Hi! I am Nina Lasala, former Treasurer of the Philppines. This blog is meant to be an open forum for investors, fellow finance professionals, and other interested parties to discuss the state of Philippine Debt Management.

Monday, February 28, 2005

COA pushes for cancellation of e-Card deal

I kept this in draft form and was unable to post this yesterday. The article below illustrates the dangers of "outsourcing" functions without proper analysis conducted by the affected government agency. As you can see, if you were in UnionBank's shoes, this development is frustrating since they must have already spent good money in developing the system. Oversights or shortcuts on due diligence can haunt you in years to come. Better to be careful and to be slow but sure.

| Monday, February 28, 2005

State auditor pushes GSIS-UnionBank e-Card deal cancellation

By Kristine L. Alave, Reporter

The Commission on Audit (CoA) has recommended the cancellation of the Government Service Insurance System's (GSIS) multi-billion contract with the Union Bank of the Philippines, which authorized the latter to provide services for the state pension fund's electronic card (e-Card) system. At the same time, government auditors pushed for the suspension of e-Card services.

In a 14-page report dated Jan. 21, the five-member CoA audit team, led by lawyer Leonor D. Boado, said the bidding process was flawed and that the eCard contract was "disadvantageous" to the government.

"In view of the foregoing,we recommend that the contract of GSIS with the UBP [UnionBank] on the e-Card project be rescinded and the project's implementation be aborted," the CoA's findings said.

The GSIS eCard is an identification card and an automated teller machine card rolled into one, which GSIS members can use to encash their benefits.

In exchange for UnionBank's services, GSIS was obliged to pay the Aboitiz-owned bank a minimum balance requirement of P1 billion and a monthly service fee one-fourth of 1% of the total loans granted (except housing loans).


The audit report noted that GSIS did not conduct a public bidding for the e-Card. Instead, it only issued letters of invitation for offers to the Land Bank of the Philippines (Landbank), Development Bank of the Philippines, Philippine National Bank and verbal invitations to Bank of the Philippine Islands, Metrobank, and Equitable PCI Bank, without specifying the approved budget, requirements, instructions to bidders, and other criteria for eligibility. Neither did it conduct a pre-bid conference with the invited banks and had discrepancies in the deadlines it imposed.

Furthermore, GSIS did not notify the Department of Justice (DoJ) and the National Economic Development Authority (NEDA) of its intention to hold a limited source bidding instead of a public bidding, a violation of the Government Procurement Reform Act. For government contracts involving an amount at least P300 million, an agency seeking to be exempted from the bidding process must get first the approval of the DoJ and the NEDA.

Justice Sec. Raul M. Gonzalez, however, said the absence of a DoJ opinion does not automatically invalidate the contract between GSIS and UnionBank. "I don't think it is illegal," he told BusinessWorld yesterday

In a telephone interview, Mr. Gonzalez said the normal procedure would be for a government agency to seek the DoJ's opinion, but added failure to do so does not necessarily mean the contract is not lawful.

"I don't think that is enough basis," he said, without elaborating.

The DoJ renders legal opinion only to parties who ask for it.


The state auditors also scored the "great haste" with which the GSIS approved the contract. While the other banks submitted their proposals and requirements as early as February, when the state insurance company sounded its call, UnionBank only submitted its proposal and presented its commercial plan on May 17, five days before the deadline. On May 20, 2004, prior to the recommendation to the GSIS Board of Trustees and the Monetary Board approval of the UnionBank's feasibility study, the contract was approved.

With the awarding of the contract to the private bank, the government, through the Landbank, stands to lose P1.27 billion in seven years, CoA said. The amount represents P632.87-million loan processing fees and P670.75 million in interest earnings.

The CoA report pointed out that UnionBank has no capability to handle the demands of GSIS's 1.5 million members because of its limited number of branches and ATMs in the country. CoA noted that seven months after the project was launched, most of the clients' benefits and dividend payments were still being paid through checks and that the e-Card internet website is "at times offline" defeating its original purpose to eliminate queues and ease transactions.

Whereas Landbank maintains 503 ATMs and has interconnections with ExpressNet and Megalink member-banks, UnionBank only has 98 ATMs. Landbank also has proven itself capable of servicing the needs of a large institution as it maintains 80% of the national agencies' accounts. As of late last year, UnionBank has no branches in 16 GSIS field offices, 51 provinces and six National Capital Region cities, CoA said.


GSIS officers, led by its chief operating officer Reynaldo P. Palmiery, refuted the CoA's findings, describing it as "inaccurate."

They urged the GSIS to dissolve the audit team and set aside the findings, "on the ground thatmembers of the team have shown manifest bias and partiality and personal hostility in their actions against the GSIS and its officials."

The auditing team also prejudged the project and had already formed negative conclusions on it without hearing the officials' side, the GSIS said.

They also maintained that the bidding process was above-board and defended UnionBank's competence, saying UnionBank is a member of Megalink and has connections to Bancnet and ExpressNet, which gives GSIS members access to over 5,700 ATMs nationwide.

In an interview with BusinessWorld, UnionBank Executive Vice-President Edwin Bautista expressed confidence of keeping the contract with the GSIS.

"As far as we are concerned, we were awarded and made investments. There is nothing new in these issues. These are the same issues raised several months back when we are still in the pilot stage. We have issued close to 500,000 cards," he said.

Mr. Bautista did not disclose the amount of the bank's investments.

GSIS has claimed the issuance of e-Card by UnionBank would cut the pension fund's administrative expenses by P250 million a year. It said it tapped the bank since it "submitted the most competent technical proposal and the most cost-efficient and advantageous" for GSIS. -- with reports from Ruby Anne M. Rubio and Ma. Elisa P. Osorio

Sunday, February 27, 2005

Italian Treasury As A Model for Valuing RoSS

Over dinner this Sunday evening, conversation turned to the issue of RoSS as a public utility and infrastructure. One of my friends observed that if private sector were going derive value from charging for services, then why can't RoSS be viewed like the MWSS where 2 private operators won out in the bidding.

Going by the PDS official's own estimate of PhP500 million a year in fees, I could then think about a discount rate of 15% going out for 10 years of steady income. One can always argue about the financial model but one could argue that the privatization value of the business spun out of RoSS is in the order of PhP 1 billion in Net Present Value terms - - PhP 1 billion that the custodians should be willing to put up as a theoretical bid for the business.

Granted I've only been on this job for 3 months but I've had to surface on my own a lot of these issues. It would have helped all of us, for instance, if the business study had looked at the legal and regulatory issues of a bid-out situation for RoSS rather than already expounding on the merits of securities lending etc.

As the Italian experience shows, the privatization is the condition precedent for enabling the capital market benefits. As we stand right now, the issues of connectivity, etc., etc. puts the cart before the horse, I think.

The Ombudsman and The Need for Public Bidding of Strategic Government Assets / infrastructure

Interestingly, the PDS* presentation to the Bureau of the Treasury in 24 November 2004 cited MTS Italy as example of a developed fixed income market ( copy of powerpoint slides from PDS is attached as Annex 1). In the same slide, PDS indicated that in 1988-together with Bank of Italy, the Italian Treasury established the framework for a centralized fixed income market through legislation.

To assess the merits of the PDS proposal , I visited the web page of MTS Italy . I urge the readers to do the same. MTS began as an Italian Treasury operated system of clearing, settlement and redemption of government debts. In 1998, this was privatized generating revenues for the Italian government. Though privatized, MTS continues to be supervised by the Italian Treasury.

The route, however, the PDS group wants to take is to effect the creation of the fixed income bourse through the BSP circulars.

BSP circulars 392 and 428 has the unintended effect of "awarding" use of what is presently a government owned multi-million peso system to private parties who’ve admitted (see Star article) that they stand to charge half a billion in fees annually from it. (This number does not take into account the number of times securities are turned over during its life. A turnover of 20 times generates Php10 billion).

I am still trying to figure this out, RoSS is a government owned property. Additional budget will be needed from government to reconfigure the system to suit the custodians’ platform and annual maintenance costs to Government will continue to be incurred to support the privately run system of the custodians particularly PDS for private gain to the tune of Php10 billion, at least, following the claim that the proposal will increase turnover. There is private sector gain as the custody platforms connect to RoSS with no income for government....

Shouldn’t the RoSS be privatized instead?
Answering that question might require the involvement of the National Economic Development Agency that is responsible for evaluating Build Operate Own / Transfer initiatives.

Hypothethically, a privatization eliminates the costs of maintaining RoSS on the part of government and it will raise the revenue the government badly needs.

Is the government not required to bid out the contract to supply services related to the registration of government securities? As Treasurer, do I ,because of the BSP and the DOF order to implement Circulars 392 and 428, have the legal authority to transfer the intellectual property rights to RoSS, not to mention the fact that it is PUBLIC INFRASTRUCTURE, to the private party custodians? To donate a system built with the assistance of bilateral institutions to benefit a few private parties?

On the other hand, will the BSP or the DOF free the Treasurer from any and all legal liability for turning over the Bureau’s electronic records to private party custodian and from any resulting damage arising from the ability of these custodians to enter and correct any of the entries in the registry?

If there are competing claims to registration by two or more private party custodians, what legal rules should the Bureau of the Treasury and the courts recognize? Should the Ombudsman find that the award to the private party custodians is grossly and manifestly disadvantageous to government, is the Treasurer free from all liability for fully turning access to RoSS to Third Party Custodians?

Circular 392 was issued in 2003 and was bruited about as a capital market reforms. At the least, the International Credit Rating Agencies were not impressed.

I realized , too, that two weeks into my term as Treasurer I was expected to execute these circulars without assessing its merits. When I joined the Bureau of the Treasury, I looked forward to becoming part of the solution to the country’s fiscal ills but some sectors have me become a part of its myriad of problems.

As a prudent keeper of the country’s resources, I have prepared the attached note (Annex 2) to the then Secretary of Finance to mitigate the harmful effects of a mandate to implement the circulars in two weeks time.

* the only non-bank custodian accredited by the BSP

Scanned handouts from Powerpoint presentation of PDS Group Posted by Hello

Friday, February 25, 2005

This is Page 8 from the FIE Study dated 2002. I understand from the study that a management consulting firm had been engaged to complete a business case study for the Bankers Association of the Philippines and the Investment House Association of the Philippines.

Again this is obviously way before I ever took on the post of Treasurer.
I noted that one of the asserted weaknesses of the current environment is that the securities are transferred in RoSS before the cash settlement is effected. The reader should note that this was used as justifying the need for capital market reforms. My observations are:

a) The BTr has long been actually doing the exact opposite for many years now as per best clearing and settlement practice. Cash must move before securities do due to the legal implications in changes in ownership of the GS. The BTr's initiatives catering to the small investors even reflected this feature dating back all the way to 1998.

While BTr personnel will always acknowledge that there are many lessons that can always be learned from private sector clearing and settlement practitioners, they are not so clueless either that this essential operating risk was overlooked.

Multilateral and bilateral funding agencies continually work with the BTr and the Bureau does get a lot of education in debt issuance strategy and operations through assistance programs.

b) The BTr does not have any records of any discussions or research performed the consultants that constituted in depth analysis of RoSS policies and procedures nor do the key personnel of RoSS have any recollection of same.

c) The BTr does not have any records of discussions regarding the potential ramifications of the study on BTr operations between the consultants and BTr officers.

Again, I premise these comments on events prior to my being here. But still, it would appear that we may have a situation here where we are initiating changes to address deficiencies that were either:

1. already addressed or;
2. non-existent / superseded at the time the study was completed;

I think it is always a good idea for all of us to review our workpapers and notes to check if the assumptions, findings, and conclusions are still valid. I assure everyone that BTr will likewise revisit its own notes and operations.Posted by Hello

My comments on the GSeD letter to the investor

The images of the GSeD's letter and the attached news article furnished me by a GS investor is a helpful recounting of events. As early as July 2004, the dealers were already communicating the options available to their investors. As you can see with the dealer's attachment, RoSS was one of the options brought forward.

This letter was obviously sent out prior to my assumption of the post of Treasurer. However, the letter is consistent with the records that we have at the BTr evidencing the fact that we held several joint consultations with GSeDs with BSP officials in attendance. The option of RoSS being elected by the investor for 392 compliance was always discussed in detail during those consultations.

It can be concluded from these documents that there could have been no misunderstanding between the BTr and the BSP. The dealer's letter is proof that the dealer also had the same understanding of the compliance options available (not to mention the Inquirer's as well).

We were already implementing the migration of accounts from our dealers to RoSS (based on their own understanding of the BSP's concordance) until we were inhibited by the DoJ opinion last month. Otherwise, BTr would have already been enabled a Circ. 392 compliant situation.

We would have been able to do that on-time, on-budget with little to no increase is operating costs since we had already configured RoSS to handle the job.

As per the Inquirer article, the BSP was already aware of the cost impact on the retail investor and the BSP wanted RoSS to handle that difficult task. That was a non-issue for the Bureau since it already did retail investor accounting.

As anyone steeped in bank operations would know, consumer and retail based financial services require more capable systems that those that focus on corporate financial services. The same is true for RoSS.

I would have much preferred that rather than reinvent the wheel and create new expenses, the market would be much better off building on what we already have here at BTr and making it possible to deliver superb services for the retail investor.

Xeroxed attachment of a Sept 6 2004 article in the Inquirer furnished by dealer to its investor Posted by Hello

An investor furnished his letter from his dealer Posted by Hello

As I promised in my earlier post of the minutes of the meeting I had with the BAP, this is the email letter of Bert Reyes cited. Posted by Hello

Comments on PDTC Cost Calculation quoted in Feb. 25, 2005 Edition of Philippine Star

An article in the Business page of the Philippine Star quotes a PDTC official as stating "... that the cost would only be one 16th of one percent per annum as based on the estimated P1.6 trillion worth of securities that has been issued by the government, 50 percent of which are being traded, resulting in a cost of only P37.5 million per month." Moreover, he challenged our own calculations of the incremental cost.

In the first place, using his own figure, the correct calculation is

{[(1.6 T x 50%) x 1%] /16} / 12 = 41.6 M per month

The BTr is more than happy to discuss and debate the calculation. At this early stage, however, I am afraid the PDTC official is merely talking about transaction costs to the investor. You can refer to the IHAP position paper that I have previously posted where IHAP itself worried about the additional costs.

Being the National Treasurer, the perspective that I am using has to be broader. Government has to worry about any overall rise in the level of the Government Treasury yield curve as well as any steepening of the curve. With our country facing the challenge of containing the fiscal deficit, government and private sector has to be very careful in the implementation of any initiative with unproven benefits.

For the sake of argument, even using the PDTC official's own calculation, the exercise will cost the government an incremental Php 500 million per year that will translate into increased borrowing costs for the government as investors will seek to recover that.

Minutes of BAP Meeting February 8, 2005

Below is a copy of the minutes of a meeting I had with BAP and the various custodians. I chose to copy and paste the document from the original Adobe PDF format rather than post each page as a picture for clarity and ease of reading. I will post the attachments mentioned in the document in a subsequent post.

February 8, 2005, 4:00 PM, BAP Office
11/F, Sagittarius Bldg., H.V. Dela Costa St. Salcedo Village, Makati City

Attendance: DoF Usec. Eric Recto
BTr Treas. Norma Lasala
Dep. Treas. Ed Mendiola
Atty. Elna Cruz
Dir. Nanette Diaz
Ms. Edna Bona
BAP Pres. Cesar E.A. Virata
Treasurers of Member Banks
Custodians Citigroup

See pages 10-14 Introductory Speech delivered by Treasurer Norma L. Lasala

Open Forum
Atty. Cruz: The DoJ Opinion mentioned the so-called “conflict of interest” of the BTr
to be custodian and registrar at the same time. BTr wanted to exercise supervisory functions over the banks which are under the supervisory function of the BSP.

The BTr needs to clarify these things because the Bureau do not want to exercise supervisory functions over the banks but since the BTr is in-charge of RoSS, its sensitivity and mandate, the Bureau needs to ask certain questions so that the BTr can perform the appropriate due diligence. For the BTr not to even as ask questions and just accept everything without even
looking into these things will mean that the Bureau did not exercise the due diligence which will be tantamount to negligence.

The BTr hopes that these will be understood by the banks that such do not mean that the BTr want to exercise other agency’s functions. But there are certain things incumbent upon the BTr because of the mandate and the sovereign issue involved. There are other issues being looked upon for clarification which the BTr feels need to be resolved before moving any further which cannot be accomplished overnight.

Treas. Lasala: Currently, the BTr is trying to enhance the capabilities of RoSS so that the
Bureau will be in compliance with international accounting and auditing standards and all other global standards with respect to government securities. What is essential is to be able to segregate of the account held proprietary which can be done in the RoSS so that the repurchases held by the banks can be disclosed and can disclose it properly. The BTr does not want banks to be in violation of rules and regulations regarding repurchases.

Dep. Treas. Mendiola:
Switch-auction. Objective: To be able to reduce the number of outstanding issues in the market. The BTr will announce what particular securities the Bureau would like to buy and the bank will then submit to the BTr competitive offers to sell that particular GS. The BTr will try to buyback all the illiquid GS and achieve the reduction of the number of ISINs.

The BTr believes that by doing so, it will improve the liquidity in the market. The announcement of which bonds will be the subject of the switch- auction will be made using the wires available to all banks. The pricing will be done on a multiple price basis obtained in a Dutch Auction method. Only eligible dealers will be eligible to submit offers with minimum offers of PHP10 million.

(The detailed procedures of the Switch-Auction will be provided to the banks the Dep.
Treas. for comments)

Treas. Lasala: The BTr will announce the prices with respect to dealt transactions (as
against with the MRTN or with respect to the yield that is fixed on a daily basis. The banks may want to review this pricing method and contrast with the current valuation method. If it is useful, it can be used to value the both proprietary and the clients’ holdings of the banks which are with the BTr. This shall be made available via SMS.

Dep. Treas. Mendiola: The BTR can determining the average done deals since they are captured in RoSS. The BTr is currently finalizing the MTM formula of valuation. This will be announced through the wires and via SMS which include the auction and the real time done rates. Comparing with Bloomberg rates was not far from the rates captured in RoSS.

PBCom: The banks would like the status and reaction of the BTr on the issue of the BTr acting as registry and as a custodian at the same time is not acceptable as mentioned in the DoJ opinion.

Atty. Cruz: The BTr is seeking clarification on several issues with the DoF. The details, however, cannot be divulged as of the moment so as not to preempt and out of respect to the DoJ. As of now, there is no final, final opinion/resolution on the matter.

USec. Recto: If (I) understood the circular correctly, the BSP is not objecting to the RoSS acting as a third party custodian. It’s not a mutually exclusive situation that the circular envisions. The BSP is not objecting to the BTr acting as a custodian as well. But what the BSP wants is to grant an option to the investor to choose another party to act as custodian. (I) hope this is clear
with all of you here. If not, then (I am) telling you that that is (my) interpretation. AG Nesting Espenilla has not opposed that interpretation. Is it your understanding that Circular 392 or 428 prohibits the BTr to act as a third party custodian? If this is the case, (I) do not agree with that interpretation because (as I have said) the circular just wanted to give thepublic the option to choose a custodian other than the BTr. The BTr is not forced to move out all securities purchased if the investors decided not to.

PDTC: Clarification on USec’s statement: The circular says that the RoSS can act as a registry but not as third party custodian. Actually, the investor has two alternatives: (1) name on registry with the RoSS as registry; and (2) go to a third party custodian.

USec. Recto: What is the default choice if the investor do not want to put the securities to
a third party custodian?

PDTC: The default choice is always the RoSS as a registry.

USec. Recto: Therefore, the RoSS acts as a de facto “custodian” if the investor does not want to put his/her security to a third party custodian and just maintain it in the RoSS. (My) reading of the circular is for the investor to be given a choice where to put their securities. What then will be the first choice of the investor is he does not want to bring it to a third party?

PDTC: The first choice of the investor is really to go to the RoSS but it is actually a name on registry and the RoSS then is acting as a registrar but not a custodian.

USec. Recto: So if the investor (as I said) does not want a custodian? What will be the
situation when (I) Eric Recto purchased a GS and (I) do not want to put it to a bank not because (I) don’t like them but because it is more convenient (for me) to keep it with the BTr for one reason or the other? Is your understanding with Circular 392 that (I) the investor is prohibited from keeping the GS at the BTr?

PDTC: No, that is your first choice actually.

USec. Recto: Then, if that is the case, what role does the Treasury play at that point? It is
in fact a custodian as well, de facto.

PDTC: (BTr) as a registry, only because there is a differentiation between the registry
and the custodians in terms of (value-added) services.

USec. Recto: Ok, in terms of services. (I) think we might be mincing words here. What (I) want to point out since there is a fine line that everyone should understand. The BSP is not compelling the investors to place the securities that he invested in to another party other than the RoSS/BTr - the BSP is not! So that the investor has the choice to keep it in the Treasury and (as I said) de facto Treasury acts as a custodian in a more generic definition of the word custodian. On the other hand, the definition of a third party custodian as opposed to the former, (I) agree is different. These differing services are the impetus for the investor to appoint a third party custodian. Agree that (a) the BTr cannot act as a third party custodian because it is not a third party because it is the issuer; (b) that the BSP is not compelling the investor to lodge the securities to an entity other than the BTR; and (c) The definition of a custodian as providers of services and the BTr in a de facto situation where the investors do not want to move their securities are two totally different things.

Citigroup: When the investor does not want to move his/her securities and maintain it to its current position in the RoSS it is referred to as self-safekeeping.

Metrobank: From the banks initial reading of Circulars 428 and 392, the bank understood
that registry by name as specified in the circular is compliant with Circular 392. The circular is silent whether the registry by name will be with the BTr or with any other party. So the banks were hoping and made to believe or the banks understood it that registry of the client’s name with the BTr is compliant with 392. This was the understanding of the banks until the banks
received a letter from Dep. Gov. Reyes (See page 15) saying otherwise i.e. registry by name with the BTr is not compliant with Circular 392. That is where the banks stand right now and do not know where to go from there.

Treas. Lasala: (We) have been in the market for a very long time and Pres. Virata have been
here far longer and he knows that any BSP Circular or any MB Resolution cannot be amended by an ordinary letter. It can only by amended or superseded by another Circular.

Metrobank: That was a very good clarification. However, (Mr. Virata) can (we) seek
clarification to the BSP on this particular letter by Dep. Gov. Reyes.

Pres. Virata: There is one clarification with DoJ (by BTr) and a clarification to the BSP (by
BAP) where the clarification with BSP may run in conflict with the BSP Circular or DoJ’s opinion on the clarification made by the BTr. This is a series of clarifications. The BTr will reduce the number of securities which the banks appreciate.

ING Bank: January 31, 2005 was the deadline given to the banks to do a reclassification
of securities that should be under HTM, ASS and TAS. Does the BTr taken this in consideration since this will impact the banks booking of securities considering the requirement of IAS 39?

Treas. Lasala: The BTr is looking to announce it way before hand so that the banks can
look into the ISINs and determine who are holding these securities in the banks’ accounts. There are also other strategies that can be employ so as to address accounting issues with respect to the classification of securities as to HTM, ASS and TAS.

Membership Meeting with Treasurer Norma L. Lasala
Page 5 of 9

Pres. Virata: Issues under IAS 39, the moment the banks move a portion of the IBODI
will already be considered tainting. (I) hope this also addressed.

Metrobank: May (I) suggest to include the accounting professionals in addressing the IAS
39 issues in the possible movement of securities or new strategies and plans related to this matter since they will be determining whether there is tainting or not and will be qualifying the banks’ accounts and invoke the international accounting standards.

Pres. Virata: The Treasury should consider that because the portfolio of the banks will be
greatly affected.

Treas. Lasala: (Nods.)

EQPCIB: Regarding the DoJ clarification, did they give any time frame when are they come up with their clarification?

Atty. Cruz: Unfortunately not, they did not give a specific time frame.

Treas. Lasala/USec. Recto: (DoF/BTr) will follow up.

EQPCIB: While (we) are waiting for the DoJ clarification, going back on the issue on name on registry, was there any discussion with the BSP, if the implementing procedures is in compliant with what is the spirit of the Circular because there are two approaches (1) name on registry and (2) appointing a third party custodian bank?

Treas. Lasala: BTr is proceeding according to the mandate and to the objectives that is shared by the BSP in its circular (policy statement) – “To promote the protection of investors in order to gain their confidence and encourage their participation in the development of the domestic capital market. Therefore the following rules and regulations are promulgated to enhance the
transparency of securities transactions with the end in view of protecting investors.” The BTr embraces the same objective and moving along the same objective.

Metrobank: Moving on to documented repo transactions. The circular is specific to delivery to a third party custodian for a bank to enjoy the 2% reserve requirements, the banks also want to implement this to start the documented repo transactions (or on-books repo transactions). On this note, may the banks be updated whether the third party custodians that have been accredited will be linking with the RoSS to be able to allow the banks to do documented repo transactions.

Treas. Lasala: There are two groups right now: (1) banks who are accredited custodians are
already linked with BTr via Moneyline Telerate and they have a separate proposal for that; and (2) non-bank also has another set of proposal. The BTr has yet to see a harmonization of proposals.

Pres. Virata: Apoy (Mr. Go of Metrobank), does that impede your trading? (Addressed to accredited custodians) Will the connection to Moneyline Telerate will already enable them to start relationships with banks who would like to appoint them as third party custodian?

Citigroup: As far as the systems of the global custodians are concerned, (our) systems
ready if Dep. Treas. Mendiola agrees.

Dep. Treas. Mendiola: Discussions and negotiations have already been made but the registry
will be compromised if the BTr will open it as a nominee or a trust arrangement. As far as connection is concerned, they are already linked via the Moneyline Telerate but as to the use of the account, the BTr is still getting a legal clarification on the matter since the Registry has been defined, in so far the existing regulation are concerned even issuances of the DoF, has always been defined as registry of ownership. This is the reason why the BTr cannot open a nominee account unless they have a strong legal opinion on this. Hence, BTr offered an alternative which the accredited custodians can easily operate even today that is to connect the custodians wherein the custodians submit to the BTr the necessary requirements. The BTr can discuss this arrangement in another session related to the Working Group chaired by USec. Recto. The BTr is already working on opening an account whether it is a nominee account or holding account. The (GS) holdings of the clients of the banks that will be delivered to a third party should definitely has to be registered with the RoSS.

Metrobank: (Addressed to Pres. Virata) Right now, the banks cannot trade documented
repo yet.

USec. Recto: (We) The Working Group (composed of DoF, BTR, BSP and the accredited
custodians) are meeting weekly to find a solution. In a matter of week or so, this issue should be resolved.

(Mr. Go thanks USec. Recto)

Pres. Virata: Is the average price for the day good enough for MTM?

ING Bank: Will the average price be obtained from interbank only?

Pres. Virata: If only interbank, therefore it is not a full market?

Treas. Lasala: This (average price) does not include trades done among the banks’ clients
only among interbank transactions. If the BTr adopts this, will this be a fair

Membership Meeting with Treasurer Norma L. Lasala
Page 7 of 9

HSBC: There are different parameters used when computing the price, did the BTr
looked into this?

Treas. Lasala: Yes, the BTr looked into these before the RoSS and did a lot of exercise to
arrive at the number and compared it with what the banks are getting in the (sophisticated) MRTN.

Pres. Virata: Is this good for all investors in GS if it is purely determined by transactions
among financial institutions? Is it going to be a good market?

HSBC: Currently, that is how the market is being priced i.e to get the 60% of the best bid among financial institutions to arrive at a benchmark.

Pres. Virata: According to the Treasurer, the BTr has the facility to compute of the average price on done deals.

Metrobank: And interpolated for those tenors where no deals have been done. (Treas. Lasala nods.) Sounds reasonable.

Chinatrust: What will be the procedure if there are no (almost zero) deal trades happening in the market (e.g. July to November 2004)? If the market will use previous day averages for what is today, it will be quite ticklish. If it continues to moves on (I) don’t think it is a good MTM procedure to adopt as well.

Treas. Lasala: In the absence of a dealt transaction, (I think) it stands to reason to adopt what is there – the only reference price available. What is a better alternative? (I think) there is no better alternative in the absence of any done transaction.

HSBC: (To clarify the Treasurer’s reply) The Treasurer would like to refer to the previous day’s (sophisticated) MRTN’s closing price if there are no done deals. (Treas. nods) Otherwise, the only alternative will be the bids from which the market is currently using.

Chinatrust: (I think) this will be quite dangerous especially if it comes to a prolonged market of no done transactions. Can the system go back and revert to getting bids (otherwise called as the MART01 format)? Again, (I guess) it needs to get into consideration the use of Bloomberg. Another question, how will the BTr define on-the-run securities – will it be inconsonance with
the same definition that the MART has implemented because the MART has already expanded its definition of on-the-run issues.

Treas. Lasala: This should not be a problem. The BTr will define the same tenor buckets
of liquid benchmarks very similar to currently market convention defined by MART.

Membership Meeting with Treasurer Norma L. Lasala
Page 8 of 9

(Mr. Avante thanks the Treasurer)

Pres. Virata: How about the banks’ currently market practice on trading based on yield of
specific tenor buckets and no on a per security basis? Will this be captured in any of these systems?

HSBC: Addressed to Pres. Virata: (I think) you are referring to how many are the benchmarks? The answer – there are roughly 15 benchmarks that the banks priced. The benchmarks are priced and correspondingly the prices are in between or interpolated MTM price. If the question arise from the point of view that there are roughly 356 securities lines, then the banks’ reply will be – there are no existing facilities to price these 356 bonds but price the 15 and interpolate the ones in the middle.

Treas. Lasala: That is what the BTr hopes to remove the so many intervening ISINs soon.

Pres. Virata: How much is the amount of borrowing of the government programmed for

Treas. Lasala: NG will borrowing PHP600 billion for the year 2005. Forty percent (40%)
of which are foreign borrowings while 60% are domestic (included NPC etc.). This is the biggest refinancing so far, hence it is critical that the BTr does it correctly and will not have too many peripheral issues unsettling the market. The BTr wants to focus on actively managing it this time so that having done so, the market will have a window of opportunity to effect real reforms in all sectors. The NG is looking to incur a budget deficit as planned of PHP177 billion (cash deficits only) which include the PHP18.8 billion in interest payments from NPC. The consolidated public sector deficit covers government and GOCCs plus other government financial institutions excluding BSP and the pension funds.

Metrobank: Does the PHP600 billion planned borrowing already taken into consideration
the impact of the tax measures being approved right now? If so, how much is estimated to be part of the PHP600 billion.

USec. Recto. For purposes of planning, (we) have only considered tax measures that have
been passed such as the sin tax law, the effect of the lateral attrition among others.

Pres. Virata: Are all the issues with withholding taxes or some of them taxable?

Treas. Lasala: Unfortunately, the BTr cannot accommodate the NOLCOs that are being
booked by the bank since there will be no forthcoming issues that will be taxable.

Pres. Virata: Right now, the BIR has also changed a number of their stance i.e. whenever you invest in a GS, it becomes a deposit substitute therefore taxed at 20% withholding which (I think) is not a correct definition of what a deposit substitute should be.

Treas. Lasala: The BTr is meeting with the BIR every so often and (we) will take this up if
you wish.

Metrobank: (We) can try to make this forum more often.


Pres. Virata: (I suppose) after the clarification, we can move forward and hopefully
transactions especially for the forthcoming issues for the FY 2005 amounting
to PHP600 billion, there will be more trade.

Thanks the Under Secretary, Treasurer and Deputy Treasurer to joining in
the BAP Treasurers in the forum.


Treas. Lasala: Thanks Pres. Virata for granting (her) request and joining in the forum and
the Treasurers of the BAP member banks. The BTr to be of assistance by
way of informing the banks of recent developments or programs the Bureau
are crafting for the broadening of the capital markets.

End of Discussion

Thursday, February 24, 2005

page 4 of IHAP Position Paper Posted by Hello

page 3 of IHAP position paper Posted by Hello

page 2 of IHAP position paper Posted by Hello

Position paper of IHAP expressing concens over BSP Circular Posted by Hello

The Dematerialized & Registered Philippine Treasury Bills/Bonds

The following is an article written by former Treasurer Caridad Valdehuesa, who presided over the design and implementation of RoSS:

Philippine Government securities were initially originated, serviced and redeemed by the Central Bank of the Philippines as fiscal agent pursuant to its 1950 Charter. Treasury bills and bonds were printed by the Central Bank Security Printing Plant and delivered to Bank's Government Securities Department for
authentication, inventory and eventual distribution to investors.

When the Philippine money market experienced fraudulent sales of money market papers in 1974, the Central Bank required financial institutions in quasi-banking to physically deliver to counter-parties all instruments traded by them, including underlying securities in repurchase agreements, as a public protection measure against multiple trades or trading in non-existent instruments. This requirement (See Manual of Regulations for Banks and for Non-Bank Financial Institutions) effectively safeguarded the money market for almost two decades, until players forgot the debacle of the l970s, took risks for granted and started trading again without requiring physical delivery in 1993 and some institutions found themselves without receipt of government securities bought after having paid millions to brokers.

In July 1993, R.A. No. 7653 renamed the Central Bank of the Philippines to “Bangko Sentral ng Pilipinas”. The new charter provides that the Bangko Sentral shall, within a period of three (3) years but in no case longer that five (5) years, phase out all fiscal agency functions and transfer the same to the Department of Finance. The Department forthwith designated the Bureau of the Treasury as the fiscal agent of the Republic. Within two (2) years (in November 1994) the Bureau assumed the functions of origination, service and redemption of government securities while institutionalizing the following innovations:

1. Scripless Securities. The Bureau of the Treasury, after intensive study and observation in the advanced markets of Canada, USA, Shanghai and Seoul, took the bold step of dematerializing Philippine Government securities one year after the US Government and two years after the Canadian Government decided on uncertificated debt. This has avoided for the Government the carry cost of printing government securities on imported security paper. Moreover, the Bureau of the Treasury and the Department of Finance thenceforth avoided the rigorous tasks of (1) signing each and every certificate, (2) its inventory, (3) issue, (4) retrieval for redemption and (5) subsequent burning for permanent retirement, not to mention the attendant handling risks (experienced by the Central Bank in the 1970s and 1980s).

The Bureau of the Treasury has adopted the International Securities Identification Numbering (ISIN) system for all scripless securities it originates, making these eligible for cross-boarder trading without the need of certificates nor physical delivery.

It has been a decade since Government Securities were uncertificated and the Philippine Government can be said to have crushed the shame brought upon the secondary market by unscrupulous brokers in l974 and 1993.

2. Registry of Scripless Securities (RoSS). Government securities trading translates to a transfer of ownership over incorporeal property either through outright sale or mere encumbrance by lending/borrowing for a specified period or as an underlying instrument/collateral. Unlike in the United States, there is no Uniform Commercial Code in the Philippines. These commercial transactions are governed by the Philippine Negotiable Instruments Law in the case of instruments conforming to the requirements of negotiability and by the Philippine Civil Law in the cases of outright sale, lending/borrowing and pledge. Both laws provide that physical delivery of the certificate of ownership is the operative act that gives validity to sales, pledges and similar encumbrances. An in-depth study by the Bureau’s internal and external legal counsels (both local and foreign) concluded that these laws (including the Corporation Code, the Revised Securities Act and the Borrowing Acts) do not prohibit uncertificated securities. Providentially, the Revised Securities Act was being revisited at the Securities & Exchange Commission (SEC). The Bureau leadership and its internal and external counsels worked closely with SEC consultants and counsels to ensure that the definition of securities did not perpetuate its bias for documented ownership rights, among other concerns. At that time, the establishment of a central clearing house for securities trade was a great promise under the aegis of the Bankers Association of the Philippines. Soon, however, it was apparent that the central clearing house was not up to expectations as it took on a bigger target market, the stock exchange, and it acquired the discarded Australian electronic system. Therefore, the Bureau lost no time to commission the development of an open system of recording all its origination of Treasury bills and bonds, as well as a capablity of recording secondary market trades. Recording every Treasury bill and bond creation was deemed by the Bureau as imperative for the acceptability and integrity of scripless securities to substitute the traditional physical evidence of a transaction, either to prove ownership or to transfer or encumber ownership. For this purpose the Bureau of the Treasury institutionalized the recording process by christening it “RoSS” for Registry of Scripless Securities, which is the electronic record of all government securities awarded as downloaded from the Automated Debt Auction Process System (ADAPS. See Item 3 below) and all secondary market trades on the same awards by Government Securities Eligible Dealers (GSED. See Item 5 below). RoSS is capable of real-time-gross-settlement with infinite capacity to register ISINs. However, in 1994 the government securities dealers were not electronically prepared to respond to the Recommendations of the Group of 30. Thus, secondary market trades had to be first confirmed between counter-parties and faxed to RoSS. In a few weeks the system and the market was working smoothly. I understand most dealers are now electronically linked to RoSS.

3. State-of-the-arts Electronic Auction. The Bureau of the Treasury leadership made sure that when it assumed the origination of Government Securities in November 1994 the process would be undertaken through an electronic mode whereby dealers submit bids electronically to the Bureau, whose auction committee would have the benefit of an electronic arraying of all bids the resultant awards of which will be downloaded electronically likewise to the Registry and to winning bidders.

In 1994, as Telerate offered the money market participants interconnectivity for their trades, the Bureau leadership was internalizing the lessons learned from their studies in the Central Bank of Canada, the Federal Reserve Bank of New York, the US Treasury Department, the Seoul and Shanghai stock exchanges. In no time the Bureau leadership was discussing the requirements for an automated distribution of Treasury Bills and Bonds, with the Telerate Representatives here and from Hongkong. One of the early obstacles was the lack of available PLDT lines from Makati (the financial capital) to Intramuros in Manila (where the Bureau holds office). Telerate's investment in technology, time, money, and grit paid off when PLDT agreed to install additional connections from Telerate offices in Makati to the Bureau. The Automated Debt Auction Processing System (ADAPS) was completed, tested, revised to detailed Treasury specifications, installed and was launched in November 1995.

The Bureau undertook massive information campaign, conducted seminars for market participants and its own staff. Aware of varying market practices, the Bureau, prescribed (a) uniform price/discount formulation, (b) a manual of accounts and accounting practices, as well as (c) standard trade documentation. Appropriate rules were issued and binding contracts were signed by market participants with the Bureau. Eligible dealers keying-in their bid/s from their respective dealing rooms was a stark contrast to the previous practice of submitting written bids to the Central Bank. A minute after the agreed cut-off time, bids are electronically arrayed (on a big screen for viewing by the Auction Committee in the Bureau of the Treasury Auction Room) from the lowest to the highest bid rate. The Auction Committee then decides the cut-off rate for the awards which are immediately downloaded to the RoSS for subsequent same-day notification to the winners/dealers. The whole process takes about five (5) minutes (it took two hours of manual arraying at the Central Bank and three days post-auction notification to dealers).

4. Settlement by the Bangko Sentral ng Pilipinas. The Bureau of the
Treasury had to initiate an arrangement with the Bangko Sentral for the the settlement of both the original awards, the secondary market trades, the servicing of coupons and the redemption of maturing government securities, for lack of a settlement institution with the financial capability to underwrite the billion peso market of government securities trade. At that time the eligible dealers were all banks, with clearing accounts and deposit balances with the Bangko Sentral. Therefore, the arrangement was at once logical and practical. Moreover, an overnight credit accommodation was arranged to be extended by the Bangko Sentral Treasury Department, in case dealers would experience delays in determining their available balances at the end of trading hours. The Bureau urged the Bangko Sentral to hasten their computerization in order to effect real-time-gross-settlement of secondary market transactions in government securities. Sadly, the Bangko was not ready, although RoSS was. Therefore, all market trades had to be settled on netting but same-day basis at the end of market trading hours. Yet there had been very few availments of the Bangko Sentral overnight credit lines.

5. Democratization of Dealership. When the auction of government securities was initiated by the Central Bank in the l970s, only seven commercial banks were acredited as dealers. Accreditation emanated from a cumbersome
process and documentary requirements, and evaluation by the Securities Department for eventual approval and confirmation by the Monetary Board. The Bureau of the Treasury in keeping with the Ramos Administration policy of demonopolizing industries, opted for a liberal policy of allowing as many entrants as banks and financial institutions willing to participate, streamlining the process of accreditation by merely requiring (1) an SEC license for securities dealing and (2) a certification of good standing by the appropriate regulatory agency (Bangko Sentral for banks, Insurance Commission for insurance companies). By 1998 there were forty (40) Government Securities Eligible Dealers (GSED). It is a market truism that the more participants present in an auction, the finer the bid rates. Competition spawns an efficient market which in turn enhances more investors.

6. Longer-Dated Bonds. The two- five- ten- and twenty-year bonds were introduced by the Bureau of the Treasury in order to lengthen the yield curve and provide bench marks for longer-term issues of the private sector. The Bureau adopted the Dutch Auction method or uniform price for the bonds ( a method of pegging a uniform coupon rate at the stop-out level of arrayed bid amounts and yield rates tendered) instead of the English method or price discrimination (where successful competitive bidders pay the price they had bid).

The Bureau of the Treasury unified the nomenclature for government securities by using only two terms: “Bills” for short-term debt and “Bonds” for medium- and longer-term debt. The Bureau also adopted the re-issue system of floating Bonds, i.e., increasing the indebtedness by using the same ISIN thus avoiding confusion in the bond market.


The innovations introduced by the Bureau of the Treasury in 1994 have been institutionalized. The Money Market has gotten used to scriptless government securities and participants are comfortable with the Registry of Scriptless Securities. Investors look to their GSED to provide them with confirmation of sale as required by the Bureau so that individual investors need not spend for a separate RoSS account. GSEDs are required to maintain a ledger of securities sold and transfer these out of their RoSS account to a “Client Account”. This service has been practically free to investors because GSED pay a minimal fee to BTr for maintaining a client account with RoSS.

A decade after the Bureau of the Treasury initiated the above safeguards, the Philippine Money Market has not seen the 1970 and 1990 fiascoes replicated. The Bangko Sentral Circular Nos. 392, 460 and 457 therefore, which is being bruited by its oficials as part of their reforms designed to prevent the recurrence of the “Bancap scam” of 1993 is a Johnny-come-lately. Clearly, there is no need for GS to be registered by a private sector third party because by being scripless, RoSS had been established as the proof of the government’s debt, providing the Commission of Audit adequate electronic trail for proper redemption/payment on maturity. Furthermore, a third party custodianship for a scripless government liability (conversely a scripless investor asset) is a contradiction in terminology.


Note: The Group of 30 mentioned in page 3 is the convention
of thirty countries around the world who met following the
stock crash of 1987, discussed and proposed safeguards
against the recurrence of capital and money market
deficencies, inefficiencies and fraud. Their proposals are
known as the G-30 Standards,

page 2 of Bert Reyes' Memo to Treasurer Figueroa Posted by Hello

Memo of Bert Reyes to former Treasurer Figueroa Posted by Hello

Take a look at the capabilities of RoSS Posted by Hello

My Reply to the an article in the Today Newspaper Feb. 21, 2005

We write in response to the article published in yesterday’s issue of TODAY. The article was unfair and misleading. It did not constitute balanced reporting as the side of Treasurer Norma L. Lasala was not sought. It was written with an obvious slant in favor of the Bangko Sentral and an attempt to denigrate the character of Treasurer Lasala. Please consider the following:

It was reported that the so-called THIRD PARTY CUSTODIANSHIP plan as designed under circular no. 392 and 428 would prevent the recurrence of double selling of securities like that of the BanCap scam. This is not correct!

The Bancap scam occurred in 1994 when government securities were still evidenced by certificates. In 1996, due to the reforms introduced by the Department of Finance and the Bureau of the Treasury (Bureau), government securities have become paperless or what is known as “scripless” through the adoption of advanced computer technology which allows transactions to be recorded at the very moment they take place. Moreover, the holdings of each investor is recorded individually under his account name; thus “double selling” of his shares like that of the Bancap scam can no longer happen.

The article also insidiously remarked that Treasurer Lasala has maintained a stand against the Third Party Custodianship because her view has been colored by her relationship with the banks. This is FALSE!

The reason why Treasurer Lasala has consistently opposed the third party custodianship is because the same is NOT EFFICIENT and is COSTLY. It adds another layer to an already simplified securities transaction at an added cost to the investing public. These are unnecessary costs because transactions can be completed without them! These costs will discourage investors from investing in government securities. It can also translate in added costs to be borne by the government and ultimately by the Filipino people in the form of higher cost of borrowings. These will add to the nation’s fiscal crisis. Treasurer Lasala’s objective and that of the Bureau is to fund the requirements of the Republic at the most efficient and most economical means.

What the article DOES NOT SAY is that the Third Party Custodianship plan, if implemented will give the custodians access to the computer system of the Bureau once it is compelled to connect its computers to them. Computer data will now be parceled out to different custodians. What was once a whole system capable of producing vital information in the nick of time now becomes fragmented and information becomes unavailable or available only after a tedious process of reconciliation. The timeliness, and consequently, the reliability of debt data will be compromised. This data is VITAL TO THE NATION and any doubt cast upon it can IMPERIL THE GOVERNMENT’S ABILITY TO FUND ITS REQUIREMENTS.

What the article ALSO DOES NOT SAY is that the Third Party Custodianship is NOT a genuine market reform! The additional costs will limit the market to the big players thereby depriving the small investors of access to government securities.

What the article ALSO DOES NOT SAY is that the proponents of the Third Party Custodianship plan are fast tracking the removal of Treasurer Lasala because they are aware that given until March 31, 2005, the Bureau under her leadership would have come up with enhancements to its systems that would render the third party custodians irrelevant.

What the article FINALLY DOES NOT SAY is that the third party custodianship is all about PROFIT!!! As blatantly represented by the proponents of the third party plan to their prospective capital investors, they will rake in profits to the tune of billions of pesos per day – certainly a staggering amount!!

It is easy for the proponents to make the public dismiss Treasurer Lasala’s objections as mere stubbornness because the public is not fully aware of its subtle implications!



Welcome to my Blog!

Dear friends, colleagues and fellow finance professionals,

I am Nina Lasala, the current Treasurer of the Republic of the Philippines. I am writing this Blog to document the events, considerations and decisions I have had to undertake during my tenure. I believe I owe it to myself, my family and for historical references to discuss the many complex issues in detail.

As some of you may be aware, much controversy has been generated as of late surrounding my alleged opposition to the Third Party Custodian regulations promulgated by the Bangko Sentral ng Pilipinas (BSP).

I am saddened but understand how the popular media has chosen to simplify the issues and trivialize it in terms of making it appear as if it were all about personality and personal agenda considerations. To be fair, I understand that these issues are not easily understood by the man on the street. However, the issues WILL directly impact the man on the street just the same.

To share my personal beliefs, I believe that we are all stewards of this country's welfare. In my humble and limited capacity as the national debt manager that is the lens I always use for viewing my responsibilites.

It is my hope that we can have a dispassionate and thorough discussion of these issues. I also hope that through these discussions, we can all come to some understanding if not agreement regarding the stand and actuations I have taken.

Nina Lasala