance abroad

Photocopy of proof of enrolment with, or billing statement from, school abroad

3. Correspondence studies: Photocopy of proof of enrolment with, or billing statement from, school abroad

4. Medical expenses: Photocopy of billing statement (for services rendered/expenses incurred abroad) or certification issued by doctor/hospital abroad indicating cost estimate ( for the treatment/service to be administered/ rendered)

5. Emigrants assets (includinginheritance, legacies, and income from properties)

a. Photocopies of: Emigrants visa or proof of residence abroad; Notarized Deed of Sale of assets in the Philippines (e.g., real estate,

vehicles, machineries/ equipment, etc.); and Proof of income received from properties in the Philippines

b. In the absence of the emigrant, a notarized Special Power of Attorney (SPA) for emigrants representative/agent. If SPA was executed abroad, original of SPA authenticated by Philippine consulate abroad.

6. Salary/bonus/dividend/other benefits of foreign nationals (including peso savings)

a. Employment contract/Certification of employer showing amount of compensation paid to the foreign national during the validity of the contract, stating whether same had been paid in FX or in pesos; if in FX, proof that the FX was previously sold for pesos to AABs;

b. ACR I-Card and DOLE Alien Employment Permit of the foreign national;

c. Applicants notarized certification that the FX remitted is net of local expenses incurred and/or previous transfers abroad; and

d. If amount to be remitted comes from sources other than salaries/compensation, information regarding the sources supported by appropriate documents should be submitted.


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* a) All purchases of FX must be accompanied by duly accomplished application to purchase FX using the prescribed format (ANNEX A). b) It is understood that when a bank certification regarding its clients deposit account is required, the owner of the account should have executed a notarized waiver of secrecy of its deposit.** All FX purchases for non-trade transactions shall be directly remitted to the: (a) intended beneficiarys account (whether offshore or onshore); or (b) resident creditor bank, whose FCDU loans are eligible to be serviced with FX purchased from the banking system. Exceptions to this rule are: travel funds, medical expenses abroad not yet incurred, and sales proceeds of emigrants domestic assets if emigrant is still in the country.1 This includes FX purchases for down payments and progress billings for non-trade services to be rendered/rendered by non-residents, where applicable.


7. Foreign nationals income taxes due toforeign governments

a. ACR-I Card and DOLE Alien Employment Permit; andb. Photocopy of income tax return covering the income tax payment sought to be remitted.

8. Sales proceeds of foreign nationals domestic assets

a. ACR I-Card; andb. Photocopy of proof of sale of asset/s indicating currency of payment

9. Producers share in movie revenue/TV film rentals

a. Statement of remittable share rental or rental; andb. Photocopy of contract/agreement

10. Export commissions due to foreign agents

a. Billing statement from non-resident agent; andb. Photocopy of contract/agreement

11. Freight charges on exports/imports

a. Billing statement; andb. Photocopy of contract/agreement

12. Charters and leases of vessels/aircrafts

a. Billing statement from non-resident lessor/owner of vessel/aircraft; andB. Photocopy of contract/agreement

13. Leases of equipment and other capital goods owned and/or leased bynon-resident entities to residents

a. Billing statement from non-resident lessor and/or owner of the equipment and other capital goods;b. Photocopy of contract/agreement; andc. Shipping documents

14. Port disbursements abroad for aircraft and vessels of Philippine registry or chartered by domestic operators and salvage fees


15. Satellite and other Telecommunication services


16. Other services provided by non-residents (such as advertising, underwriting


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including brokers feesfor initial public offering involving Philippine shares, consultancy, information technology, etc.)

For underwriting fees/commissions/related expenses:a. Copy of the international underwriting agreement or similar agreement/contract which shows the fees/commissions and related expenses and offer price;b. Detailed computation of the amount subject for remittance certified by the authorized officer of the issuer; andc. Proof of listing of the IPO shares in the PSE

For Foreign Brokers Commissiona. Certified true copy of the covering purchase invoice or sales invoice, as the case may be, reflecting the commission due the foreign broker/dealer client; andb. Detailed computation/allocation of the commission due the foreign broker/dealer client for each purchase transaction

17. Share in Head Office Expenses (including reimbursements)

a. BSRD for the assigned capital in the branch;b. Audited schedule/s of allocation of expenses for the period/s covered;c. Certification from the Head Office that the share in Head Office expenses remains unpaid and outstanding; andd. Audited financial statements of the Philippine branch

18. Insurance/reinsurance premium due to foreign insurance companies

Billings/invoices of insurance companies/ brokers abroad

19. Claims against domestic insurancecompanies by brokers abroad

Billings/invoices from foreign insurer/ reinsurer

20. Net Peso revenues of foreign airlines/shipping companies

a. Statement of Net Peso Revenues (Peso revenues less expenses) certified by authorized officer of airline/shipping company; andb. Photocopy of contract/agreement

21. Royalty / copyright /franchise / patent/ licensing Fees

a. Statement/computation of the royalty/ copyright/franchise/patent/licensing fee; andb. Photocopy of contract/agreement.

22. Net Peso Revenues of embassies/consulates of foreign countries

Statement of net peso revenues (Peso revenues less expenses) certified by the Embassys/Consulates authorized officer

23. FX obligations of Philippine credit card companies to international credit card companies/non-resident merchants

Summary billings


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24. Refund of unused foreign grant/aid by from non-residents funded by inward remittance of FX that was converted to Pesos through AABs

a. Copy of the contract/agreement covering the foreign grant/aid;b. Request from grantor for the refund of the unused amount of grant/aid; andc. Bank certification on: i. Inward remittance of the foreign grant/aid and its conversion to the Philippine pesos; and ii. Balance of the PHP account from which the Philippine peso to be converted shall be debited

25. Refund of unused foreign loan proceeds that were funded by inward remittance of FX that was converted to Pesos through AABs

a. Copy of the contract/agreement covering the foreign loan;b. Request from creditor for the refund of the unused foreign loan proceeds; andc. Bank certification on inward remittance of the FX loan proceeds and conversion to Philippine pesos

26. Settlement by Philippine DepositInsurance Corporation (PDIC) of FCDU deposit claims2

Crtification by PDIC on the amount of deposit liabilities to be paid to resident and non-resident depositors

2 For the settlement by PDIC of FCDU deposit claims, supporting documents must be presented regardless of amount. Both resident and non-resident claims may be serviced.

b. If client is not an accountholder of the servicing branch:

Duly accomplished Application to Purchase Foreign Exchange form (indicating the specific purpose of the purchase of FX).

Supporting documents as stated in the BSP Circular No. 645 (Manual of Regulations on Foreign Exchange), as amended by Circular 698, Circular 742 and Circular 794, Item A of Appendix 1.


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BSP CIRCULAR NO. 794Series of 2013Appendix 1B.) Sale of FX for Servicing Foreign/Foreign Currency Loans including Prepayments by Private Sector covered by Sections 22 to 31 of the FX manual

Purposes:Documents Required(All originals except as indicated)3

Loan Payments

1. Medium/Long-term foreign/foreign currency loans (with original maturities of over 1 year)

a. Regular amortization/payment 1.a BSP registration letter and accompanying Schedule RA-2 (Part I: Schedule of Payments on BSP-Registered Foreign/FCDU Loans and Part II- Details of FX/Hedging Transactions for BSP-Registered Foreign/FCDU Loans); and1.b Copy of billing statement from creditor.Amounts that may be purchased shall be limited tomaturing amounts on scheduled due dates indicatedin the registration letter. Purchase and remittanceof FX shall coincide with the due dates of theobligations to be serviced, unless otherwise explicitly allowed by the BSP.

or

2.a BSP letter-authority for the borrower to purchase FXto service specific loan account/s and where applicable, the Schedule of Foreign Exchange Purchases from the Baking System; and2.b Copy of the billing statement from creditor.Amounts that may be purchased shall be limited to the unutilized balance of the letter authority. Remittance of FX purchased shall coincide with the due dates of the obligations to be serviced, unless otherwise explicitly allowed by the BSP.

a. If client is an accountholder of the servicing branch:

Duly accomplished Application to Purchase Foreign Exchange form (indicating the specific purpose of the purchase of FX).

Supporting documents as stated in the BSP Circular No. 645 (Manual of Regulations on Foreign Exchange), as amended by Circular 698, Circular 742 and Circular 794, Items B and C of Appendix 1

5. For sale of FX to residents to cover payments for NON-TRADE OBLIGATIONS THAT ARE FOREIGN CURRENCY LOAN-RELATED or FOREIGN INVESTMENT-RELATED, the following documents shall be required regardless of amount:


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3 All original documents shall be stamped FX-SOLD indicating the date and amount of FX sold, and whether on spot or forward basis and signed by the sellers authorized signatory.

2. Short-term foreign/foreign currency loans (with original maturity of up to 1 year)

a. Loans from offshore creditors (banks and non-banks)

b. Loans from FCDUs/OBUs

1.a BSP approval or registration letter showing loan terms and borrowers receiving copy of its report on short-term loans as submitted to BSPs International Operations Department (IOD); and

1.b Copy of billing statement from creditor.Amounts that may be purchased shall be limited to:(a) amounts/rates indicated in the BSP approval or registration letter; or (b) the outstanding balance of the loan indicated in the report, whichever is lower. Purchase and remittance of FX shall coincide with the due dates of the obligations to be serviced, unless otherwise explicitly allowed by the BSP.

For loans requiring BSP approval/registration:1.a BSP approval or registration letter showing loan terms;1.b Certification from the lending bank on the amount outstanding; and1.c Copy of the billing statement from the creditor.Amounts that may be purchased shall be limited to: (a) amounts/rates indicated in the BSP approval or registration letter; or (b) the outstanding balance of the loan indicated in the bank certification, whichever is lower. Purchase and remittance of FX shall coincide with the due dates of the obligations to be serviced, unless otherwise explicitly allowed by the BSP.

For loans not requiring BSP approval/individual registration4

2.a Promissory Note (PN) certified as true copy by the Head of the lending banks Loans Department:2.b Certification from the lending bank:i. On the principal amount still outstanding;ii. That the loan is eligible for servicing with FX to be purchased from the AABs/AAB-forex corps in line with existing regulations;iii. That the loan was used to finance trade transactions (as well as pre-export costs in the case of FCDU loans to exporters) of the borrowers; and

b. Prepayments of foreign/foreign currency loans of the private Sector that are not publicly-guaranteed

1.a BSP registration letter and accompanying ScheduleRA-2 (Part I: Schedule of Payments on BSP-Registered Foreign/FCDU Loans and Part II: Details of FX/Hedging Transactions for BSP-Registered Foreign/FCDU Loans; and1.b Original of the BSP letter acknowledging receipt of the borrowers notice of prepayment

4 Individual registration means a BSP registration document is required

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Payments related to Guarantees and similar arrangements (including Risk Take Over arrangements)

1. Payments by resident guarantor under the guarantee

2. Payments by the original resident obligor to the AAB/foreign guarantor arising from the call on the guarantee

3. For FX liabilities arising from guarantees and similar arrangements [including Risk Take Over Arrangements (RTO)] that do not involve foreign/FCDU loans

4. Regular fees related to Build-Operate-Transfer (BOT) and similar financing schemes with transfer provisions

iv. On the date when the loan account was reported to the appropriate BSP department/office under the prescribedforms. (This may be dispensed with for new loans which may not have been reported yet to BSP as of date of application to purchase FX.)

2.c Copy of the billing statement from creditor.Amounts that may be purchased shall be limited to amounts/rates indicated in the bank certification or PN, whichever is lower. Purchase and remittance of FX shall coincide with the due dates of the obligations to be serviced, unless otherwise explicitly allowed by the BSP.

a. For guarantees requiring BSP approval under Sections30.1 and 30.3: (i) BSP approval of the foreign/foreign currency obligation; and (ii) creditors call on the guaranteeb. For guarantees not requiring BSP approval and registration under Section 30.2(a): (i) copy of the required report stamped as received by the BSP; and (ii) creditors all on the guarantee

a. BSP approval of the resulting foreign/foreign currency obligation; andb. Billing statement from the AAB/foreign guarantor.

a. BSP approval of the resulting foreign/foreign currency obligation;b. Copies of:i. Agreements/contracts covered by the guarantee/similar arrangement;ii. Standby Letter of Credit (SLC) or guarantee contact/agreement for the guarantee;c. Proof/notice of original obligors default and creditors call on the guarantee; andd. Billing statement from the non-resident or local bank guarantor

a. BSP Registration Documentb. Copy of the covering agreements/contractsc. Billing statement from the private sector project company/proponent


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C.) Sale of FX for Servicing of Foreign Investments, Investments by Residents and Related Transactions Covered by Sections 32 to 44 of the FX Manual

Purposes:Documents Required(All originals except as indicated)5

Foreign Investments1. Capital Repatriation of:

a. Portfolio Investments in:i. PSE-listed securities

ii. Peso Government Securities

iii. 90-day time deposits

iv. Other peso-denominated debt securities issued onshore by private resident firms

b. Foreign Direct Equity Investments

BSRD or BSRD Letter-Advice from the registering custodian bank and any of the following:a. Photocopy of the original brokers invoice; orb. Electronically-generated copy of the brokers invoice; orc. Systems-generated copy of the brokers invoiceDocuments under items a to c shall contain the settlement amount, number of shares, investment identity, and settlement date for the transactions covered.BSRD or BSRD Letter-Advice from the registering custodianbank and photocopy of Confirmation of Purchase for Peso Government SecuritiesBSRD or BSRD Letter-Advice from the registering custodianbank and photocopy of Matured Certificate of Deposits for 90-day time depositsBSRD and photocopy of matured security, or proof of sale, or equivalent document covering the debt securites

a. BSRD;b. Photocopy of Proof of Sale or relevant documents showing the amount to be repatriated; in case of dissolution/capital reduction, proof of distribution of funds/assets such as statement of net assets in liquidation;c. Photocopy of Clearance from appropriate department of the BSP-Supervision and Examination Sector (for banks), or from the Insurance Commission (for insurance companies), from the Department of Energy or from the National Power Corporation (for oil/natural gas/geothermal companies);d. Detailed computation of the amount applied for in the attached format (Annex N) prepared by the selling stockholders representative;e. Photocopy of pertinent audited financial statements; andf. SEC clearance in case of dissolution, if applicable.

2. Remittance of Dividends/ Profits/Earnings/ Interests

a. BSRD or BSRD Letter-Advice;b. Photocopy of PSE-cash dividends notice and Phil.Central Depositoryv (PCD) printout of cash dividend payment or computation of interest earned issued by MMI issuer or bank;c. Photocopy of secretarys sworn statement on the Board Resolution covering the dividend declaration;

5 All original documents shall be stamped FX-SOLD indicating the date and amount of FX sold, and whether on spot or forward basis and signed by the sellers authorized signatory.

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d. Photocopy of latest audited financial statements or interim financial statements of the investee firm covering the dividend declaration period (for direct foreign equity investments);e. For direct foreign equity investments, photocopy of clearance pertaining to the investee firm from BSP-Supervision and Examination Sector (for non-PSE listed banks), Insurance Commission (for Insurance companies), Department of Energy or from the National Power Corporation (for oil/natural gas/geothermal companies); andf. Detailed computation of the amount applied for using the prescribed format (Annex N).

3. Outward remittance in equivalent FX of: (a) excess pesos funded with inward remittance of foreign exchange computed as follows: peso proceeds of foreign exchange inwardly remitted less the peso amount actually used for BSP-registered investment/s; plus (b) interest earned on the excess pesos, if any

a. Certified true copy of certificate of inward remittance of foreign exchange and conversion to pesos;b. Original BSRD showing utilization of not less than 50 percent of total peso proceeds, net of charges, if any. In case of investments registered by custodian banks, an original bank certification indicating details of the registered investment my substitute for the BSRD;c. Swift message/letter request from non-resident investor for return of excess funds;d. For remittance of interest earned from the peso cash account, certification from the depository/custodian bank on the amount of interest pertaining to the excess peso funds for outward remittance.

4. Investments by Philippine residents under Section 44 of the FX manual

a. Outward investments by residents in:

i. Debt and equity securities issued offshore by non-residents, including depositary receiptsii. Offshore foreign currency-denominated Mutual Funds and Unit Investment Trust Funds (UITFs)iii. Foreign currency-denominated intercompany loans to offshore parent companies/sudsidiaries of residents with an original tenor of at least one (1) yeariv. Investments in real property abroad, including condominium units

a A certification by the resident investor on the cumulative FX purchases from AABs and AAB-forex corps within the calendar year for all investments under Section 44 of the FX Manual;b. Original BSP letter-approval for the purchase of FX from AABs and AAB-forex corps for all investments under Section 44 of the FX Manual, in excess of the USD60 million limit;c. Photocopy of clearance from the Insurance Commission (IC) for investments of insurance companies;d. Photocopy of swift payment order instruction from the counterparty/broker/trader indicating the name of payee and type/kind of investment authenticated by the broker/trader (for instruments purchased offshore); or Proof of purcfhase of the debt securities by the resident client, namely: copy of the deal ticket, banks confirmation of sale, clients letter of instructions indicating intent to purchase the securities and other details of the transaction (for instruments held for sale/trading by banks); ande. Photocopy of any of the following as applicable: (i) investment proposal or agreement/subscription agreement/Deed of Sale or Assignment of the Investments/bond or stock offering/signed loan agreement or equivalent signed document, with an original tenor of at least one (1) year/Contract to Sell covering a sale of real property abroad; or photocopy of investors order/letter to broker/trader/bank to purchase instruments (such as investments in debt and equity securities, as well as depositary receipts, Mutual Funds and UITFs)


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b. Other investments by residents:

i. Bonds/notes of the Republic of the Philippines or other Philippine resident entities issued offshore, including peso-denominated bonds/notes requiring settlement in foreign currencyii. Instruments held for sale/trading by banks operating in the Philippines, namely: (i) bond/notes under item (a) hereof; and (ii) debt securities issued by non-residents and payable in foreign currencyiii. Equity securities issued by residents and listed abroad

All FX purchases for non-trade transactions shall be directly remitted to the: (a) intended non-resident beneficiarys account (whether offshore or onshore); or (b) resident creditor bank, whose FCDU loans are eligible to be serviced with FX purchased from the banking system. Exceptions to this rule include travel funds, medical expenses abroad not yet incurred, and sales proceeds of emigrants domestic assets if emigrant is still in the country.

b. If client is not an accountholder of the servicing branch:

Duly accomplished Application to Purchase Foreign Exchange form (indication the specific purpose of the purchase of FX).

Supporting documents as stated in the BSP Circular No. 645 (Manual of Regulations on Foreign Exchange), as amended by Circular 698, Circular 742 and Circular 794, Items B and C of Appendix 1


6. All foreign exchange purchases for non-trade transactions shall be directly remitted to the (a) intended non-resident beneficiarys account (whether offshore or onshore); or (b) resident creditor banks, whose Foreign Currency Deposit Unit (FCDU) loans are eligible to be serviced with foreign exchange purchased from the banking system. Exceptions to the rule include travel funds, medical expenses abroad not yet incurred and sale proceeds of emigrants domestic assets if emigrant is still in the country.

7. Sale of FX to residents for payment of foreign exchange obligations to residents other than authorized agent banks and direct credit or deposit in a foreign currency deposit unit account are STRICTLY NOT ALLOWED.

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Amounts that may be purchased shall be limited to: (a) amounts/rates indicated in the BSP approval or registration letter; or (b) the outstanding balance of the loan indicated in the bank certification, whichever is lower. Purchase and remittance of FX shall coincide with the due dates of the obligations to be serviced, unless otherwise explicitly allowed by the BSP.

1. Duly accomplished Application to Purchase Foreign Exchange form

2. Loans from Foreign Currency Deposit Units (FCDUs)/ Offshore Banking Units (OBUs):

a. BSP approval or registration letter showing loan terms or certification from the lending bank on the amount outstanding; and

b. Copy of billing statement from creditor.

Documentary Requirements for Short-termForeign Currency Loans With Original Maturityof Up to 1 year with Security Bank:

Amounts that may be purchased shall be limited to amounts/rates indicated in the bank certification or PN, whichever is lower. Purchase and remittance of FX shall coincide with the due dates of the obligations to be serviced, unless otherwise explicitly allowed by the BSP.

Or:

a. For loans not requiring BSP approval/ individual registration, Promissory Note (PN) certified as true copy by the Head of the lending banks Loans Department and certification from the lending bank:

b. Copy of billing statement from creditor.

i. On the principal amount still outstanding;

ii. That the loan is eligible for servicing with FX to be purchased from the Authorized Agent Banks (AAB)/ Authorized Agent Banks-forex corps in line with existing regulations;

iii. That the loan was used to finance trade transactions (as well as pre-export costs in the case of FCDU loans of exporters) of the borrower; and

iv. On the date when the loan account was reported to the appropriate BSP department/office under the prescribed forms. (This may be dispensed with for new loans which may not have been reported yet to BSP as of date of application to purchase FX.)


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AABs and AAB-forex corps may sell foreign exchange to service payments for imports under any of the following arrangements subject to the provisions of Sections 9 to 13 and the guidelines covering the sale of foreign exchange for trade transactions under Appendix 4 of BSP Circular 645. Definitions of the types of trade transactions are found on Glossary of Terms of BSP Circular 645.

Letter of Credit (L/C), which gives the seller assurance that he will receive the payment for the goods, is binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller. In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame.

Documents Against Payment (D/P) is an arrangement under documentary collection in which an exporter instructs the presenting bank to hand over shipping and title documents to the importer only if the importer fully pays the accompanying bill of exchange or draft.

Trade Transactions

Documents Against Acceptance (D/A) is an arrangement under documentary collection in which an exporter instructs the presenting bank to hand over shipping and title documents to the importer only if the importer accepts and signs the accompanying bill of exchange or draft.

Open Account (O/A) is an arrangement whereby the shipping documents are sent and released by the exporter directly to the buyer, without coursing the documents through the banks, upon the buyers promise to pay at some future date after shipment.

Direct Remittance (DR) is a supplier-buyer arrangement where payment is made within 29 calendar days from bill of lading/airway bill date.

Advance Payment is an arrangement between the seller and buyer where the buyer pays, either partial or full, the seller prior to the shipment of the goods.

Documentary requirements for sale of FX on Importations under Letter of Credit (L/C), Documents against Acceptance (D/A), Open Account (O/A), Documents against Payment (D/P), Direct Remittance (DR) and Advance Payment:

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Letters of Credit (LC) Copy of LCOriginal Shipping documents

Bill of Lading or Airway Bill

Invoice

Document against Acceptance (DA)

Accepted Draft

Original Shipping documents


Invoice

Open Account (OA)Proof of Report to BSP



Invoice

Document against Payment (DP)

Collection Letter/Instruction



Invoice

Direct Remittance (DR)Original Shipping documents


Invoice

Advance PaymentPurchase Order

Sales Contract or Proforma Invoice signed by both parties

Notarized Letter of Undertaking


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Sale of Foreign Exchange via Derivative Products The tenor and maturity of such contracts shall not be longer than: (i) the maturity of the underlying foreign exchange obligation; or (ii) the approximate due date or settlement of the foreign exchange exposure. The tenor/maturity shall be co-terminus with the maturity of the underlying obligation or the approximate due date or settlement of the foreign exchange exposure. This shall not preclude pre-termination of the contract due to prepayment of the underlying obligation or exposure, provided, that for foreign currency loans, prior BSP approval has been obtained for the prepayment and a copy of such approval is presented to the AAB counterparty.

Only non-trade transactions with specific due dates shall be eligible and shall be subject to the same documentation requirements under Appendix 1 of BSP Circular 645, with the following additional guidelines for foreign currency loans.

Foreign Currency Loans owed to non-residents or AABs

The maturing portion of the outstanding eligible obligation, i.e., those that are registered with the BSP, including interest and fees thereon as indicated in the BSP registration letter, may be covered by derivatives subject to the documentary requirements indicated above. A copy of the creditors billing statement may be submitted on or before the maturity date of the contract.

Pre-termination of the contract due to prepayment of the underlying obligation or exposure is allowed provided, that for foreign currency loans, prior BSP approval has been obtained for the prepayment and a copy of such approval is presented to the AAB counterparty.

List of Minimum Documentary Requirements for Foreign Exchange Sale through Derivative ProductsUnless otherwise indicated, original documents shall be presented on or before deal date to banks.

1. Non-trade Transactions

Hedging Foreign Exchange Purchases of Clients

Tenor and Maturity and Settlement for Trade and Non-trade Transactions

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Sale of Foreign Exchange to Cover Obligations via Derivatives

Sale of Foreign Exchange to Cover Exposures via Derivatives

Under Letters of Credit (LC)

Copy of LC opened; and

Accepted Draft or Commercial Invoice / Bill of Lading

Under Letters of Credit (LC)

Copy of LC opened; and

Proforma Invoice, or Sales Contract / Purchase Order

Under Documents against Acceptances (DA)/Open Account (OA) Arrangements

Certification of reporting bank on the details of DA/OA under Schedule 10

Copy of Commercial Invoice

Under Documents against Acceptances (DA)/Open Account (OA) ArrangementsAny of the following where delivery or shipment shall be made not later than one (1) year from deal date:

Sales Contract

Confirmed Purchase Order

Accepted Proforma Invoice

Shipment/Import Advice of the Supplier

Direct Remittance

Original shipping documents indicated in Item II.a of Appendix 4 of the BSP Circular 645

In addition to the above requirements, the bank shall require the customer to submit a Letter of Undertaking that:

i. Before or at maturity date of the derivatives contract, it (the importer) shall comply with the documentation requirements on sale of foreign exchange for trade transactions under Appendix 4 of the BSP Circular 645; and

ii. No double hedging has been obtained by the customer for the covered transactions.

2. Trade Transactions


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Trust ReceiptsTrust receipts can only be dealt through the spot market.

Below is the regulation of Trust Receipts Transactions under Presidential Decree No. 115:

Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible as part of international reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other agreements executed between the entruster and the entrustee.

Bank Processing

Cut Off with Branch: 12:00pm cut off for funding

Standard Charges*:Cable fee of USD20.00Commission of 1/8 of 1% of the Principal USD Amount

Philippine Dollar Domestic Transfer System (PDDTS)

Real Time Gross Settlement (RTGS)

Cut Off with Branch: 12:00pm cut off for funding

Standard Charges*:Commission of PhP100.00Cable of PhP300.00Accounts Payable RTGS : Amount x .00001, minimum of PhP100, maximum of PhP400.00Below PHP10,000,500.00 - Minimum of P100.00 PHP10,000,500.00 X .00001 - rounded off to the nearest peso. Above PHP40,000,000.00 - maximum of PHP400.00

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PHP0.30 for every 200 or fraction thereof of Peso Notional. Peso Notional will be roundest off to nearest amount divisible by 200.*

Standard Charges*:Commission of USD5.50Additional documentary stamp charges of PHP0.30 for every 200 or fraction thereof of Peso Notional apply if Peso account is credited.

Standard Charges*:Cable fee of USD20.00Commission of 1/8 of 1% of the Principal USD AmountIf the correspondent bank charge is OUR wherein the client is the remitter and all charges will be debited from his/her account, the charges are the following:

Documentary Stamp Charges for Peso funded deals for International Transactions

Outward Telegraphic

Inward Remittance

a. For USD and other Third Currency**

USD15.00 or its Peso equivalent at Selling Rate

b. For JPY Currency** EUR40.00 or its USD/PHP equivalent at Selling Rate

c. For EUR Currency** EUR40.00 or its USD/PHP equivalent at Selling Rate

d. For HKD Currency** HKD300.00 or its USD/PHP equivalent at Selling Rate

e. For AUD Currency** AUD20.00 or its USD/PHP equivalent at Selling Rate

f. For SGD Currency** SGD20.00 or its USD/PHP equivalent at Selling Rate

g. For NZD Currency** NZD60.00 or its USD/PHP equivalent at Selling Rate

h. For GBP Currency** GBP20.00 or its USD/PHP equivalent at Selling Rate

i. For CNY Currency** USD15.00 or its Peso equivalent at Selling Rate

*Rates are subject to change

**Subject to change, and billing received from the Beneficiary Bank

Additional documentary stamp charges of PHP0.30 for every 200 or fraction thereof of Peso Notional apply if Peso account is debited.


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Understanding Foreign ExchangeSpot Transactions

Commodity and Terms Currency

Bid and Offer Rate

USD/PHP = 41.50

USD/PHP = 41.50/41.52

Commodity Currency : The currency that is being bought or sold The currency that is being priced Normally, it is the left side of the currency

pair Normally, it is the USD

Examples: USD/PHP, USD/JPY, USD/SGDUSD/CAD, USD/CHF ...

Bid Rate : This is the BUYING rate of the bank This is the price at which the BANK will

BUY the commodity currency In the example above, the bank will buy USD

1 and pay PHP 41.50 Consequently, this is where the CLIENT can

SELL the commodity currency In the example above, the client can sell USD

1 and receive PHP 41.50

Terms Currency : The price for one unit of the commodity The amount of currency that paid for 1 unit

of the commodity currency Normally, it is the right side of the currency

pair Normally, it is the not the USD

Examples: USD/PHP, USD/JPY, USD/SGDUSD/CAD, USD/CHF ...

Offer Rate : This is the SELLING rate of the bank This is the price at which the BANK will

SELL the commodity currency In the example above, the bank will sell

USD 1 and receive PHP 41.52 Consequently, this is where the CLIENT

can BUY the commodity currency In the example above, the client can sell

USD 1 and receive PHP 41.52

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FX Risks

Interest Rate Risks

FX risk is the risk that is brought about by adverse foreign exchange movements.

For a Philippine exporter an adverse FX movement would be if the Peso appreciates, then they will receive less Pesos for every USD they sell.

For a Philippine importer, an adverse FX movement would be if the Peso depreciates, then they will need more Pesos for every USD they buy.

For international investors, Peso appreciation or depreciation can cause the value of their USD investments to either decrease or increase.

Interest rate risk is the risk that is brought about by adverse movements in interest rate levels.

Investors who invested in fixed interest bearing assets (e.g. T-bills, T-notes, Bonds) will experience a capital loss (opportunity loss) if market interest rates start to increase over the life of the investment (i.e. they will get the Yield to Maturity at the time of investment vs. a now higher market yield).

Borrowers with fixed interest rate liabilities (e.g. loans) will have to pay a higher rate relative the market rates if loan rates begin to fall over the life of the loan.

Borrowers with floating interest rate liabilities (e.g. loans) will have to pay a higher rate if market interest rates begin to rise over the life of the loan.

What is a Derivative A security whose value, and hence price, is dependent on or derived from one or

more underlying assets. The derivative itself is merely a contract or agreement between two or more parties. The value of the derivative is determined by fluctuations in the underlying asset. The most common underlying assets include commodities, currencies, stocks, bonds, interest rates and market indices.

Derivatives are generally used as an instrument to hedge risk in the underlying asset.


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What is a Hedge

Risk-On/Risk-OffRisk Appetite/Risk Aversion

Getting into a derivative transaction to reduce or eliminate the risk of unfavorable price movements in an asset.

Normally, a hedge consists of taking an offsetting (opposite) position in a related security, such as a forward contract

Example of a hedge would be if an exporter were to receive US dollars in the future, say 30 days from now, the exporter can enter into a Forward Contract to sell your dollars 30 days from now to hedge his FX exposure. By entering into a Forward Contract to sell USD vs. PHP, the exporter is able to lock in a price today for settlement in the future (i.e. 30 days from now).

An investment sentiment in which price behavior responds to, and is driven by, changes in investor risk tolerance.

Risk-on / Risk-off refers to changes in investment activity in response to global economic patterns.

Against the US dollar, the Philippine Peso is as a riskier currency.

During periods when risk is perceived as low, investors tend to engage in higher-risk investments.

When risk is perceived as high, investors have the tendency to be inclined toward lower-risk investments.

In a risk-on environment, where investors look for riskier assets (e.g. Philippine Government Securities) the Peso usually appreciates against the USD Dollar.

In a risk-off environment, where investors look for safer assets (e.g. US treasuries) the Peso usually depreciates and weakens against the US Dollar.

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Risk Aversion A description of an investor who, when faced with two investments with a similar

expected return but different perceived risks, will prefer the one with the lower risk.

A risk-averse investor dislikes risk, and therefore will stay away from adding high-risk stocks or investments to their portfolio. Investors looking for safer investments will generally stick to index funds and government bonds, which generally have lower returns.

A FX forward contract is a contract that locks in the price today at which an entity can buy or sell a currency for settlement on a future date.

Also known as deliverable forward or a plain vanilla forward.

All the terms of the contract (i.e. whether the client is buying or selling USD, the FX Forward Rate, the Amount, settlement date, etc.) are agreed upon on transaction date.

In FX forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity and on a specified future date. These contracts cannot be transferred.

FX Forwards (Deliverable)

FX Forwards (Deliverable) - What is the forward rate? The forward rate is not the same as the spot price

The forward rate is not a projection

The forward rate is the Future Value of the Spot rate given current interest rates

It follows the concept of Time Value of Money

Forward Rate formula:

Forward Rate = Spot Rate + Swap PointsSwap Points = Spot Rate * IRD * T/360IRD = PHP interest rate USD interest rate

Similar to Future Value formula:

Future Value = Present Value + InterestInterest = Principal (PV) * Rate * T/360


The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

PHP 1,000 today is greater thanPHP 1,000 in the future.

For example, assuming a 5% interest rate, PHP1,000 invested today will be worth PHP1,050 in one year (PHP1,000 + (PHP1,000 x 5%) = PHP1,050; or PHP1,000 x 1.05 = PHP1,050).

Conversely, PHP1,000 received one year from now is only worth PHP952.40 today (PHP1,000 / 1.05), assuming a 5% interest rate.

Time Value of Money

Example to compute for a 3-month forward rate:

Spot rate = 41.50PHP interest rate (PHIREF) = 1.4029%USD interest rate (SIBOR) = 0.4600%Tenor = 92 days

(1) IRD = PHP interest rate USD interest rate = 1.4029% - 0.4600% = 0.9429%

(2) Swap Points = Spot rate * IRD * T/360 = 41.50 * 0.9429% * 92/360 = .10

(3) Forward Rate = Spot rate + Swap points = 41.50 + .10 = 41.60

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FX Forwards (Deliverable) - Example

FX Forwards (Deliverable) - Forward Sell

An exporter will receive USD proceeds 3 months from now from their export sales

The client wishes to hedge their USD export proceeds to protect their FX exposure from FX risk due to the volatility of the USD/PHP

The client enters into a 3-month forward contract with a forward price of 41.60

Benefit: Whether USDPHP goes above or below 41.60, client is able to sell at 41.60, By eliminating foreign exchange risk, FX appreciation or depreciation will not affect the clients expected profit/loss.

Downside: The forward contract does not allow the client to gain when FX moves in the favor of their exposure.

Benefit to the USD Seller:When you enter into an FX forward contract to sell USD, you are locking in the forward price, and will sell your USD holdings at the pre-computed forward price on settlement date. You are protected 100% if rates move against you (when the PHP appreciates), but you may not benefit when rates move in your favor (when the PHP depreciates).

Payoff profile:The horizontal line (the x-axis) represents the spot price at expiration. The vertical axis (the y-axis) illustrates the profit/loss as the spot price moves along the x-axis.

Long Underlying Asset

Forward Sell Hedge

Hedge Outcome


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FX Forwards (Deliverable) - Forward BuyBenefit to the USD Buyer:When you enter into an FX forward contract to buy USD, you are locking in that forward price and will buy your USD requirements at the pre-computed forward price on settlement date. You are protected 100% if rates move against you (when the PHP depreciates), but you may not benefit when rates move in your favor (when the PHP appreciates).

A non-deliverable forward contract is a contract that locks in the price today at which an entity can buy or sell a currency on a future date (similar to a plain vanilla forward contract).

Unlike a deliverable forward, there are no exchanges of principal amounts on settlement date. There is a net-settlement of amounts where the profit or loss computed on settlement date is exchanged. The net settlement amount is calculated by taking the difference between the pre-computed NDF exchange rate (i.e. forward rate) and the prevailing exchange rate (11:30 am weighted average for USD/PHP NDFs) at the time of settlement multiplied by the notional amount of funds.

Payoff profile:The horizontal line (the x-axis) represents the spot price at expiration. The vertical axis (the y-axis) illustrates the profit/loss as the spot price moves along the x-axis.

Non-Deliverable Forwards (NDFs)

Long Underlying Asset

Forward Sell Hedge

Hedge Outcome

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An exporter will receive USD proceeds 3 months from now from their export sales

The client wishes to hedge their USD export proceeds to protect their USD revenues.

The client enters into a 3-month (92 days) non-delivarable forward contract with a forward price of 41.60

Scenario 1 - Assume the PHP Appreciates

On the 91st day, assume USD/PHP AM WT AVE. exchange rate is 40.60 (11:30am fixing rate)

Net settlement amount:

41.60 40.60 = +1.0 (i.e. client receives)

Client can sell USD holdings at current market price of 40.60

Net effect to client:

40.60 + 1.0 = 41.60 hedge cost

Scenario 2 - Assume the PHP Depreciates

On the 91st day, assume USD/PHP AM WT AVE. exchange rate is 42.60 (11:30am fixing rate)

Net settlement amount:

41.60 42.60 = -1.0 (i.e. client pays)

Client can sell USD holdings at current market price of 42.60

Net effect to client:

42.60 1.0 = 41.60 hedge cost

Non-Deliverable Forwards (NDFs) - Example

All NDFs have a fixing date and a settlement date.

The fixing date, which is one business day before the settlement day for USD/PHP NDFs, is the date at which the difference between the prevailing market exchange rate (fixing rate) and the agreed upon exchange rate (forward rate) is calculated.

The settlement date is the date by which the payment of the difference is due to the party receiving payment. Settlement of the difference is in PHP.


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FX Swaps

An FX swap is an agreement between two parties to exchange 2 cash flows over a specified period. The 1st exchange is called the Near Leg. the 2nd exchange which happens in the future is called the Far Leg.

The cash flows that the counterparties exchange are tied to the value of foreign currencies (i.e. Spot rate for the near leg and the Forward rate for the far leg.)

An FX swap is a contract that simultaneously agrees to buy (or sell) an amount of currency at an agreed rate and to resell (or repurchase) the same amount of currency for a later value date to (from) the same counterparty, also at a pre-computed rate (i.e. the forward rate).

There are TWO (2) simultaneous transactions in an FX SWAP Transaction:

A SPOT DEAL and an off-setting FORWARD DEAL.

Buy Spot and Sell Forward : Buy/Sell Swap

Sell Spot and Buy Forward : Sell/Buy Swap

In this FX Swap transaction, you buy USD today and pay PHP;and in the future, you sell the USD that you boughtand receive PHP

In this FX Swap transaction, you sell USD today and receive PHP;and in the future, you buy back the USD that you soldand pay PHP

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Pricing mechanics is same as Forwards

Use Spot rate for SPOT DEAL

Use Forward Rate for the FORWARD Deal

Example 3 month SELL/BUY FX Swap Transaction:

Company has USD but:

Needs PHP now for operational expenses

Needs USD after three months for importation

Assume the following rates:

Spot Rate : 41.50

Forward Rate : 41.60

An Illustration:

On Spot Date On Maturity Date

DAY 1:Company sells USD at spot rate of 41.50 while simultaneously entering into a forward buy at forward rate of 41.60

The company sells its USD holdings and receives PHP for operational expenses

DAY 91:Company buys USD at forward rate of 41.60

The company buys back its USD to pay for importations and pays PHP


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FX Options

Option Buyers

CALL Options

Kinds of FX Options

Option Sellers

PUT Options

If you BUY an Option, you have the RIGHT but not the OBLIGATION to exercise the contract

You have a choice

You pay a Premium for that RIGHT/CHOICE

If you BUY a Call Option, you have the right to buy USD

If you SELL a Call Option, you have the obligation to sell USD if the buyer chooses to exercise the option

If you SELL an Option, you have the OBLIGATION to perform what is stipulated in the contract

You DONT have a choice

You receive the Premium for the OBLIGATION

If you BUY a Put Option, you have the right to sell USD

If you SELL a Put Option, you have the obligation to buy USD if the buyer chooses to exercise the option

A foreign-exchange option (FX option or currency option) is a financial derivative instrument that gives:

The FX Option Buyer the right, but not the obligation, to perform what is stipulated in the FX option contract at a pre-agreed strike price on a specified expiration date.

The FX Option Seller, the obligation to perform what is stipulated in the FX Option contract should the FX Option Buyer choose to exercise his/her rights.

Option Buyers and Option Sellers

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Which FX Option is for your company?

Terminologies

USD BUYERS: USD SELLERS:

BUY A CALL OPTION You have the right to buy USD

SELL A PUT OPTION You have an OBLIGATION to buy USD (if Put Option buyer decides to exercise the right to sell)

BUY A PUT OPTION You have the right to sell USD

SELL A CALL OPTION You have an OBLIGATION to sell USD (if Call Option buyer decides to exercise the right to buy)

STRIKE PRICE - the pre-agreed exchange rate; the agreed upon price at which the option buyer would exercise the contract

EXPIRATION DATE - the specified date; the date at which the option may be exercised (to exercise the right to perform what is stipulated in the FX option contract)

MONEYNESS

At The Money(ATM)

Call OptionOption that gives holder the right to buy

Put OptionOption that gives the holder the right to sell

In The Money(ITM)

Out of The Money(OTM)

STRIKE = FWD

STRIKE = FWD

STRIKE < FWD

STRIKE > FWD

STRIKE > FWD

STRIKE < FWD


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Factors Affecting Option Prices

Example: Buying a Put Option

Notional AmountThe larger the notional amount, the more expensive the option

Interest RatesAffects the future value of the underlying asset MoneynessIn The Money (ITM) > At The Money (ATM) > Out of The Money (OTM)

TenorThe longer the tenor, the more expensive the option Volatility of underlying assetThe higher the volatility, the more expensive the option Option Type

American Style Exercise - An FX Option that can be exercised one time, anytime until the expiration date. American exercise type options are more expensive than European exercise type options.

European Style Exercise - An FX Option that can only be exercised at the expirations date.

Notional : USD100,000.00

Strike : 41.20

3 month FWD price : 41.60

Tenor : 3 months

Premium : PHP 32,000.00 (.32 cents)

Strike < Fwd price (i.e. Put Option is Out of The Money (OTM))

If on expiration date exchange rate is: USDPHP 40.80

Client will exercise the Put Option (the right to sell at the strike price)

Client will sell USD100,000.00 at the Strike price of 41.20

Average Price is 41.20 - .32 (premium) = 40.88

Better Average Price than Market Price of 40.80

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Payoff Profile - Buying a Put Option (1/3)This Hockey Stick illustrates the payoff profile at expiration for buying a Put Option. The horizontal line (the x-axis) represents the spot price at expiration. The vertical axis (the y-axis) illustrates the profit/loss as the spot price moves along the x-axis.

If spot falls to the right of the strike price (where the option buyer has the right to sell USD) of 41.20, the put option is worthless as the put option buyer will not exercise the put option and will just sell at the prevailing market price.

If spot falls to the left of the strike price, the option will gain value because the put option buyer will exercise the put option.

The graph shows that the USDPHP has to be trading below 40.88 to break even (strike price of 41.20 minus premium of PHP0.32 per USD).

Payoff Profile - Buying a Put Option (2/3)In this diagram, the diagonal broken line represents the payoff profile of someone who is long USDPHP (holding USD). The intersection of the broken line and horizontal line (price of USDPHP) is the break even point, or the cost of the USD to the USD holder.

If spot falls to the right of the break even point (i.e. when the PHP depreciates), the USD holder experiences a gain as the USD holder can sell his/her USD holdings above the break even level.

If spot falls to the left of the break even point (i.e. when the PHP appreciates), the USD holder experiences a loss as the USD holder may sell his/her USD holdings below the break even level.


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Payoff Profile - Buying a Put Option (3/3)This diagram shows the combined payoff profile for someone who has a long USD exposure and hedged that exposure by buying a put option. The combined/resulting hockey stick in solid line shows that all downside risk has been eliminated (i.e. flat to the left of the strike price) while all upside benefits remain (i.e. increasing P/L as FX rates move to the right of strike price of 41.20).

Buying a Put Option to hedge your USD proceeds shows that the company is 100% protected at exchange rates below the strike price of 41.20 (to the left of the strike price), as the company can sell at the strike price.

If the spot price on expiration date falls above the strike price of 41.20, the hedge begins to show gains as the client can now sell at the prevailing market price.

Example: Buying a Call Option

Notional : USD100,000.00

Strike : 41.80

3 month FWD price : 41.60

Tenor : 3 months

Premium : PHP 32,000.00 (.32 cents)

Strike > Fwd price (i.e. Call Option is Out of The Money (OTM))

If on expiration date exchange rate is: USDPHP 42.30

Client will exercise the Call Option (the right to buy at the strike price)

Client will buy USD100,000.00 at the Strike price of 41.80

Average Price is 41.80 + .32 (premium) = 42.12

Better Average Price than Market Price of 42.30

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Payoff Profile - Buying a Call Option (1/3)This Hockey Stick illustrates the payoff profile at expiration for buying a Call Option. The horizontal line (the x-axis) represents the spot price at expiration. The vertical axis (the y-axis) illustrates the profit/loss as the spot price moves along the x-axis.

If spot falls to the left of the strike price (where the option buyer has the right to buy USD) of 41.80, the call option is worthless as the call option buyer will not exercise the call option and will just buy at the prevailing market price.

If spot falls to the right of the strike price, the option will gain value.

The graph shows that the USDPHP has to be trading above 42.12 to break even (strike price of 41.80 plus premium of PHP0.32 per USD).

Payoff Profile - Buying a Put Option (2/3)In the diagram below, the diagonal broken line represents the payoff profile of someone who has a short USDPHP position (or a requirement to buy USD). The intersection of the broken line and horizontal line (price of USDPHP) is the break even point.

If spot falls to the left of the break even point (i.e. when the PHP appreciates), the short USD position experiences a gain as he/she can buy their USD requirement above the break even level.

If spot falls to the right of the break even point (i.e. when the PHP depreciates), the short USD position experiences a loss as he/she can only buy the USD requirement below the break even level.


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Payoff Profile - Buying a Put Option (3/3)This diagram shows the combined payoff profile for someone who has a short USD exposure and hedged that exposure by buying a call option. The combined/resulting hockey stick in solid line shows that all upside risk has been eliminated (i.e. flat to the right of the strike price) while all downside benefits remain (i.e. increasing P/L as FX rates move to the left past the strike price of 41.80).

Buying a Call Option to hedge your USD requirement shows that the company is 100% protected at exchange rates above the strike price of 41.80 (to the right of the strike price), as the company can buy at the strike price.

If the spot price on expiration date falls below the strike price of 41.80, the hedge begins to show gains as the client can now buy at the prevailing market price.

An interest rate swap is a bilateral contract committing each party to make payments to the other at regular intervals over an agreed period.

The amount to be paid for each leg is calculated on a different basis (i.e. fixed rate, floating rate, or based on a specified formula agreed by both parties) and is based on equal notional amounts.

Typically, there is no exchange of principal amounts and the interest payments are netted against each other. Settlement is usually within a T+2 basis, T+1 basis for a PHP IRS.

Interest Rate Swap (IRS)

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Example

Notional Amount : $1,000,000

Tenor : 2 years

Payment Frequency : Quarterly

Reset Frequency : Quarterly

Leg 1 : Pay 2.00% fixed p.a.

Leg 2 : Receive 3M LIBOR

There will be no cash exchange at start date.

Every quarter, client will pay interest differential of 2% and 3M LIBOR. Floating interest rate (3M LIBOR) will reset every quarter.

There will be no cash exchange at maturity.

Pay Fixed, Receive Float:

What you Have : Floating Rate Loan

Your View : Interest rates will increase during the next two years.

What You Want : To manage interest rate risk and lock-in your interest payments while rates are relatively low.


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Example


Tenor : 2 years


Reset Frequency : Quarterly

Leg 1 : Receive 2.00% fixed p.a.

Leg 2 : Pay 3M LIBOR

There will be no cash exchange at start date.

Every quarter, client will receive interest differential of 2% and 3M LIBOR. Floating interest rate (3M LIBOR) will reset every quarter.

There will be no cash exchange at maturity.

Receive Fixed, Pay Float:

What you Have : Fixed Rate Loan

Your View : Interest rates will decrease during the next two years.

What You Want : To take advantage of decreasing interest costs.

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What you Have : You have excess funds in Currency B (ex. Peso)

Your View : Interest rates in Currency B will decrease during the next two years or you can borrow Currency B at low fixed rates.

What You Want : Funds in Currency A (ex. Dollar) with fixed interest payments.

A cross currency swap is a bilateral contract to exchange a series of future interest payments denominated in two different currencies at an agreed interest rate and exchange rate.

The amount to be paid for each leg is calculated based on a fixed rate, a floating rate, or a specified formula agreed by both parties and is based on equal notional amounts. Principal amounts may or may not be exchanged at the start and at maturity.

A CCS can be structured as either a fixed-for-fixed, fixed-for-float, or float-for-float agreement and is usually settled within a T+2 basis, T+1 basis for a USD/PHP CCS

Pay Fixed (Currency A), Receive Fixed (Currency B)

Example


Exchange Rate : 41.25

Tenor : 2 years


Leg 1 : Pay fixed rate of 2.25% p.a. on $1,000,000

Leg 2 : Receive fixed rate of 4.00% p.a. on P41,250,000

Cross Currency Swap (CCS)


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On start date, client will give SBC P41,250,000 (Currency B) and receive $1,000,000 (Currency A).

Every quarter, client will pay interest of $5,625 to SBC and receive interest of P412,500.

At maturity, client will pay back $1,000,000 plus $5,625 interest and receive P41,250,000 plus P412,500 interest.

Pay Fixed (Currency A), Receive Fixed (Currency B)

Pay Fixed (Currency A), Receive Float (Currency B)

Example



Tenor : 2 years


Leg 1 : Pay fixed rate of 2.25% p.a. on $1,000,000

Leg 2 : Receive 3M PHIREF + 50 bps on P41,250,000


Your View : Interest rates in Currency B will increase during the next two years or you can borrow Currency B at low floating rates.

What You Want : Funds in Currency A (ex. Dollar) with fixed interest payments.

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Every quarter, client will pay interest of $5,625 to SBC and receive interest of 3M PHIREF + 50 bps. Floating rate will reset every quarter.

At maturity, client will pay back $1,000,000 plus $5,625 interest and receive P41,250,000 plus the last interest payment.

Pay Fixed (Currency A), Receive Float (Currency B)

Pay Float (Currency A), Receive Float (Currency B)

Example



Tenor : 2 years


Leg 1 : Pay floating rate of 3M LIBOR + 100 bps on $1,000,000

Leg 2 : Receive 3M PHIREF + 50 bps on P41,250,000


Your View : Interest rates in Currency B will increase during the next two years or you can borrow Currency B at low floating rates.

What You Want : Funds in Currency A (ex. Dollar) with floating interest payments.


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Pay Float (Currency A), Receive Float (Currency B)


Every quarter, client will pay interest of 3M LIBOR + 100 bps to SBC and receive interest of 3M PHIREF + 50 bps. Both rates will reset every quarter.

At maturity, client will pay back $1,000,000 plus the last interest and receive P41,250,000 plus the last interest.

Settlement Lines:

Pre-Settlement Risk line

Pre-settlement risk (also known as default exposure) refers to the amount of money that may be owed by the defaulted party on a defaulted transaction.This is equivalent to the credit exposure of a transaction over its term prior to either default or a settlement date. The Bank recognizes the need to quantify this exposure in order to monitor and properly set counterparty credit risk limits.

Settlement Risk line

Settlement risk is the risk that a counterparty does not deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per the trade agreement. The Bank recognizes the need to quantify this exposure in order to monitor and properly set counterparty credit risk limits.

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2002 ISDA Master Agreement & Schedule to the ISDA Master Agreement

The 2002 ISDA master agreement is a standard document that covers the general terms and conditions of derivatives transactions. This document, once signed, will form part of your permanent file. The schedule to the ISDA Master Agreement lists the additional conditions required by SBC related to derivatives.

Board Resolution

The Board Resolution is a document that authorizes the company to deal derivatives with SBC.

Documentary RequirementsPrior to Dealing:

Client Suitability Questionnaire

The Client Suitability Questionnaire (CSQ) assesses the clients level of understanding on FX derivative products and determines his/her risk appetite. The risk levels range from Type 1-5. A Type 1 rating is given for extremely risk averse investors/companies and allows them to do regular outright FX forwards and Swaps. Generally, a higher risk level would allow the investors/companies access to more complex derivative products such as Non-deliverable Forwards (NDFs),FX Options and Exotics. Should the client insist on dealing in a product that is above his classified risk level, he will be required to sign a waiver affirming that they are fully aware of the risks involved when dealing with such financial derivatives.


FX

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gUnderlying Asset Confirmation

The underlying asset confirmation is a document needed for every deal. This basically shows the details of the transaction as well as certifies that the company is hedging FX risk and has not engaged in any double hedging.

Term Sheet

For NDFs, FX Options, IRS and CCS. The term sheet which states the agreed details of the deal, is a front office document and should also be signed by authorized sales representative.

Transactional Documentary Requirements :

CSQ Process1

2

4

3

Security Bank will conduct suitability review of client using the Client Suitability Questionnaire

For corporate clients, the CSQ shall be completed and signed by a duly authorized senior level officer

Clients shall be informed of their CSQ score through a Client Suitability Letter. The score of the CSQ shall be contained in a Client Suitability Letter to be signed by both Security Bank authorized sales representative and supervisor, and by a duly authorized senior level officer

Completed CSQs will then be submitted to the Risk Management Division of the bank to be scored.

For each level of sophistication, Security Bank will be offering the appropriate range of financial products that would help the client meet their investment or hedging objectives.

Non-market counter party clients are then categorized into 5 types, ranging from the most risk-averse and the least sophisticated (Type 1) up to the most risk seeking and most financially sophisticated (Type 5)client. Type 3 represents the middle quantile of investors

The raw CSQ score (0 to 100) is translated to the investor type (1 to 5) through a simple linear table


FAQ

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Frequently AskedQuestions

Treasury SalesFX and Rates Hedging Division


FAQ

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Frequently Asked Questions

1. What is the maximum amount I can buy OTC?

2. Can anybody get into a Hedge?

3. Is there a minimum tenor for hedging?

4. What is the minimum amount for hedging?

5. What is Double Hedging?

USD 60,000.00; For sale of exceeding USD120,000.00, supporting documents as stated in the Appendix 1 of BSP Circular 645, as amended by Circular 794

You can hedge if you have foreign exchange or interest rate exposures. Examples of such clients are exporters, importers, borrowers or lenders.

There is no minimum tenor you can hedge provided that the tenor of the derivative contract shall not be longer than the maturity of the underlying. Please see BSP Circular 645 as amended.

You can hedge any amount. But the amount you will hedge has to be equal or less than the amount of the underlying asset/liability/exposure you are hedging. You cannot hedge more than the amount of your underlying asset/liability because it will be considered double hedging. Please see BSP Circular 645

Getting into a derivative contract with an underlying FX obligation/exposure that has already been hedged.


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Fixed IncomeSecurities

Fixed Income SecuritiesDistribution


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Types of FixedIncome Securities

Treasury Bills (T-bills)

Fixed Rate Treasury Notes (FXTNs)

Retail Treasury Bonds (RTBs)

Global Peso Notes (GPNs)

ROPs

Onshore Dollar Bonds

Foreign Sovereign Bonds

GOCC-issued Bonds

Zero-Coupon Bonds

Philippine Corporate Bonds

Foreign Corporate Bonds

Other Products SecureFlex TDSecure Premium Dollar Earner

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Direct and unconditional obligations of the national government

Issued by BTr (Bureau of Treasury)

Liquid - can be traded in the secondary market before maturity

Carry a maturity of one year or less

Do not bear interest

Issued at a discount from face value and are redeemed at maturity for the full face amount of the instrument




Carry a maturity of more than one year

Treasury Bills (T-bills) Features:

Term: 91, 182, 364 days

Tax Feature: Interest income subject to 20% withholding tax unless investor is a tax-exempt institution

Type of Income: Tax-paid

Interest Computation: True discount formula

Manner of Purchase: Auction or through secondary market

Treasury Bills (T-bills)

Fixed Rate Treasury Notes (FXTNs)

Debt instruments issued by a sovereign government (Republic of the Philippines)

Direct and unconditional obligations of the sovereign government (Republic of the Philippines)

Issued via BTr (Bureau of Treasury)

Practically free from default

No longer certificated - scripless in form

Government Securities (GS)


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Interest-bearing

Issued at a price equal to the face value and are redeemed at maturity for the full face amount of the instrument plus interest/coupon for the final period

Fixed Rate Treasury Notes (FXTNs) Features:

Term: 3, 4, 5, 7, 10, 20, 25 years



Coupon/interest rate: Fixed for the life of the FXTN

Coupon payment period: Payable semi-annually in arrears

Interest Computation: Calculated on a 30/360 day basis



Issued by BTr (Bureau of Treasury) primarily to cater to the retail market or end-users



Interest-bearing


Retail Treasury Bonds (RTBs)

Retail Treasury Bonds (RTBs) Features:

Term: 3, 5, 7, 10, 15, 20, 25 years



Coupon/interest rate: Fixed for the life of the RTB

Coupon payment period: Payable quarterly in arrears



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Foreign currency-denominated (mostly in US Dollars)



Interest-bearing


ROPs

ROPs Features:

Term: 5, 7, 10, 15, 20, 25 years

Tax Feature: Taxable

Coupon/interest rate: Fixed for the life of the ROP



Philippine-peso denominated

Coupon payment and bond settlement in US dollar, based on USD/PHP exchange rate


Interest-bearing

Redeemed at maturity for the full face amount of the instrument plus interest/coupon for the final period

Global Peso Notes (GPNs)

Global Peso Notes (GPNs) Features:

Term: 10, 25 years

Type of Income: Taxable

Coupon/interest rate: Fixed for the life of the GPN





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US Dollar-denominated


Interest-bearing


Traded onshore/locally, listed in PDEx (Philippine Dealing Exchange)

Onshore Dollar Bonds

Onshore Dollar Bonds Features:

Term: 10.5 years

Tax Feature: Final Withholding Tax on the Bonds for all tax classes of all holders shall be assumed by the Republic

Type of Income: Tax assumed

Coupon/interest rate: Fixed for the life of the ODB




Direct and unconditional obligations of other national governments (aside from the Republic of the Philippines)

Denominated in US dollars



Interest-bearing


Foreign Sovereign Bonds

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GOCC-issued Bonds Features:

Term: 3, 5, 7, 10, 15 years

Tax Feature: Interest income subject to 20% withholding taxor tax-exempt

Type of Income: Tax-paid or tax-exempt

Direct and unconditional obligations of a Government Owned and Controlled Corporation

Less liquid than GS but can be traded in the secondary market before maturity


Depending on the issuer, can either be interest-bearing - issued at a price equal to the face value and are redeemed at maturity for the full face amount of the instrument plus interest/coupon for the final period; or non-interest bearing - issued at a discount from face value and are redeemed at maturity for the full face amount of the instrument

GOCC-issued Bonds

Coupon payment period: Payable semi-annually or quarterly in arrears; or none if issued at a discount
