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.

Tuesday, March 29, 2005

What Do You Think? Make your voice heard!

I thought it would be interesting for all of us to get a feel what reader sentiments are at this point. So, I urge you to make your voice heard and answer this poll question:

Based on what you have read on my Blog, do you believe that the FIE has influenced the BSP's policies on 3rd Party Custody?


Free polls from Pollhost.com

Tuesday, March 22, 2005

Getting things done RIGHT

As I noted in my previous posting, I do not believe that there is any disagreement on the goal of improving the Philippine Capital Markets.
For historical reference, it is important to record the fact that the BTr was in numerous meetings with its Government Securities Dealers and the custodian banks throughout most of 2004 inclusive of public consultations. With respect to helping them meet their concerns regarding Circulars 392 and 428, we had done the following:

a) Drawn up a workflow consistent with the dealers' and custodians' concerns and requirements which we discussed with the BSP starting Nov. last year:

Proposed Schematic I was working on last year with the BSP Posted by Hello

b) Secured the necessary budget to effect the following enhancements for RoSS;

c) Announced a 31st March 2005 initial delivery date to the GSeD community through Bloomberg to begin meeting the requirements of the GSeDs and custodians;

From November last year to the time that I left, we could not seem to make headway with respect to our proposal.

With this as historical context and reference, it is critical to understand the significance of the re-articulated position paper of the BSP as released by them through the BusinessWorld edition of 11 March 2005.

In the Arguments Section, the BSP said,

"...What this means is that, in the case of government securities, the investor may take direct delivery of securities bought by instructing the dealer to instruct RoSS to credit his securities account. This is perfectly acceptable, provided that RoSS has the capability to directly confirm to the investor his transaction on a timely basis.

However, the Client Interface System of the RoSS is deemed non-compliant at the moment because of this material deficiency, as well as its inability to render periodic securities statements directly to the investor.
It will be considered compliant as soon as these deficiencies are remedied."

Rather than resort to 3rd party custodians for safeguarding the investor, the investor protection mechanism that the BSP is affirming is that provided there is an independent means for the investor to be informed of what is going on with his securities account, then the BSP is meeting part of its objectives. At the same time, by empowering the investor direct access to RoSS, we would be joining a select group of countries in terms of best practices for investor protection. The readers might want to refer to the Direct Registration System implemented in the US by the Depositary Trust Corp. last year following a 1994 exposure draft issued by the US SEC. (please click on the links to the referenced sites)

In addition, with the BSP agreeing to BTr pursuing our original proposal, we would also be able to resolve the ticklish issue of costs for implementing 392. Because the BTr already has an approved budget, we would then be only talking about a very small one time cost. Any way you look at it, I would like to think it is WIN-WIN for all the stakeholders.

As an aside, the BSP and readers may be interested to know that even before I left, the BTr was already doing test SMS messages for government securities (GS) informing investors of the latest GS prices through their cell phones.

For the very specific issue of investor protection, I leave it to BSP, BTr, and the GSeDs to earnestly study the abovementioned recommendation which is realistic, proven, and deliverable.

I believe the foregoing to be in the realm of operational issues and approaches.

What will continue to be troubling with respect to Circulars 392 and 428 deal with the legal aspects surrounding such issues as:

1. GS issuances and RoSS are strategic infrastructure that the government relies on for its funding requirements. Again, what is the proper disposition of government infrastructure? What is the proper means for accessing government infrastructure?

2. To use Sen. Roxas words, can regulatory fiat be used as a substitute for legislation in creating franchises? Does it make sense for the national government to limit the trading of its securities to a single market? Would building capital market infrastructure need to be bid out ala Italian Treasury and everywhere else there is an exchange centralizing GS and seek enabling legislation? (This is a point that the people in FIE seem to gloss over whenever they cite these examples of "G-30 best practices");

3. Where are the regulatory boundaries between SEC and BSP? We are talking about efficiencies and transparencies related to securities and yet the BSP is setting the agenda? How do we avoid overlaps and opaque and conflicting operations in the future;

4. Should an exchange be deemed as a quasi-public entity, more in keeping with a franchise? If so, should its revenues be subjected to a cost-recovery formula that is approved by a toll-regulatory commission no different form other utilites. Should major expense items such as IT infrastructure be supervised because the amortization costs of these decisions are still passed back to the investor and government alike?

5. How should we understand the term "disadvantageous the government". Shouldn't all the purported benefits and overall reductions in costs be quantified and guaranteed by the proponent similar to the way other privatized utility operators have been required to do.

Friday, March 18, 2005


Question 1 – Will the custody rule of the BSP prevent a Third Party Mutual Fund scam similar to the Stanchart case raised by Senator Enrile (a point likewise raised in today's issue of the BusinessWorld)?

Answer: No, and this is the paradox, if Stanchart stands accused of an infraction if a Third Party Rule exist, why then accredit the bank and force the BTR to deal with the bank as among its agents under Circular 392 and 428?

The Stanchart alleged sale of unregistered securities to the public is squarely a supervisory concern. Bangko Sentral has an existing rule that gives licenses to banks looking to engage in derivatives transactions. The Bangko Sentral has given the Stanchart a derivatives license , hence , it was able to engage in selling its Third Party Mutual Fund product. The rules for engaging in derivatives are for the Bangko Sentral to enforce.

The contention that a Third Party Custodian can prevent the custodization of fraudulent or unregistered securities is overly optimistic since a custodian functions under the instructions of the party that lodges the security in the Registry (and as such is not responsible for doing due diligence on what security is being put in). To use an analogy, if I put a fraudulent land title in my safety deposit box, and claim to an interested buyer that I hold good title, the bank is in no position to determine the authenticity of the document kept in custody.

Question-2. Is PHILIPPINE DEPOSITORY & TRUST CORPORATION (PDTC) a quasi-public corporation? Who are the owners? Who were the incorporators?

Answer : No. PDTC is not a quasi-public corporation. It is a private corporation. BAP and IHAP, among others, became investors by virtue of their investments in Philippine Clearing and Depository Corporation, a losing corporation and the forerunner of PDTC.

Question 3. Is it true the securities purchased by investors are recorded in the name of the GSEDs in the RoSS?

Answer: NO, Government securities sold are recorded in the RoSS in the name of the individual investors under its RoSS –Client Interface System (CIS). Since its inception in 1996, the RoSS was built from the start to register securities in the name of the individual investors (hence the name, Registry of Scripless Securities) . As shown during the small investors program launched in 1998 , the maturity values of the Small Denominated Tbonds even the individual investor’s bank accounts were directly credited.

Question 4. Is it true that the use of the Third Party Custodians is voluntary?

Answer: Section 1 c and d of BSP Circular 457 describes the fate of investors who “decline to deliver their existing securities to a BSP accredited third party custodian” as follows:

“c) Any BSP regulated institution shall not enter into securities transactions with a client who has outstanding securities not delivered to a BSP accredited third party custodian, and

d) It shall be the responsibility of an BSP regulated institution to satisfy itself that the person purchasing securities from it has no outstanding securities holdings which were not delivered to a BSP accredited third party custodian. “

Question 5. Isn’t BAP an owner of PDTC?

Answer: BAP had holdings in the former Philippine Central Depository, Inc. which was folded , after certain valuations, into the PDTC . Hence, BAP’s share in PDTC.

Question 6. – Will the custody rule of the BSP prevent a recurrence of the Bancap scam?

Answer: Bancap has often been misused as example to defend the Third party rule. Unfortunately, the scam took place when the Tbills and Tbonds were still certificated and the Bangko Sentral was in charge of the issuance, settlement and redemption of Tbills and Tbonds.

The Real Time Gross Settlement (RTGS) and Delivery –versus-payment (DVP) conventions now fully implemented in RoSS on both the securities and cash legs of the transactions effectively ensure that it will not be possible for dealers to sell securities they do not have.

Question 7. – Is the claim of the PDS that transactions will be seamless and that there will be straight through processing true?

Answer: No, it will be more cumbersome and risky because the process will not be straight through. There will be re-encoding from the front end to settlements. It is inefficient and non-compliant to BRS standards, among others.

Question 8 – Why did I resist circular 392 and 428?

Answer: The title of National Treasurer bears the responsibility of managing the borrowing program of the government. In other words, to borrow at the most competitive price for government.

Some of the objections I had against the circulars include:

  1. The circulars do not add value, and are unnecessary
  2. They increase costs for both government and the investing public
  3. They expose the government and the investing public to risks by mandating that government give up over 1 Trillion worth of securities that it currently manages to a custodian called PDTC that is capitalized at only 450 million pesos .
  4. They nullify existing laws and executive orders
  5. They create an agency agreement without any liability assumed by the agents
  6. They will result in the awarding public infrastructure for private gain without any public bidding.
  7. They reverse the democratization process undertaken by BTR and tends to cartelize once again the bidding process for Government Securities
  8. They render inefficient what once was an efficient process of issuing, settling and redeeming Philippine Government Securities through the RoSS, a core function of the Bureau of Treasury
  9. They parcels out a mandate of the BTR to private entities without public bidding or consultations being made.
Question 9– How can the Bangko Sentral salvage Cir 392 , 428 , 457, itself and the FIE?

As a former Treasurer who has served both in the public and private sector, I am fully supportive of reforming the capital markets and increasing liquidity in the trading of government and private debt instruments. However, the implementation taken by the banking industry should have followed a strategy wherein all stakeholders in the project are in close coordination with each other to come up with a solution that is mutually beneficial.

There are still a lot of issues that have to be properly mapped out and addressed. What we as members of the financial community should do is to sit down and have a dialogue rather than have one industry player impose its will on the other stakeholders. What the FIE should be is infrastructure for our country. We as Filipinos all stand to gain by having this infrastructure in place, but this infrastructure should be suited to the needs of the local market, it must be cost effective and self sustaining, and above all, it MUST BE TRANSPARENT AND BENEFICIAL TO ALL STAKEHOLDERS.

In other countries that have implemented similar Fixed Income Exchange projects, the SEC, the Treasury, the Central Bank, Private Custodians, Stock Transfer Agents, Brokers and Dealers all sat down to figure out what kind of infrastructure is needed. I recommend that we do the same.

Thursday, March 17, 2005

Sen. Mar Roxas asks "Is the PDTC rent-seeking?" Listen to the audio clip

What is "Rent-Seeking"?

According to Leon Felkins (*), Rent seeking behavior is

"The expenditure of resources in order to bring about an uncompensated transfer of goods or services from another person or persons to one's self as the result of a "favorable" decision on some public policy....Examples of rent-seeking behavior would include all of the various ways by which individuals or groups lobby government for taxing, spending and regulatory policies that confer financial benefits or other special advantages upon them at the expense of the taxpayers or of consumers or of other groups or individuals with which the beneficiaries may be in economic competition."

In the audio clip, Sen. Roxas asks if PDTC is not a rent seeker and acquired an unfair advantage through regulatory fiat. As a result, he wants to "ferret" out the truth and moved that hearings be conducted.

My deepest gratitude to Sen. Pimentel for taking the time to listen me and making the effort to understand such a complex issue. Many thanks as well to Sen. Roxas for identifying the competitive and public policy issues related to the 3rd Party Custody circulars. I can only pray that in the days to come the other senators will actively participate in the debate on the senate floor.

Macromedia Flash plugin for your browser is required to listen to the file.

Wednesday, March 16, 2005

Computershare - Provider of Trading Platform to Fixed Income Exchange

I clipped the following from an article in the IT section of the BusinessWorld today:

"The FIE will really be a big hit in the Philippines. Like what we have provided in the Swiss capital market, the system is capable of administering 8,000 orders per second," Ms. Muliawan noted.
The Philippine Dealing and Exchange Corp. (PDEx) just purchased X-stream at P450 million.
PDEx, who will manage the FIE, saved P50 million from the deal because it made Computershare part owner of the firm. Computershare aside from being the technology provider also owns 10% of the PDEx.

The article would appear to be press release which featured a Ms. Lina Muliawan, project manager for the FIE project.

We will leave it to PDEx to enlighten the industry on the costing of system and the savings generated by giving the vendor equity in PDEx. Last we looked, the same PhP450 million was held out as the capitalization of PDEx.

8000 orders per second. Nobody needs to tell me that costs a lot of money to have that impressive capability. If PDEx is concentrating on institutional trades rather than retail, then we are only looking at 300 to 400 trades per day. Gosh, since IT depreciates so rapidly (my IT friends tell me that every 2 years, you pay half of what you would have otherwise bought for today for twice the power), did we pay for something now that we will need some 7 years from now, if we're lucky?

Again, this all ends up as costs that are going to be passed on to both the borrower and the investor.

Tuesday, March 15, 2005

TCS clinches US$3 Million Philippine Dealing System project

Below is an article posted on Tata Consultancy Services' (TCS) investor relations page. In the article the company notes the importance of the PDTC to their growth. If the FIE project is indeed a National Project as Mr. Lacsamana stated below and will feed the growth of TCS, one could argue that TCS should have compensated our government for giving them this franchise called Government Securities???

Please read the highlighted portions of the article.


Mumbai, November 18th, 2004

Tata Consultancy Services Ltd (TCS), a leading global IT services organization, announced today it has been awarded a US$3 million contract by the Philippine Dealing System Holdings Corp. (PDS) through its subsidiary the Philippine Depository & Trust Corp. (PDTC), to implement a Depository, Registry, Clearing & Settlement System for the equities and fixed income securities market in the Philippines.

Under the terms of the contract, TCS will implement its eClearSettleTM software - a comprehensive solution for depositories, clearing organizations, transfer agents and central banks. PDS is Philippine's electronic platform for trading, clearing, depository, registry and custody of fixed income securities. Recently, the Bangko Sentral ng Pilipinas (Central Bank of Philippines) initiated a series of market reforms of which PDTC, together with the other projects under the PDS Group, will play active roles.

"This is a national project. A fully automated depository, clearing and settlement system will enhance the efficiency of the country's fixed income market and further reenergize the equities market. With globalization, we need world-class infrastructure to drive our capital markets forward. TCS has demonstrated outstanding global standards, both with its products and processes. With TCS' eClearSettleTM, PDS stands in good stead, both as a technology-based enterprise and as a world-class clearing house," said Roy B. Lacsamana, President & COO of PDTC.

TCS' eClearSettleTM is a comprehensive solution for financial markets encompassing clearing and settlement for equity, debt and derivatives markets as well as depository and registrar services. Among the key features of eClearSettleTM are:
Clearing, settlement and depository (CSD) operations for cash and derivatives markets
Integrated risk management with interfaces to third party products
Real Time Gross Settlement (RTGS) operations and securities settlement for central banks
Registrar services, and
State of the art technology and interfaces over the Internet, SWIFT, email, mobile and land phones.

Regional director for TCS Asia Pacific Girija Pande said: "This landmark deal in the Philippines is part of our growth plan in the Asia Pacific region. The Philippine Depository & Trust Corp is a national mission-critical infrastructure. With eClearSettleTM we are confident of delivering the efficiencies needed to take the fixed income markets in the Philippines to the next level."

This engagement forms part of a larger growth strategy for TCS in Asia Pacific, with the TCS Group taking a strategic 10% stake, at par, in PDS for a consideration of about USD 0.9 million. TCS Asia Pacific - headquartered in Singapore - is today a major player in information technology consulting, services and business process outsourcing in the region.

The TCS project team involves professionals with extensive financial services and IT experience. Comprising experts who have worked on complex projects in the global securities markets, the solution is expected to be completed within a short timeframe.

TCS' global customers in the financial services industries include: SIS, Switzerland, STRATE, South Africa, National Stock Exchange (India), National Securities Depository Limited, India, Canadian Depository, Kuwait Clearing and Company, Deutsche Bank, ING Group, AIG, and AXA Insurance.

About Philippine Dealing System Holdings Corp.

Philippine Dealing System Holdings Corp. (PDS Holdings) was established to operate through its subsidiaries, namely: Philippine Dealing & Exchange Corp. (PDEx), Philippine Depository & Trust Corp.(PDTC) and Philippine Securities Settlement Corp. (PSSC) (collectively, the "PDS Group") the Philippine Fixed-Income Exchange Infrastructure Project. The Fixed-Income Exchange Infrastructure will serve the Philippine fixed-income securities transactions. The integrated infrastructure will be unique and possibly the first in Asia. The PDS Group will also be the systems provider for the foreign exchange markets.

The proponents of the said Project are the Bankers Association of the Philippines (BAP) and Investment House Association of the Philippines (IHAP). The Project was pursued in view of the desire of various financial market stakeholders both from the private and public sectors to establish an efficient and secure market place. It could be said that the Project will be the culmination or the fruition of all the market reforms that were and are continuously being instituted.

PDEx or the Exchange is the entity that will operate and maintain the trading system. PSSC is the central post-trade processing unit responsible for matching, clearing and settlement of fixed-income and foreign currency trades. PDTC is the entity that will offer the depository, custodian and registry services.

Shivanand Kanavi
Vice President, Tata Consultancy Services
Phone: +91 22 56689999
Email: shivanand.kanavi@tcs.com

RoSS as a golden parachute - by SEN. AQUILINO PIMENTEL - A Privileged speech delivered on March 14, 2005

RoSS as a golden parachute


Privileged speech delivered on March 14, 2005

Recently, the mass media reported the ouster of the National Treasurer, Ms. Norma L. Lasala, barely four months after she assumed the office. It was the shortest term served by a treasurer. It was so efficiently executed that long before the appointment papers of her successor were signed, the major dailies already announced her replacement with certainty.

Why? What triggered her unceremonious removal from office?

Outright Injustice

It certainly wasn’t because she had done something wrong as her superior, Secretary Cesar Purisima, had so unfairly insinuated in the press that the Department of Finance “had something against her.” Because if that were so, fairness dictates that the department should reveal what wrong she had done. But to simply imply that she had done something wrong without backing it up with proof is to my mind not only malicious but an outright injustice to the national treasurer who was merely trying to do her duty as best she could.

What, then, has she done to merit her removal?

Denouncing BS Circulars

The thing that apparently triggered her dismissal from office was her having categorically objected to the issuance and implementation of Bangko Sentral Circular Nos. 392 and 428 which created the so-called Third Party Custodians in the securities market of the country.

On the day she took her oath of office, she was instructed to implement these circulars even before she has had the time to study their merits. But prudence, however, dictated that she make an in depth study of the implications of the Circulars. And what did her study uncover? She learned that Circulars 392 and 428 were intended (1) to unduly favor a private entity, the Philippine Depository & Trust Corporation (PDTC) and (2) that their implementation would be grossly disadvantageous to the government and to the people.

The reasons for her conclusion follow:

Increase costs

1. Their implementation would increase the costs of investing in government securities that in turn would raise the country’s debt burden.

The very creation of the so-called third party custodians will cause the increase in the country’s debt burden. How?

Selling of government securities is one of the means by which the government borrows domestically from the public. Right now the investors who buy government securities do so without having to pay any amount other than the cost of the government security. The buyer simply instructs his bank to submit a bid for a government security. Without much ado, the transaction is done and recorded in the RoSS in a matter of minutes.

If the investor has to course his purchase through a custodian, the custodian will charge him fees for its services.

Billions in additional costs

How much would such custodian fees amount to? According to Vicente Castillo, President and chief Executive Officer of PDS, a third party custodian, those fees would amount to half a billion pesos on an P800billion transaction.

P800 billion is a rather conservative estimate given that a government security is turned over several times, say twenty times, in a year. The cost could easily soar up P20 billion. Please note that the estimate was made by just one of six private custodians. To complete our discussion, we mention that the six are: four foreign banks, namely, Standard and Chartered Bank, Hongkong and Shanghai Bank, Deutch Bank and Citibank; one local bank, Bank of the Philippine Islands, and a non-bank, PDTC.

The country has some P2 trillion worth of government scripless securities in a given year. That is the magnitude of the transactions in scripless securities that normally pass through the RoSS annually. On the basis of the estimate, the costs of transactions in scripless securities - if private custodians were involved – would more or less be P20 billion.

If private custodians are allowed to lay their hands, as it were, on the scripless securities transactions, additional costs will have to be borne initially by the investor when he bids for the government security. The government, in turn, would have to increase the interest rate it pays on the scripless security to enable the investor to recover his added cost. In the end, the people would have to ultimately bear the added cost.

Foreign aided facility

2. The implementation of BSP Circulars 392 and 428 would also mean awarding a government infrastructure worth millions of pesos that the country has obtained from foreign aid and grants to a private entity without just compensation - - - for free! How will this be done?

For the PDTC (Philippine Depository and Trust Corporation) to function as third party custodian, it will have to connect its computer system to the computer system of the government operated by the Bureau of the Treasury. By making such a connection, PDTC will gain access to sensitive and vital debt data of the government and the sophisticated system that maintains such data. This system which is called the Registry of Scripless Securities or the RoSS was developed in 1996. RoSS has capabilities parallel to the advanced systems in the United States and Canada. There is nothing like it in Asia.

It looks, therefore, like only the PDTC will benefit from the implementation of the circulars in question. PDTC apparently wants to access, infiltrate and use the RoSS system of the Bureau of Treasury and for free!

It is said that the government wants to privatize the RoSS. If that is so, wouldn’t the proper way be to go through a public bidding? If RoSS is sold to private parties through public bidding, it will, no doubt, fetch a handsome sum equivalent to tens of billions of pesos given its superior quality and capacity. We have been at wit’s end on how to raise much needed revenues. Why give away such a valuable asset for free to a private company?

Imperils debt data

3. Implementation of 392 and 428 will endanger the integrity of the country’s debt data and the government’s ability to manage its debts. How?

The RoSS contains vital debt data which form the bases for the preparation of reports and the culling of statistics used by the government in crafting the budget and timing its borrowing efforts. It maintains detailed records down to the level of individual beneficial owners and is able to give the government fast information on who it owes money to, how much is owed and the terms of such obligations.

The third party custodians, as designed by 392 and 428 will maintain a general account of the investors buying the government securities, the details of which will be known only to them and no longer known by Bureau. It will create a ridiculous situation where in order to determine who the government owes any amount to and how much it owes, the Bureau would now have to ask six different entities, namely, Standard Chartered Bank, Hongkong Shanghai Bank, Citibank, Bank of the Philippine Islands and Deutch Bank and PDTC and, thereafter, do a reconciliation with each one. Coming up with reliable debt figures will be tedious, if not impossible.

Risky implementation

4. Implementation of 392 and 428 would be extremely risky for the government. Why?

PDTC is an accredited third party custodian by the Bangko Sentral. But it is capitalized at a mere P500M pesos. Given the trillions of pesos worth of securities it will handle, what protection can it offer the investors and the government for the scripless securities that will pass through its hands? While the comparison may be odious, let me say that, at least, a savings bank is capitalized for more - - at least P2.5 billion.

No sweat private gain

5. Implementation of 392 and 428 would mean the use of government funds for private gain.

Using government securities as a staple and connecting to the government’s computer, third party custodians will charge custodian and other fees. Meanwhile, it is the government which has to reconfigure the RoSS system to accommodate the custodians and continue to maintain and operate it so that the third party custodians can make a living! This is what the Tagalogs would call “sinisuerte talaga!”

Unnecessary circulars

6. Implementation 392 and 428 is unnecessary.

Implementing the circulars we are discussing gives no added value to the securities market or to the government. The circulars would only allow private custodian companies to intervene in a market that already functions efficiently with hardly a cost to the investor or the government. The market and the Bureau are being disrupted to accommodate and sustain the creations of Circulars 392 and 428. In fact, objections were raised by the Investment Houses Association of the Philippines, BAP Member Banks and Insurance companies. But like other well-meaning complaints, the objections all went unheeded.

Whenever the proponents of 392 and 428 are asked what advantage would there be in the creation of third party custodians, they answer that it will prevent a recurrence of a scam similar to the Bancap scam of 1994.

Bancap scam before RoSS

The answer is neither good nor honest. Everyone knows that the Bank of Commerce was involved in that scam in 1994. In fact, sad to say, its Treasurer, Rey Feliciano, later took his own life. The perpetrators of the scam, Ms. Marilyn Nite and her colleagues defrauded several banks, Planters Bank, among them, by selling a government security worth Php450 million several times resulting in multiple claimants over it.

When the Bancap scam occurred in 1994, the RoSS was not yet organized. At that time, government securities were evidenced by certificates. The lag time between the printing of the certificate of a government security and the sale of the security made possible multiple selling such that by the time the certificate was printed, more than two parties could claim ownership of the same security. At that time it was the Central Bank which was charged with the function of issuing government securities.

Since 1996, however, with the development of the RoSS, government securities have become paperless or what is now called “scripless”. These means that they begun to exist as electronic entries in the RoSS in 1966. Recording of transfers of ownership are done on “real time”, i.e., as soon as they transpire. This, as well as other standard features of the RoSS - delivery versus payment, report rendition to primary dealers, benchmarking, etc., will not allow a scam similar to that of Bancap to happen again.

Undisclosed facts

Now, private custodians would have a significant role to play only if government securities were still evidenced by certificates. In a paperless or scripless environment, what is there to take custody of?

Benchmarks, price transparency, price discovery, etc. – these are services that the RoSS is or is capable of rendering at no cost to the investor or to the government. In fact, investment rates are now available via short messaging system or text messages, and an investor can know the value of his or her securities practically anywhere in the world he or she might be a given moment.

These facts have not been disclosed to the public and to the authorities when Circulars 392 and 428 were issued.

Who benefits?

I wonder why the proponents are, as a newspaper has put in, “in such a murderous haste” to implement the circulars? Who are the powers behind these circulars? Who stands to benefit from them? If this so called “capital market reform” is so good why then was the country still downgraded by the credit raters in spite of the fact that Circulars 392 was issued on July 2, 2003 and circular 428 was issued in April, 2004?

Why had the Bangko Sentral refused to disclose to the Bureau the criteria with which they accredited the private custodians who would now take over the functions of the RoSS? Why is the BSP forcing the Bureau to simply allow the connection of the systems of the custodians with the RoSS without any asking any questions?

How odd that the very government agency – the Bureau of the Treasury - that is expected to implement the circulars and which is in a position to understand the consequences of their implementation has not been previously consulted. How can the issuance of mere bank circulars nullify existing laws that gave the Bureau of the Treasury its mandate? The Bangko Sentral cannot alter laws.

Why did the Department of Finance merely stand aside and allow an agency under it to be divested of its core function by the Bangko Sentral? Why this “short arms” deal? Did anyone in the Department of Finance and the Bangko Central benefit from this arrangement?

These questions need urgent answers.

Summing up

To sum up, implementing BSP Circulars Nos. 392 and 428 is wrong. It is harmful to the country and to the people. It should be stopped. The brains behind the idea of the circulars in question include BSP Governor Rafael Buenventura and the PDTC officials, Vicente Castillo, Cesar Crisol, Topper Coronel, Terry Montecillo, William Ferguson, Ms. Flor Tarriela and Roy Lacsamana. There’s a common thread that binds the lady and the gentlemen mentioned. They were all incorporators of PCD, the forerunner of the PDTC, and they were all former Citibankers about 15 to 20 years ago and worked in the Trust Division of the bank.

It is also interesting to note that the Articles of Incorporation of the Philippine Depository & Trust Corporation (formerly Philippine Central Depository, Inc) listed BSP governor Rafael Buenvaventura as a former member of its Board of Directors and one of its incorporators.

These are obviously powerful people who could cause the removal of honest and hardworking public servants who oppose their plans even if the latter acted out of a sincere belief that those plans would be disadvantageous to the government. It looks like the power they wield is practically limitless so that it needs to be checked.

It looks like the transfer of the Ross from the Bureau is being used to provide a golden parachute for some people to land a sinecure or even a lucrative position in the private sector once they retire from the public service. I hope I am wrong but the questions I have raised, I think, demand forthright and honest answers.

In fairness, the people who are named in this speech or who think that they are alluded to should be given the chance to respond before the proper Senate Committee which may be authorized to conduct an investigation relative to the questions raised in this speech.

Example Worthy of Emulation

In closing, let me say that the example set by Ms Norma Lasala in standing up against the wishes of her superiors for what she, after serious study, believe would be bad for the country, deservesemulation -- not condemnation, by other public servants. The insensitive manner by which she was removed as head of the Bureau of Treasury speaks volumes of the way this government is being run hellish to the honest and faithful public servant but heavenly to the corrupt and wayward public officials

Opposition to BSP circulars cost Treasury exec her job

This article is from the Philippine Daily Inquirer...Thank you for posting a link to my website and keeping the issues current.

Inquirer News Service

FORMER National Treasurer Norma Lasala, reportedly was sacked from her post after airing her strong opposition to the Bangko Sentral ng Pilipinas Circulars No. 392 and 428, which called for the creation and implementation of the Third Party Custodianship system.

The circulars went into effect on Jan. 3.

Lasala said investors would have to pay huge service fees to third-party custodians, most of which would be banks.

The investors would then recover the cost they incurred by demanding higher interest rates for Treasury bills and bonds the next time they buy government securities, thus jacking up interest rates, she said.

The former official of the Bureau of Treasury (BTr) has no qualms in expressing her strong views against the third-party custody system despite the support given by her bosses--former Finance Secretary Juanita Amatong and incumbent Finance Secretary Cesar Purisima--to the BSP's capital market reform program.

"The implementation of aforesaid circulars is being relentlessly pursued with absolute lack of disclosure to the proper authorities and to the public as to the detrimental consequences of such a move to the government," Lasala said in a message posted in an online blog, which she created purposely as a venue to debate the merits of the third-party custody system.

Lasala was replaced by Omar Cruz, a supporter of the third-party custody.

Proponents of Third Party Custodianship said that the present system would protect investors from the crooked practices of unscrupulous dealers. They cited the the Bancap scam of 1993, which almost brought down the financial market.

But treasury officials said the scam happened during the time when securities still come in paper forms.

According to Gerardo Francisco, BTr director, the fraudulent selling of T-bills and T-bonds will not likely happen because securities now come in electronic form.

The BTr's Registry of Scripless Securities, or ROSS, will be enough to ensure the protection of investors, because the transfer of securities are recorded in the accounts of government securities eligible dealers, or GSEDs, Francisco said.

"How can there be double selling when we are already in the electronic stage?" he said.

BTr officials and employees also said that those pushing for the passage of the third-party custody system hoped to engage in profiteering disguised as consumer protection.

Lasala said that the third-party custodians would also require a huge cost for reconfiguring the ROSS, a project for which the BTr would not have enough funds.

With third-party custodians, the ROSS has to be reconfigured because each custodian has to have an account within it, she said.

The ROSS will continue to record security transfers, but it is within the account of third-party custodians that the securities will be kept safe. The custodians will perform various investment activities on behalf of its investors.

But for Lasala and her allies in the BTr, third-party custody is nothing but a program crafted by opportunistic capitalists who will reap huge profits at the expense of a financially bleeding government and the public.

Lasala, who ended her term last Feb. 15, may be fighting a lost cause for now. But the former national treasurer said that leaving the BTr did not mean she lost the battle. Instead, by being out there, she would be fighting for her cause on a broader field of battle, and with arms provided by the people.

Michelle V. Remo

Monday, March 14, 2005

Keep on Making a Difference!

My heartfelt thanks to those who have quietly organized themselves to support me on this debate. I could not have even gotten halfway to where we are today if not for the constant advice, comments, and insights all of you have given me.

Given the timing, I can only imagine the peer pressure that is going on right now what with the press releases of the individual banks supporting the FIE. :)

Egos are very much invested and pride certainly as well. It is certainly an uncomfortable time for all of us but we can only pray that it will utlimately result in a better financial environment for us all.

RP Senate - Privileged Speech

Sen. Nene Pimentel is giving a speech on the CB Circ 392 debate at 4 pm today. We understand that Sen. Serge Osmena may lead the interpellation. Readers may want to verify the information that we've received that the BAP has given its side of the story to Sen. Osmena.

However the oppositors get their points across to the Senate on the position I've repeatedly stated (that RoSS can meet and exceed what the BSP needs by way of investor protection), we are achieving the debate that Circ. 392 sorely needed.

The oppositors may claim that the use of the privileged speech is uncalled for and that the Senate is not the forum to discuss capital market issues, however, we trust that the Senate debate can also re-examine the solemn duties and responsibilities that all public servants are trusted and sworn to uphold.

In my case, I saw it as my duty to perform a diligent study of what was being asked of me by my bosses at DoF, the BSP, and the BAP in the case of 3rd party custody.

To question when I did not understand, to make helpful recommendations whenever I could, and above all, to ensure that the Bureau faithfully executed its appointed responsibilities; these were my duties.

I leave it to the readers to form their own judgements regarding the assertions that this site has been sowing disinformation and half-truths. Some three weeks ago, I seem to remember that I was being painted in the media as an obstructionist, a non-team player, a lackey of a supposed dealers cartel, or all of the above.

Sunday, March 13, 2005

Comments on BSP Response to Third Party Custodianship Issue

My response to the BSP article published in BW last Friday, March 11, 2005 is three-fold:

1. Understanding RoSS
2. The Technical issues
3. Points to Ponder

Comments posted on March 12, 2005, dealt on RoSS, its history, functionalities and its significant role in public debt management.


BSP Statement: '"actions and securities balance reports are also not given directly and are instead coursed through the same dealer banks. for all intents and purposes, investors remain out of the loop and can only hope that they are treated fairly by their dealer bank.


The BSP conveniently neglects to state that coursing the securities account statement through dealer banks is only one of several options available to investors in RoSS. The investor has two other options available in RoSS-having a regular statement mailed to his designated mailing address, or having statement or queries "on demand" but without any regularly generated statements.

BSP statement: "What this means is that, in the case of government securities, the investor may take direct delivery of securities bought by instructing the dealer to instruct RoSS to credit his securities account. This is perfectly acceptable, provided that RoSS has the capability to directly confirm to the investor his transaction on a timely basis.

However, the ClientInterface System of the RoSS is deemed non-compliant at the moment because of this material deficiency, as well as its inability to render periodic securities statements directly to the investor. It will be considered compliant as soon as these deficiencies are remedied.

So it is not tru that business is being taken away from RoSS to be substituted by third party custodians.,


First, while the BSP circular explicitly states that RoSS can be used to house the investors account, subsequent pronouncements made by BSP are not consistent with this - e.g. the unsigned e-mail from Deputy Governor Reyes addressed to the banks, circular 457 sec 1 letter c, and subsequent press release , e.g. article written by a reporter of a leading daily, Maricel Burgonio titled "RoSS falls short of requirements, says BSP".

Second, the "client Interface system" referred to here is the front -end value added service offered by a service provider that supports only certains functionalities of RoSS.As stated in previous comments, RoSS is demonstrably and fully capable of independent investor accounts and varios modes of securities statement delivery, but BSP has never bothered to examine it (at least the BTR has never received such request).

BSP Statement :" Unfortunately, the oppositors want to deny this option and insist on a RoSS monopoly and is forcing RoSS to rapidly upgrade, whether ready or not, just to pre-empt the entry of private sector custodians.


This is false. Historical records will clearly show that the functinoality of independent investor accounts has been in existence since 1998 when the Small Investors Program (SIP) was launched.

BSP Statement: "We expect that the RoSS having a "state-of-the-art" computer system can easily interface with any system without fear of intrusion. The issue of security breach can well be addressed by the appropriate computer security systems and technology, like firewalls, which the RoSS is expected to already have in place.


The BSP seems to equate computer security with purely external threats and fail to consider the possible threat to the integrity of the system coming from connected comuters and even authorized users, as if they have not heard the age-old maxim- garbage in, garbage out.

The Ross database currently contains data on OWNERS and DEALERS of government securities. Allowing entry into the system of custodian's holdings and transactions will effectively "contaminate" the database, without the BTR having the ability to determine for itself the real owners of the securities it has issued. This is the "intrusion" that the BTR is trying to avoid, among others.

BSP Statement: "As for the connectivity of the trading platform of the Fixed Income Exchange, the PDEX, it will not connect to the settlement system. It is the PDEX backoffice settlement server that will connect to the RoSS and all such connections are pre-conditioned on the observance of the security protocol that will be dictated by the BTR.

It should be noted that it is a global standard for exchanges to achieve straight-through-processing (STP). Given that done deals (trades) are already captured in the exchange trading system (in this case PDEX), the trades would be sent electronically to the clearing agent (in this case, RoSS) for clearing and settlement, without the need for any re-encoding of the trade details in the Telerate terminal.


RoSS has always operated in STP mode, from auction, through trades and coupon payments, to maturity. IN all of its interfaces-with the auction system, with Telerate, with PSE, and with other service providers it has dealt with in the past-it has avoided any re-encoding of data.

However, the kind of STP envisioned by PDEX will require modifications to ensure that the sellers of GS actually have the securities they are trying to sell BEFORE these are actually sold. This is to ensure compliance with the G20 recommendation on RTGS and DVP, which are international best practices for securities trading. How PDEX hopes to achieve this by having only their settlement server connected to RoSS is a big issue.

Further , there will still be Over the counter trades(OTC), how to capture these trades to get to anywhere near STP mode is the bigger issue.

Lastly, to mandate whether OTC should altogether be abolished is the biggest issue.


1. BSP article in BW says its circulars are market reforms which aim at:

a. delivery of securities to investors;
b. acceptance of thrid party custodians as a critical agent for protecting investor interest to lead to deepening of the market;
c. migration to formally organized trading of debt securities in secondary market for efficient price discovery and transparency.


I.. This is for certificated money market issuances of banks and private corporations, not for Tbills and Tbonds which are uncertificated. BSP had this rule under CBP circular 437-74 since November 4, 1974 but BSP was not able to prevent the Bancap scam - WHY?

BTr's shift to scripless government securities has not seen the scam repeated. could it be that delivery is not the key to scam-less trading?

2. BSP should detail to the public its safeguards/guarantee that third party custodians (who are also banks and dealers) will not engage in practices they ascribe to the other banks (whom they have not accredited as custodians)

3. Why cannot BSP detail to the public hoe FIE and the custodians hope to provide "price discovery and transparency" so we are not just enamoured by the phrase but have a basis for evaluating the statement.

II. BSP on current situation: risky to bank customer who trust banks; securities investors are exposed to abusive bank dealers; investors incur opportunity costs; risky to financial system because unscrupulous dealers freely engage in undocumented buy-back to avoid reserves and reduce their supervision fees.


It is understandable that BSP does not trust banks. An IMF consultant once quipped to BSP's Superintendent of Banks (back then):"Whenever I talk to you, I get the impression that banks exist to be supervised". But does not the BSP exist, among others, to assure the public clients of banks that banks can be trusted because they are supervised by the BSP? If BSP can't trust its banks, who else should?

There was mention of opportunity cost to investor and this was not explained.

III. BSP wants some paper (not necessarily the securities subject of transaction to be delivered to investor for his protection, via:

a. book entry to investor account, then confirmation of t sale shall be delivered to investor.
b. book entry transfer to securities account of investor-designated custodian who will hold securities in investor's name, then confirmation of sale shall be delivered to investor.


For all the words used, the thought is still the same as what is being done now for investors in Tbills and Tbonds. Investor's acquisition of treasury bills/bonds/, if you will, in a RoSS account in investor's name.

BSP concludes that RoSS in non-compliant with the above requirements simply by saying it is deficient because it is unable to give securities statement directly to investor. I dispute that for reasons cited in the second part of this paper , but also because my own experience showed that I get my securities statement from RoSS signed by BTR officer, but after the first confirmation statement, I do not need periodic reports on my 5-year bonds anyway I get credited in my LBP account for the coupons as regularly as the sun rises in the east each morning. I can also opt to simply get a regular statement from the BTR but whatever for, as I hold my small investments to maturity anyway.

Yesterday, a friend called me to complain that she went to a Bank (who shall be nameless) to put her (millions) in government bonds. she was given two papers to sign. One was to designate a custodian and the other was to authorize the dealer bank to transfer the bonds to the custodian. Both documents would waive any and all courses of action against the dealer and the custodian should there be a liability arising from the handling of the securities. She did not like the seeming absolute exoneration of the bank dealer and the bank custodian so she decided to put her money in tme deposit!

I also went to a universal bank and a commercial bank to place my little amount in Tbills. While the rate for 52 days of 6.5% was acceptable, the account officer advised me to ready and understand two documents I will have to sign and have notarized:

a.) A Special Power of Attorney to the universal bank to (among others) transact with a securities registry and/or custodian to open a settlement account for the proceeds of the securities, etc.

b.) A letter to the universal bank certifying that as long as I have outstanding securities not delivered to a BSP accredited third party custodian, I shall not be allowed to enter into securities transactions with the universal bank thereby freeing the universal bank of any and all liabilities arising from the universal bank's implementation of my instruction.

IV. BSP says PDTC does not lend money nor trade in securities so it does not need capital for credit and market risks.


How about personnel risk,legal, technological , and other oprating risks? Why issue PDTC a quasi-banking license? Does this not render PDTC a competitor of the banks it is going to serve? Consider the unfair disadvantage it has over banks since it is not even capitalized like the banks?

Business Continuity plans, Contingency risks?? even FIE has not yet obtained its SRO license...

V. BSP pontificates that security can be addressed by appropriate computer system and technology (referring perhaps to BTR when the staff raised technological risks)


This shows that FIE and PDTC do not have the security configured because they leave it to "BTR-Custodian Agreement"

VI. BSP says "PDEX will not connect to Settlement (presumably RoSS). Only PDEX back-office (will presumably connect to RoSS) preconditioned on BTR security protocol that BTr will dictate.


This is a play of words to assuage BTR personnel . PDEX back-oofice is not PDEX? RoSS is doing STP now with the burden of PDEX on its back. Why should RoSS take on additional layers?

third party custodian

This is to comment on the statement of Asst. Gov. BSP Espelita during a debate last night at Channel 11 between Atty Elna Cruz about the third party custodian.
Mr. Espelita mentioned that BSP is order to develop capital market has to create six (6) more lanes  to be represented by the six (6) BSP accredited third party custodians as against  only one lane represented by BTr RoSS.
Mr. Espelita failed to note that under the present system, there are already forty one (41) lanes represented by forty one (41) GSEDs that serve as ways to flow government securities to the secondary markets/investors. By reducing the number of lanes from forty one (41) to only six (6) third party custodians will limit the flow of investment to secondary markets, thus the proposal of BSP is contrary to their goal of developing capital market.  

Friday, March 11, 2005

Preliminary Response to BSP


In reviewing, the comprehensive reply of the BSP, I realized that there are a lot of topics to cover. It will take me this weekend to compose a reply that can satisfactorily discuss each major topic.

At this point, the major impression I am forming is that all stakeholders need a fuller appreciation of the capabilities of RoSS and its subsequent upgrades. I am saying this because most of the comments within BSP reply seem to be hinged on their less than complete understanding of RoSS

It is painfully apparent also that these capabilities that were implemented by my predecessors as well as by myself were not fully communicated to other stakeholders. If there is a fault, it is s the superficial knowledge of RoSS because a lot of the valid concerns of the BSP for improving investor protection are already addressed in RoSS.

For example,

BSP statement:In the current uncertificated securities environment, control by dealing bank is achieved by "delivering" or transferring by book-entry the purchased securities from its primary account to a sub-account under its own primary account in RoSS.

The arrangement is inherently risky to the customer as far too much trust is required to be placed in bank dealers, who are always under severe pressure to make profit, to always do the right thing for their customers.”

The sub-accounts under the control of dealer banks is only one of the several arrangements available in RoSS for supporting name-on-registry capability, and is intended to support custodianship/nominee arrangements where the custodian or nominee is required to name the beneficial owner of the securities.

What the BSP may not be aware of is that RoSS is also capable of supporting independent investor accounts, which are fully under the control of the investor through the use of a PIN, and actually result in having proceeds of the investment placed directly in the investor’s designated bank account.

This capability has been fully demonstrated “in production mode” in the BTR’s Small Investor Program (SIP) initiated in 1998 which was implemented by my predecessor Prof. Leonor Briones, and again with the Small Denominated Treasury (SDT) Bonds which were listed in the PSE in 2000. These initiatives spurred the incorporation of direct access and direct registration facilities within RoSS itself to benefit and protect small investors. Equally important is the fact that these services could be then cheaply. These facts can easily be verified with both Landbank and DBP since they acted as the direct settlement institutions for these initiatives.

BSP statement: "In the mid-1990s this kind of arrangement led to the BANCAP scam that enabled unscrupulous traders to sell to multiple customers the same securities. At its height, it created a lot of nervousness in the financial system and only timely defensive action prevented full-blown systemic crisis. This case is actually still being disputed in the courts today by three banks claiming ownership over the same set of government securities.

Critics claim that this situation was already addressed by the conversion to scripless government securities recorded under the RoSS system.

It did not. RoSS, as a registry, merely keeps an electronic record of what was once a paper-based system but it does not significantly improve the situation because it perpetuates the system where customer securities accounts, now paperless, are fully controlled by the dealer bank.

This reference to the BANCAP scam is used to justify the need for third party custodians is historically out of context. What BSP should mention, however, is that:

1. BANCAP happened in the early 1990’s, BEFORE government securities were dematerialized. In a subsequent capital markets study, the Capital Markets Development Council, I believe, there were several weaknesses cited with the then Book-Entry System and the certificated securities regime. RoSS is actually a direct outcome of this study and was implemented (in 1996). to prevent another Bancap-like scandal. Again, I would urge all stakeholders to read former Treasurer Valdehuesa’s well written historical recounting of these events ;

2. Since RoSS has been in place, there has been NO single incident similar to BANCAP; and

3. In fact, the Realtime Gross Settlement System (RTGS) and Delivery vs. Payment (DVP) conventions now fully implemented in RoSS on both the securities and cash legs of the transactions effectively ensure that it will not be possible for dealers to sell securities they do not have.

Additionally, custodianship as a concept in a regime of "certificated " Treasury Bills and Bonds has no place in a regime of uncertificated Treasury bills and Bonds. RoSS is not the 'registry' of old , e.g., the civil registry or the registry of deeds. RoSS is the state-of-the-arts inseparable phase of the BTr's mandate of managing and controlling national government's debt from domestic and foreign sources. RoSS is the end of the continuum of borrowing domestically through the floatation of Treasury Bills and Bonds, i.e., electronic auction, electronic recording of awards, electronic settlement with BSP. RoSS is the subsidiary ledger in BTr's function of maintaining the financial accounts of the National Government and its agencies.

BSP statement: Transaction confirmations and securities balance reports are also not given directly and are instead coursed through the same dealer banks. For all intents and purposes, investors remain out of the loop and can only hope that they are treated fairly by their bank dealer.

Coursing the securities account statements through dealer banks is only one of several options available to investors in RoSS. The investor has two other options available in RoSS – having a regular statement mailed to his designated mailing address, or having statements or queries “on demand” but without any regularly generated statements.

I will limit my comments to here for now. I beg my readers’ indulgence and if they would so kind as to read the rest of my observations in subsequent postings.

My reply to BSP's Comments in the March 11, 2005 Edition of the BusinessWorld

Dear Readers,

A great article was publuished in today's issue of the BusinessWorld. I believe that the article gives us an organized framework for debating the many complex issues at hand. I will post all my comments through this website sometime tonight, as there are a lot of points that need to be addressed.

Stay tuned....


Thursday, March 10, 2005

BSP CIRCULAR NO. 457 Series of 2004

Below is BSP Cir. 457. We need to reconcile the statements given by Dep. Gov. Espenilla durring last night's forum on Diyos at Bayan on Channel 11 regarding the fact that investors HAVE A CHOICE as to whether they would want to use a 3rd Party Custodian or not.

Take for example Section 1. c, isn't the ability to trade one's security an intrinsic right that comes along with buying that security in the first place? What value does a fixed income security have for an investor if he cannot trade it when the prices move either for him or against him.

In other words, the investor is still forced to take on a third party custodian if he needs the protection of being able to trade out of his position. Why can't the investor have the best of both worlds? He has direct registration with RoSS (as allowed by Circ. 428) and can still trade.

The lawyers can now decide whether access to trading and liquidity is a proprietary right that belongs to the investor which should not be disenfranchised.

CIRCULAR NO. 457 Series of 2004
Pursuant to Monetary Board Resolution No. 1415 dated 30 September 2004, the following clarificatory regulations governing securities custodianship operations of banks and non-bank financial institutions under the supervision of the Bangko Sentral ng Pilipinas (BSP), are hereby issued as follows:

Section 1. Pursuant to the provisions of Subsecs. X238.2 of the Manual of Regulations for Banks, as amended by Circular No. 392 dated 23 July 2003, and Subsecs. 4101Q.4 and 4104N.3 of the Manual of Regulations for Non-Bank Financial Institutions, as amended by Circular No. 450 dated 6 September 2004, securities sold on a without recourse basis shall be delivered to the purchaser, or to his designated custodian duly accredited by the BSP: Provided, That a bank/other entity authorized by the BSP to perform custodianship function may not be allowed to be custodian of securities issued or sold on a without recourse basis by said bank/entity, its subsidiaries or affiliates, or of securities in bearer form. Existing securities being held under custodianship by banks/other entities under BSP supervision, which are not in accordance with said regulation, must therefore, be delivered to a BSP accredited third party custodian. However, banks and other financial institutions under BSP supervision may maintain custody of existing securities of their clients who are unable or unwilling to take delivery pursuant to the provisions of Circular No. 392 but who declined to deliver their existing securities to a BSP accredited third party custodian subject to the following conditions:

a) the custody arrangements with clients have been in existence prior to the effectivity date of this Circular;

b) the dealing bank/NBFI under BSP supervision had been informed in writing by the client that he is not willing to have his existing securities delivered to a third party custodian;

c) any BSP regulated institution shall not enter into securities transactions with a client who has outstanding securities not delivered to a BSP accredited third party custodian; and

d) it shall be the responsibility of any BSP regulated institution to satisfy itself that the person purchasing securities from it has no outstanding securities holdings which were not delivered to a BSP accredited third party custodian.

Section 2. The provisions of Section 12 of Circular No. 428 dated 27 April 2004 are hereby amended, as follows:
For purposes of compliance with the requirements of R.A. No. 9160, otherwise known as the “Anti-Money Laundering Act of 2001,” as amended, particularly the provisions regarding customer identification, record keeping and reporting of suspicious transactions, a BSP-accredited custodian may rely on referral by the seller/issuer of securities: Provided, THAT IT MAINTAINS A RECORD OF SUCH REFERRAL TOGETHER WITH THE MINIMUM IDENTIFICATION, INFORMATION/DOCUMENTS REQUIRED UNDER THE LAW AND ITS IMPLEMENTING RULES AND REGULATIONS.-

Section 3. A BSP accredited custodian must maintain accounts only in the true and full name of the owners of the security. However, said securities owners may be identified by number or code in reports and correspondences to keep his identity confidential.

Section 4. Securities subject of pledge and/or deed of assignment as of the date of this Circular, may be held by a lending bank up to the original maturity of the loan or full payment thereof, whichever comes earlier.

Section 5. Sanctions
Without prejudice to the penal and administrative sanctions provided for under Sections 36 and 37, respectively of R.A. No. 7653 (The New Central Bank Act), violation of any provision of this Circular shall be subject to the following sanctions/penalties.

First Offense –

a. Fine of P10,000.00 a day for the institution for each violation reckoned from the date the violation was committed up to the date it was corrected; and

b. Reprimand for the directors/officers responsible for the violation.

Second Offense –
a. Fine of P20,000.00 a day for the institution for each violation reckoned from the date the violation was committed up to the date it was corrected; and

b. Suspension for ninety (90) days without pay of directors/officers responsible for the violation.
Subsequent Offenses –

a. Fine of P30,000.00 a day for the institution for each violation from the date the violation was committed up to the date it was corrected;

b. Suspension or revocation of the authority to act as securities custodian and/or registry; and

c. Suspension for one hundred twenty (120) days without pay of the directors/officers responsible for the violation.

Section 6. Effectivity
This Circular shall take effect fifteen (15) days following its publication in the Official Gazette or in a newspaper of general circulation.

14 October 2004

What Happens When an Investor Does not Use the Services of a Third Party Custodian?

Sec 1, letter (c) of BSP Circular 457 series of 2004 states that any BSP regulated institution shall not enter into securities transactions with a client who has outstanding securities not delivered to a BSP accredited third party custodian.

From the foregoing, it is obvious that even as BSP claims that using a third party custodian is voluntary, the circular makes it very restrictive for an investor not to do so.

To Our Friends in Media, Thank You!

Zoe Television Channel, Channel 11 invited us to its program "Diyos at Bayan", hosted by Brother Eddie Villanueva and Ms. Kata Inocencio last night, March 10, 2004, between 9:00 to 10:30 in the evening.

The objective of the program was to ventilate the issues surrounding the Third Party Custodianship and Connectivity. They invited Mr. Nesting Espenilla, Assistant Governor of the Bangko Sentral ng Pilipinas and Atty. Elna Cruz, former Executive Assistant of the former Treasurer at the Bureau of the Treasury.

The reasons why we have been opposing the implementation of BSP circular nos. 392 and 428 were cited. It was a very good opportunity for us to have been able to make the public aware of the harm to the country and the people that the said circulars could cause if implemented.

The challenge given at the end of the show by Atty. Cruz is a warning we wish to reiterate to every well-meaning reader/citizen. It is the driving force which makes us continue this crusade against the implementation of the said circulars, and it is essentially this: It is not enough for one to know what is right and wrong. Whenever we see that a wrong is being committed or about to be committed, we must speak up and be willing to take a stand. For if we keep our silence or fail to take action to correct the wrong, we abet its perpetuation and become accessories to the wrongdoing. To put in another way, we quote a familiar saying: "THE KEY TO THE TRIUMPH OF EVIL IS FOR GOOD MEN TO DO NOTHING."

Once again, thank you to all of you who have taken up this cause with us. Let us continue the good fight!! May the Lord bless and prosper you.

Wednesday, March 09, 2005

A Businessworld Article on FIE vs. OTC by Noel G. Reyes

MANILA, PHILIPPINES | Wednesday, March 9, 2005
By Noel G. Reyes

Even as the battle against the Bangko Sentral's third-party custodianship rule rages, monetary authorities and their allies are set to open a new battlefront in their fight to introduce new measures meant to reform the local capital market, but which the other side criticizes as reversals, at best, and crass opportunism, at worst. This time, the monetary authorities set their sights on fixed-income exchange (FIE) against the current practice of over-the-counter (OTC) trading for government and corporate bonds.
OTC trading, in its most basic sense, refers to the system wherein bond dealers transact trades over the telephone. Today's actual OTC trades have evolved from this primal description. In today's practice, OTC trades involve electronic trading systems, such as the system run by Bloomberg, currently used by local traders. Notably, developed bond markets abroad, mainly in the US, also use OTC trading.
Using this OTC trading platform, plus Bloomberg interface, local bond traders have developed market benchmarks such as MART1, currently used as the benchmark for short-term interest rates by banks in repricing their loans and derivative instruments. Market participants further point out that this system has helped develop a deliverable on-the-run market -- referring to the so-called secondary bond market where government bonds bought at auction can be traded by bondholders among themselves. The benchmarks generated by the current system have expanded to include three-year and four-year interest rates.
Coupled with the Bureau of the Treasury's registry of scripless securities (RoSS) system, the current OTC system of local bond traders has turned into a true DVP (delivery-versus-payment) settlement system. Developed by the Treasury, RoSS is an electronic record of all debt obligations of the Republic, all kept in scripless form (i.e., not in certificate form). DVP, meanwhile, refers to the system wherein the buyer and seller exchange cash and securities ownership simultaneously ("kaliwaan" in the local lingo).
Into this situation, the market reformers at the Bangko Sentral decided that a more formal market arrangement is required, in the form of the fixed-income exchange. This FIE "was conceived as a comprehensive financial market structure that will provide an electronic platform for trading, clearing and settlement, and depository and custodianship of fixed-income securities and derivatives," according to the handbook of the Philippine Stock Exchange, one of the investors in the Philippine Dealing System Holdings Corp., the parent company of the FIE.
The FIE's proponents criticize the present OTC trading system as non-transparent, among other things, and further blame the resulting noncompetitive trading system for the wide bid-ask spreads in government securities in the secondary market. Extremely wide bid-ask spreads connote a highly inefficient and illiquid market. These proponents argue that their FIE system would help narrow this spread, although by what mechanism they could not say.
"In case the public does not know it yet, we would like to inform all women and men from all walks of life that the Bangko Sentral ng Pilipinas (BSP) is divesting the BTr of the electronic record of scripless debt of the Republic," stated a manifesto issued by BTr staff. "Ruled as legal by the Department of Justice, the divestment is in favor of the fixed-income exchange (FIE) and third-party custodians "
While the FIE is envisioned to provide the hallmark functions of an exchange -- from price discovery, to transparency, better market access and delivery-versus-payment -- market participants argue that the present system already accomplishes these functions and, more importantly, does so at no additional cost to the participants. In contrast, the FIE will exact its pound of flesh by charging exchange fees as well as custodianship fees through its wholly owned Philippine Depository & Trust Corp.
Those who oppose the FIE's establishment further note that market liquidity may even suffer since the FIE would exclude some current market participants from trading directly in the new exchange. The FIE's accomplishment of the price discovery function is seen to be, at best, at par with the current system; it may even be of poorer quality should the OTC market run parallel to it, as the latter would sap liquidity from the exchange.
Another weak point of the FIE is that, upon implementation, it would be incapable of true DVP. As such, market participants feel this would be a reversal of the current system which already incorporates DVP.
Further, market participants note that the FIE has failed to address issues concerning credit and anti-money laundering. The latter imposes a constraint on the FIE, banning it from venturing beyond bond trades done among banks. That would then call to question the FIE's avowed goal of deepening and widening the market for bonds, which would necessitate the inclusion of more participants.
These then are the criticisms against the FIE. Just like the third-party custodianship rule, the establishment of the FIE is seen as an imposition of additional costs on the market in exchange for limited to zero additional benefits. Against the current OTC system, which already uses an electronic platform and a DVP system of settlement, the FIE's purported advantages remains ambiguous. It would take a lot of convincing before local bond traders believe that the FIE can actually deliver a better service and not only create rent for a select few.

Tuesday, March 08, 2005

BusinessWorld - New Treasurer seeks more consultation on custodian rules

Italicized phrases below are mine.


MANILA, PHILIPPINES | Tuesday, March 8, 2005

New Treasurer seeks more consultation on custodian rules

By IRA P. PEDRASA, Reporter

Despite the controversy over a Bangko Sentral order for private banks to be custodians of government debt papers, National Treasurer Omar T. Cruz is not about to ask the regulator to delay its implementation.

After all, he has been told by his boss, Finance Secretary Cesar Purisima, to implement that order -- the very same one that reportedly cost Mr. Cruz's predecessor her job.

But in an interview yesterday, Mr. Cruz also admitted that central bank's third-party custodian rules were indeed beset by "legal, technical, and operating" issues.

Thus, he would prefer to first improve communication lines between Treasury and Bangko Sentral before they take effect.

"Regulators need to know what's going on in our shop, and I want the Treasury to know what's going on at their side, because the two will have to work together at the right time," he told BusinessWorld.

"We all know what the mandate is [from Finance], but at the end of the day, what I would really like to do in terms of this so-called mandate is I'd really want my team to work together hand in hand with all the participants so that we can address all the issues pertaining to this matter. And there are really legal, technical, operating, and backroom issues -- whether they pertain to big or institutional investors or even retail investors," he added.

Treasury officials led by former National Treasurer Norma L. Lasala had openly opposed the central bank's third-party custodianship rules, fearing that these would jeopardize the management of the government debts, among others.

Through circular nos. 392 and 428, Bangko Sentral ng Pilipinas required buyers of government securities, as well as other securities, to deposit these with a custodian, other than his own bank or broker, for safekeeping. But these custodians will still need the Treasury bureau's Registry of Scripless Securities, where they want to open omnibus accounts on behalf of buyers. At present, Treasury handles the trade and safekeeping of all government securities -- bills and bonds -- sold.

Ms. Lasala had believed that her refusal to turn over the registry system to central bank's accredited custodians led to her replacement.

Mr. Cruz said he would continue dialogues with other Treasury officials, "to make sure that everyone is heard and that due process is always followed, and due diligence is done."

He also said that he was willing to meet his predecessors, including Ms. Lasala, to talk about leadership strategies. "I'm an open guy, I'll not monopolize the ideas. Something has to be learned from someone," he said.

"It is not my intention to undo very good things and what Ms. Lasala has put up," he stressed.

During her short stint as Treasurer, Ms. Lasala introduced switch auctions and made use of benchmark rates for the secondary market, among others. "The enhancements don't necessarily have to clash with the other regulators' requirements, we just need to make sure that certain regulatory concerns are also taken into account," Mr. Cruz added.

Questions an Investor in Philippine government Securities might want to raise....

RE Circulars 392 and 428 - Questions a Small Investor, Regulator, Government, PDS investor, a GSED, an Accredited Third Party Custodian, Mid-office personnel, Backroom or Support Personnel, Compliance Officer and a BAP member might want to raise ……


1. What added safeguards can I expect to enjoy under this new regime with a 3rd party custodian? Now with BTr Ross , I can check with BTr if my securities account was credited by my GSED. I don’t have to do this everyday and it does not cost me a single cent to make that inquiry. What other types of report rendition do I need?

2. Can you tell me what it will cost me if I will be referred to a Third Party Custodian?

3. Are you telling me that the Third Party Custodians are the better credit risks than government? Or that the Third Party Custodians are the better risks than my bank? Perhaps, I should stop dealing with my bank altogether?

4. Why do I need a Third Party Custodian when my investment is only for Php100,000 at 6% net for 3 months? I heard that the transaction fee for a Third Party Custodian will cost me Php900.00, how about the other charges? Perhaps my GSED took a cut of 1% on a security it bought at 7% that was sold to me at 6%, but that translates to only Php250.00 vs. the Php900.00. What will happen to my earnings?

5. What will executing a Special Power of Attorney in favor of the Third Party Custodian constitute? Why can’t my bank explain what this is all about? Why does someone else have to handle my investment? I used to do it by myself. How come I now have to authorize someone else to act for me?

6. I trust my bank that is why I deal with them, why will I be referred to a total stranger and I am told this is for my protection?

7. Price Transparency? BTr can make prices available via SMS, via my cellphone, how transparent can it get? I am in Mindanao, how can I participate in a fixed income bourse in Manila?

8. Portfolio valuation? I don’t need this, perhaps, the bigger accounts do but BTr will also make available a benchmarking procedure that is more superior than market’s. As a small investor, I usually hold my securities up to its maturity. I don’t trade it, the little I will earn from lending my securities will go to naught .

9. I heard that if I were a Retail Treasury Bond holder, I need not elect a Third Party Custodian, why is this so? There are also foreign Insurance companies who got exemptions from this rule, why the disparate application of the rules?

10. If only the big accounts will be enrolled for the Third Party Custodianship and their portfolios can be used to short the market ,what happens to the price of my investment?

11. When can I expect to trade my securities to a dealer other than the bank I bought it from? Do I need this facility if my investment is only for Php100,000? What would a ¼% saving fetch for a 30 day instrument with a principal of Php100,000 net of vat and other charges?

12. Are they serious when they claim this is for my and the other small investors’ protection?

Sunday, March 06, 2005

Executive Brief on Circulars 392 & 428 issues

BSP Circular No. 392 which was issued on July 2, 2003 and Circular No. 428 issued on April 15, 2004 are the two (2) circulars which created the THIRD PARTY CUSTODIANS. Essentially, these circulars provided for the following:
1. Banks and Non-bank financial institutions under the BSP supervision may act as securities custodians and/or registry upon approval by the Monetary Board for them to function as such upon their compliance with the pre-qualification requirements of the BSP.
2. The functions and responsibilities of a securities custodian are the following:
a. Safekeeping of the securities of the client;
b. Holding of title to the securities in a nominee capacity;
c. Execution of the purchase, sale and other instructions;
d. Performance of at lease a monthly reconciliation to ensure that all positions are property recorded and accounted for;
e. Confirmation of tax withheld;
f. Representation of clients in corporate actions in accordance with the direction provided by the securities owner;
g. Conduct of mark to market valuation and statement rendition;
h. Doing earmarking of encumbrances or liens such as, but not limited to Deeds of Assignment and court orders; and
i. Acting as collecting and paying agent
j. Does securities borrowing and lending operations as agent.
3. The functions and responsibilities of a securities registry are the following:
a. Maintenance of an electronic registry book;
b. Delivery of confirmation of tranactiona dn other docuemntw within agreed trading periods;
c. Issuing of registry confirmations for transfer of ownership as it occurs;
d. Preparation of regular statement of securities balances at such frequency as may be required by the owner on record but not less than every quarter;
e. Following of appropriate legal documentation to govern its relationship with the issuer.
The RoSS is a sophisticated, highly technical, state-of-the art computer system operated and maintained by the Bureau of the Treasury. It was a multi-million project developed in 1996 from financial aid and grants and is parallel in performance and efficiency with systems used in the United States, Canada and Europe. Since its inception, the RoSS has been capable of direct registration of beneficial owners and is capable of handling 156 million individual, independent accounts (It presently holds merely 42,300 accounts). Data culled from the RoSS are the bases for the government’s statistics, budget and other reports to the public. The RoSS IS A VITAL TOOL in the government’s DEBT MANAGEMENT.
The RoSS records in scripless form all peso–denominated Philippine government securities. Trades are settled on real time gross settlement and effects redemption of all maturing peso-denominated Philippine securities. Ross has securities and lending facilities, allows derivation of benchmarks based on actual done interbank trades in the secondary market and reportorial facility for primary and end-beneficial accounts and statement rendition on a daily basis.

Below is a comparison of the changes that will result from the implementation of BSP circular nos. 392 and 428 :
Posted by Hello

From the foregoing, it is apparent that the implementation of the THIRD PARTY CUSTODIANSHIP as designed under BSP Circular Nos. 392 and 428 will be GROSSLY DISADVANTAGEOUS to the government and the Filipino people for the reasons cited herein:
1. The implementation is inefficient and retrogressive because:
a. It merely adds another layer in a transaction that is already simple and working. The bank which used to be able to transact directly with the BTr will now be required to course its transaction through a third party custodian ;
b. Reports and debt data which used to be available to the government in the nick of time will now be difficult to prepare, if not impossible. Information which was once whole will become fragmented so that to be able to get a total picture of the country’s debt, BTr will now need to request for the records known and available only to the custodians;
c. A reconciliation of records between the BTr and the custodians will now become necessary.
d. It will not maximize the capabilities of the RoSS and will even limit the same.
2. The implementation will be costly to the government because:
a. Added costs to the investors will inevitably be passed on to the government who is the issuer of the government securities in the form on higher borrowing costs and/or interest costs. By their own admission in a local daily, PDTC disclosed that it stands to gain half a billion pesos per annum. This is a conservative estimate considering the number of times ownership of a security can be traded in a year. The investors would naturally take the added costs into consideration when they submit their bids for the government securities thus increasing the government’s cost of borrowings and adding to the people’s debt burden.
b. The re-configuration of the RoSS will entail costs that have not been provided for in the BTr’s budget.
3. Implementation will be risky to the government because:
a. With the connection of the PDEX trading platform to the RoSS it will expose the RoSS to the risk of a security breach. Since the PDEX trading platform will connect directly to the RoSS portals, the RoSS system and all the information it maintains INCLUDING CONFIDENTIAL INFORMATION can be accessed by PDTC.Moreover, virus and other elements that can adversely affect data stored in the RoSS can be passed on from the PDEX system;
b. Since debt information will be parceled out to several custodians, the likelihood of unreconciled figures will not be remote. Any difference in figure will impair the INTEGRITY of the country’s debt data and and endanger the government debt management processes;
c. Adjudication risks will arise when the issue of which record among the six custodians and that of the BTr shall be deemed controlling in the event of discrepancy.
d. Third party non-bank custodian, PDTC is capitalized at merely P500MM, and yet it will be entrusted with the handling of government securities amounting to Php 2 trillion .
e. The government stands to lose the transparency of its records and will be unable to promptly determine who it actually owes money to. Any delay or errors in the gathering of statistics on debts can adversely affect its debt management capability.
f. It can discourage investors from investing in government securities thereby impairing the government’s ability to fund its requirements.
g. If the award to private entities will be proven disadvantageous to government, it renders the BTR liable and vulnerable to all types of suits/litigations.
4. Implementation is unnecessary.
a. Services like providing benchmarks, mark to market valuations , price discovery and transparency and others are already being rendered by the BTr RoSS at no cost to the investor and the government. In fact an investor is able to determine rates and prices anywhere he is through the short messaging system (SMS/text messaging system). These enhancements are among those approved under the Medium-Term Investment Program (MTPIP)of government.
b. Services to be offered by the third party custodians are already being offered by the GSEDs and the Trust Departments of banks. There are existing BSP circulars regulating these custodial functions.
c. It will be uneconomic for small investors to enlist the services of a custodian as the Php 900 transaction fee more than erodes the meager returns on small investors’ holdings on top of the other fees that the Third Party Custodians will charge. The small investors do not incur any cost right now under the BTr –RoSS .These small investors will be left with RoSS. Definitely the holders of Retail Treasury bonds (RTBs) as the alternative systems under circulars 392 and 428 will not be able to accommodate them negating the claim that the proposed system was meant to safeguard the small investors.
d. OTC trades will still continue and inputting other data manually negating the claim that the alternative systems effect seamless and straight-through-processing .
a. WITHOUT ANY VALUE ADDED TO THE PHILIPPINE GOVERNMENT SECURITIES MARKET, government funds will be used to configure the RoSS, and operate and maintain the same, BUT it will be the PRIVATE third party custodians, more particularly PDTC WHICH WILL BENEFIT from it;
b. The connectivity/implementation of the aforesaid circulars will, in effect, mean an unauthorized awarding of a beneficial use and ownership of a GOVERNMENT ASSET to a PRIVATE ENTITY WITHOUT JUST COMPENSATION TO THE GOVERNMENT. If the government were to decide to privatize the RoSS, it should have been duly bidded out which would, no doubt, fetch the government a substantial amount thereby adding to its resources without the need to raise additional taxes.
c. The implementation of the aforesaid circulars is being relentlessly pursued with ABSOLUTELY LACK OF DISCLOSURE to the proper authorities and to the public as to the detrimental consequences of such a move to government. By the issuance by the Bangko Sentral of mere bank circulars, existing laws are nullified and/or changed to suit the needs of PDTC and another government agency, the BTr is divested of its core function.
d. An “agency” is created whereby the third party custodian can bind the government to contracts and obligations WITHOUT the said custodian being made liable to the government.
e. Confidentiality of bank and GOVERNMENT records and transactions will be breached.