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.

Thursday, April 07, 2005

"A ruse by any other circular letter is still a ruse"

I can understand how discombobulating it is to be at the receiving end of the following:

(A) BSP Circular-Letter dated 31 March 2005: Reduced Statutory Reserve under Circular No. 444

OFFICE OF THE DEPUTY GOVERNORSUPERVISION AND EXAMINATION SECTORCIRCULAR-LETTERTo: All Banks and Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) Concerned This is to remind all concerned banks and NBQBs that the reduced statutory reserve of two percent (2%) provided under Bangko Sentral ng Pilipinas (BSP) Circular No. 444 dated 18 August 2004 may not yet be availed of pending:

1) the issuance of the pertinent market convention acceptable to BSP that shall govern deposit substitutes transactions evidenced by repurchase agreements (repos) covering government securities; and

2) the opening for the purpose of a separate RoSS account with the Bureau of Treasury by the BSP-accredited third party custodian.

For your guidance.

(Sgd.) ALBERTO V. REYES Deputy Governor
31 March 2005

- Since when have statutory reserves supposedly set by Central Banks for prudential reasons been a function of market conventions on repurchase agreements or absence of such or the opening of RoSS accounts of regulated institutions with another branch or agency of government without the latter's knowledge and assent??!! This is a clearly an attempt to pressure BTr into connectivity using the market as a battering ram!


Anonymous Anonymous said...

I'm no genius..but without connectivity to RoSS, then trades consummated through PDEX don't mean much right now do they. Can someone remind me why we are paying any fees at all for accessing the trading floor? Wasn't PDS Holdings supposed to have straightened this all out already? And now Gov. Bert, after "eating our spinach", isn't allowing us to "have our candy"...that's not fair :/

10:13 AM

Anonymous Anonymous said...

to anonymous above,

Count your blessings. At least si Gov. Bert is so transparent to the point that he documented the fact that connectivity to RoSS isn't there!

10:17 AM

Anonymous Anonymous said...

Is this the way it is supposed to work? We capitalize the FIE. We are forced to use the FIE by BSP circulars . We provide the FIE revenue to cover their exorbitant costs. The weare supposed to pressure the BTR into connecting the FIE so they can charge us even more.

I thought the "think tank" of the FIE was supposed to put the entire capital markets infrastructure together for us. I mean isn't that what our insititutions are paying for? Why should we do something we are paying someone else to do? Why should we be used as a battering ram?

In 2003, we as a market were already in talks with the BTR and the BSP to develop a RoSS-BSP DvP interface through an existing infrastructure. The FIE guys told us to wait for their "straight through process". Why do we need to help them develop their straight through process? We were fine in developing our own at a far lower cost.

I think the FIE geniuses should think their implementation over because their self-proclaimed value-proposition of an orderly market is laughably disorderly.

Easy for them to screw things up royally because it is us that pay!

11:47 AM

Anonymous Anonymous said...

I think that covering a lie is really difficult as what BSP and PDEx officials are finding out for themselves. They will have to issue circulars upon circulars but the bottom line will still be the same - it is very obvious they still want to milk money out of every investor and Filipino at no expense to them!
These guys must really believe that everybody else except themselves are DUMB. Their current exercise just exposes who is DUMBER!

1:59 PM

Anonymous Anonymous said...

DUHH. . .

I don't get it. Who is the 'DUMBER" one? The deceiver or the one allowing himself to be deceived? Is the deceived so powerless to take action? Does not the inaction revitalize the deceiver?

How long will the deceived allow himself to be deceived???

2:11 PM

Blogger donj said...

i'm still not getting answers to my other posts regarding an independent electronic audit for ross. it seems there is no other system connected to ross to do real-time monitoring/ auditing the integrity of the database.perhaps this is one reason for the 3rd party custodian rule.

3:03 PM

Anonymous Anonymous said...

This entire custodianship blunder may lead the philippine stock market and government securities investing to collapse.

If 90% of investors are not in favor of those new guidelines, imagine what will happen if the 90% decide to take action by pulling out their investements. Let us just hope they do not decide on the same day. God help us.

6:20 PM

Blogger donj said...

i'm not sure the investor would just pullout his investment in government securities because he does not like the custodian rule. perhaps he would no longer make additional investment and would just collect income up to maturity with the existing ones. if for some reason i'm not aware the custodian rule can cause a default in payment then i agree everybody will pullout.

8:22 PM

Anonymous Anonymous said...

If 1/4th of investors decide not to renew their fixed income investments at maturity and dump the stock market what do you think will happen? Volume traded will go down, rates will go up, and stock prices will decline. Watch and weep.

10:59 AM

Blogger donj said...

i'm just wondering.if investors would no longer invest in stocks and bonds, where will they place their money? is this because of the custodian rule that they have to react this way?

2:09 PM

Anonymous Anonymous said...

China, India, Hong Kong, Singapore, Malaysia, Vietnam, Russia, Argentina, Mexico... US, Germany, UK, Japan, Switzerland.

Custodian rule? It is a burden, an additional cost of doing business with no value added.

A government acting like a bully and a terrorist will drive away investors. Protect your capital. Beware of big brother.

4:15 PM

Blogger donj said...

the countries mentioned above have no custodian costs in their fie? my understanding of the fie is that bid/ask spread of the securities will narrow. but the profit that used to go to dealer banks under otc will just be transferred to the custodians. the investors' situation will remain the same except for the added protection. perhaps the bureau of treasury and the fie/bsp can find a mutually workable system without the custodian rule.

5:12 PM

Anonymous the Joker said...

I am not too sure about that.

1) Debt markets globally are not centralized exchanges. They are over-the-counter dealer‘s markets linked by electronic communications and information services.

Public investors interested in holding debt instruments place orders to purchase assets either directly with a dealer or a securities broker or indirectly through his or her fund/asset manager.

Dealers deliver securities either to the broker/asset manager nominated by the investor or to the investor himself through either physical delivery or through direct registry. Fund/asset managers manage the assets in the name of the investor.

Any entity that manages assets on behalf of their owner is a custodian. Global practice recognizes not only the business of securities custody but the mechanics of sub-custody. Global practices also recognize banks as natural choices for custodians as banks both have franchises to engage in asset management and also have, as value to customers, expertise in payments and securities processing as well as images of being a safe repository. Regulators should ensure that banks are judicious in exercising these functions.

Custody globally is a service provided by accredited entities and not a mandate from the regulators.

There is no added protection from custody for an investor that is not available with proper implementation of the direct on-registry delivery proposed on this blog. There are however added services available from a custodian that may interest an active traders but be completely without value to some investors (who would be better served by an asset manager than a mere securities custodian).

2) The narrowing of the bid/ask spread is not a direct result of custody. Finer spreads result from the manner of price formation in the financial market. No person engaged in business provides a service for free. As shown by the FIE proponents themselves, the efficient market structure carries an onerous price. The spread of the dealer will narrow but the commission charged by the intermediary filling the investors order will result in figures approximate to a dealer's spread. Tack on to that the auxiliary and ancillary charges for straight through processing, custody, regulatory fees and taxation. The bottom figure raises the economic investment volume pricing out smaller traders and smaller investors. The price transparency offered by the exchange is merely transparency. It does not guarantee you direct access to that price without the intervention of other costs. What transparency will give you as an investor is the opportunity to compare costs and select intermediaries based on their ability to fulfill your needs as an investor. There will however be no categorical "thinning of the spread" as there "ain't no such thing as a free lunch".

3) Without a doubt, the entities involved should come up with some solution that is workable. These entities are not just those you mentioned because both the status quo and what the FIE/BSP want investors to do just doesn't multiply loaves and fishes for the return starved investors of this market. This is the main issue. It is complicated by the manner in which the reforms programs have been implemented, i.e. democratic only by accident. These are reforms and they are going to hurt. The proper implementation would have been to ask all affected parties how much pain it is they are all willing to undergo instead of what has happened which is ramming the reforms through by perceived regulatory fiat (which is the equivalent of performing surgery without anesthesia). Take for example the issue raised by Nina in this post. Reserve requirements are tools of monetary policy. The verbiage of the circular turns them into an instrument of duress compelling banks to submit to the requirements of circular 392.

6:14 PM

Blogger donj said...

if we compare otc vs. fie, fie has a narrower bid/ask spread according to mr. virata. however this gain over the otc will just be offsetted by new costs including that of custody under the fie. even if custody is global practice, the bureau of treasury say it does not add value. but bsp say the custody will prevent another bancap scam. i assumed fraud thru electronic means using scriptless securities. does bsp have a remote terminal of ross so it can conduct electronic audit on the integrity of the database?

7:10 PM

Anonymous the Joker said...

1. Re Bancap:


What the Senator said...

Scriptless secuities in the RoSS unlike physical certificates cannot be lost nor can they be oversold because the RoSS being the central registry of ownership will not permit transfer of more securities than a holder has. Moreover it will not permit the transfer of more securities than originally issued.

2. Re Custody:

There is a difference between securities custody as a service and the "third-party, not affiliated with the seller custody" of circular 392.

The service of securities custody may be of value to some (not all)investors and should be optional to investors. The BSP third party custody is mandatory.

3. Re audit of the system:

The BSP has already reviewed the RoSS system because the BSP together with the BTR developed a delivery versus payment infrastructure connecting the BTR's RoSS with the BSP's payment system (PHILPASS).

7:41 PM

Blogger donj said...

so the ross system is connected to bsp for the dvp configuration only. but not as an independent auditor to monitor the integrity of the records. if the scriptless securities can be used as loan collateral, is this scenario not possible. a hacker with inside information has gain access to ross. a client needs collateral for a loan. someone at the bank knows the hacker. they borrow the scriptless security thru the system. and return it once the loan is paid in full without anybody knowing. seems nobody gets hurt here. but without change in reserve requirement, does it not affect money supply and in turn inflation?

8:53 PM

Anonymous the joker said...

1. Re: using securities as collateral - Being scriptless, the transfer must take place within the books of the BTR/on the records of the RoSS. The securities may not be transfered outside the RoSS system. One of the complaints of the BTR regarding the third party custody issue is the fact that the list of actual owners is no longer centralized at the BTR but instead spread over the several accredited custodians.

2. Re: Hackers - The operations department of the BTR, the unit that runs the RoSS is full of highly capable people of unquestionable integrity. They are there to make sure that hacking incidents will not happen on their watch.

3. Re: Money Supply - the development of securities financing (ie using securities as collateral to secure advances of cash or other securities) will definitely have an impact on money supply as securities turn from stores of liquidity into vehicles for obtaining liquidity. As this practice is already prevalent in the market, the BSP already has proper safety nets to sterilize the impact of the multiplier effect of securities financing on money supply.

9:13 PM

Blogger donj said...

aside from business opportunity, the lack of auditing protocol of ross by an independent party can be a justification for the custodian rule. with trillions worth of securities that can affect money supply and inflation, an additional layer on ross for monitoring/auditing function is understandable. system ownership/usage can be shared by the concerned parties. perhaps this will put the custody rule on government securities redundant but not for commercial papers.

3:58 PM

Anonymous the Joker said...

But that is not the job description of a custodian...

Recommended Reading:

Franchised entities cannot assume to exercise powers beyond those expressedly granted them by the law that creates them.

(Begging the question of course that securities transactions are commercial activities and their regulation is expressedly granted by law to the SEC not the BSP. These circulars (392 section 2 and 428)are arguably beyond the regylatory powers of the BSP governor.)

8:36 PM

Blogger donj said...

i was thinking of an audit committee for ross comprising the parties concerned i.e. btr, bsp,coa?!not the custodians. information is power. and it seems the problem is whether to hold, share, or relinquish power over ross. if this can be resolved perhaps the 3rd party custody for government securities will just be voluntary. and with fie, pricing would be more efficient and transparent to the investing public.

10:02 PM

Anonymous Anonymous said...

Oh, what a circus!

At least one of the trapeze acrobats is retiring this April.
Another one is on his way out soon
thereafter. . .

Let's hope the replacements are not as bad acrobats. On second thought, let's hope they're not acrobats at all. The whole show is sickening. If they are, imagine having to put up with their show for the next number of years!!!

Let's just call in the clown!

4:15 PM

Anonymous P.T. BARNUM said...

I AM INSULTED!! The good old time circus was supposed to be the GREATEST SHOW ON EARTH! This one looks like it is getting to be the DAMNEST show. . .

4:25 PM

Anonymous Anonymous said...

to donj...
How can price be transparent in fie when even the dealers are questioning the fees that the fie is charging them and fie could not explain.

10:08 AM

Blogger donj said...

what i mean is from the investors' perspective that fees can be unbundled or itemized. i don't know whether they are cost or market based. perhaps if there is a public hearing regarding the fees it would be better. but what i think is important is that a centralized fie is more efficient for investors since it can provide the best bid/ask price based on prevailing market conditions.

11:12 AM

Anonymous Anonymous said...

to donj...
I believe you are just parroting the line of the FIE people..

5:45 PM

Blogger donj said...

i was hoping some people would articulate on the advantages of otc over fie. not personalities. it is understandable that to implement monetary policy, the central bank will influence the market structure for government securities. the fie will broadened investors' base and increase liquidity. however, market development for government securities has still a long way to go. the concerned parties should now put their acts together.

10:55 PM

Anonymous Anonymous said...

That dude the Joker articulated on all that in detail. Please explain in as much detail how a centralized exchange is supposed to do everything you talk about.

11:20 AM

Blogger donj said...

i cannot find any articulation that otc is better than fie here. without point by point comparison, this is all can think of for the meantime. perhaps those who would like to maintain the status quo of otc structure can share their opinions.

11:39 AM

Anonymous Anonymous said...

to donj ...
Amen to the above poster that the Joker dude has elucidated this already...its either you are too d**b to understand or you refuse to understand or maybe you are an employee of FIE.
(Rewind, rewind) Even the issue of unbundling the fee structure, FIE could not even explain the fee structure to the traders so how can you expect FIE to be transparent to the investors?
The investors have no say nor can demand from FIE to explain the fee structure..'basta bayad ka, tapos'.
Gets mo na donj??? Kung hindi pa, taga FIE ka nga.

3:28 PM

Anonymous Anonymous said...

Does anyone here understand the

5:11 PM

Blogger donj said...

i'm just stating my opinion as a small-time investor who is not satisfied with the otc structure. i assume that when fie is open to public, the system will be more or less similar with pse. with on-line service thru internet, i can post my own bid/ask price. i can access supply/demand information real-time for trading decision. i'm sure the fie will adhere to strict requirements like audit trail, market surveillance, regulation etc. to make this work. i'm wondering why you're so against fie. if the fees are priced too high then fie will fail. but i'm sure they know that already.

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