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

Monday, May 23, 2005

DAFT Circular Letter

The Office of the new BSP Deputy Governor, Supervision and Examination Sector circulated a draft circular letter, supposedly, among all supervised institutions (NOTE THAT THE BUREAU OF THE TREASURY IS NOT A SUPERVISED INSTITUTION)

Excerpts from the circular letter:

To: All Banks and Non-Bank Financial Institutions Under BSP.

The Subject: Guidelines that will implement the Delivery by the Seller of Securities to the Buyer or to his Designated Third Party Custodian


Pursuant to the of the Bangko Sentral ng Pilipinas (BSP) to promote the protection of investors in order to gain their confidence in the securities market as enunciated undef Circular Nos. 392 and 428 dated 23 July 2003 and 27 April 2004, respectively , the following rules/guidelines shall be observed by banks and non-bank financial institutions (NBFI) under BSP supervision in their dealings in securities whether they are acting as seller, buyer, agent or custodian.

RULE 1 . Distinction Between a Custodian and a Registry....A securities custodian is a BSP-accredited bank or NBFI designated by the investor to perform the following functions: safekeeping, holding title to the securities, either in a NOMINEE or TRUSTEE capacity, etc..... a securities registry other than the Bureau of the Treasury, is a BSP -accredited bank or NBFI designated or appointed by the issuer to maintain the securities registry book either in electronic or in printed form. It records the initial issueance of the securities and subsequent transfer of ownership and issues registry confirmation to the buyers/holders......

RULE 2 . Registry of Scripless Securities of the Bureau of the Treasury (BTR)
.........the BTR as registry cannot act ac custodian of government securities pursuant to the opinion of the Secretary of Justice dated 17 January 2005 due to an irreconcilable conflict of loyalties, that is anathema to agency if the same institution were to act as registrar and at the same time.

RULE 3. Delivery of Securities..... securities sold on a without recourse basis shall be delivered by the seller to the purchaser, or to his designated BSP-accredited custodian.....

RULE 4. Mode of Delivery....The delivery must be supported by a confirmation of book-entry transfer to be issued by the securities registry in case of a nmae on registry or by a confirmation receipt to be issued by the cusotdian in case of delivery to the purchaser's designated custodian.

RULE 5. Client Information....the choice of the custodian is the sole prerogative of the securities purchaser. The Seller or dealer may, however, indicate to their clients their preferred custodian. Attached as Annex "A" is a suggested template to the client.

RULE 6.Custodianship Agreement

RULE 7. Authority of the Securities Owner/Purchaser to Revoke Special Power of Attorney (SPA)

RULE 8 . Reports of the Custodian

RULE 9 . Right of the Securities Owner to Sell his Securities

RULE 10. Undelivered Securities Sold

RULE 11. Compliance with the Anti-Money Laundering Act of 2001....

(c) the custodian has unchallenged access to the KYC records/documents of the referring seller/issuer pertaining to the referred client;
(e) the seller/issuer must provide the custodian with the following MINIMUM information/documents: for individuals # 1-10 and for corproations, #1-10.....

RULE 12 . Safekeeping of Customers' Identification Documents.....Notwithstanding RULEs 11 and 12, the Custodian is not precluded from conducting its own KYC activities and maintaining direct custody of the KYC documents of its clients.

For your guidance.



ANNEX A of Circular Letter

Template of a three page Letter To Investor

Annex A


Dear Investor:

We wish to inform you that the Bangko Sentral ng Pilipinas (BSP), in July of 2003, issued Circular No. 392, Series of 2003, which requires all securities sold by banks on a “without recourse basis” (i.e., the bank has no liability to the buyer of securities in paying the obligation due on the security) to be delivered to the buyer/purchaser of securities through any of the following means:

a. If the security is evidenced by a certificate of indebtedness, the certificate must be transferred in the name of the purchaser/buyer and physically delivered to the purchaser/buyer OR to his designated BSP-accredited third-party custodian.

b. If the security is immobilized or dematerialized (i.e., that the security is not evidenced by a certificate of indebtedness and instead a security account is created in the electronic books of the registry in the name of the purchaser/buyer or his designated custodian):

i. The security must be delivered by book-entry transfer to the appropriate securities account of the buyer in the registry of said securities, which must be evidenced by a confirmation in writing by the registrar to the buyer. The confirmation of sale or document of conveyance shall be physically delivered by the seller or dealer to the buyer, or

ii. The security must be delivered by book-entry transfer to the appropriate securities account of the BSP-accredited third-party custodian designated by the buyer/purchaser in the registry of said securities, which must be evidenced by a confirmation in writing by the registrar to the said BSP-accredited third-party custodian, who shall in turn issue to the securities owner a delivery receipt acknowledging receipt of the securities.

Circular No. 392 is part of the package of reforms instituted to support the development of the domestic capital market through enhanced investor protection and greater market transparency. It provides for more defined role and responsibilities for the custodians and registrars and a stricter supervision and regulation thereof by the BSP. It aims to provide the client the following benefits:

a. Full control and possession of the securities purchased;
b. Independent validation of the existence of securities purchased;
c. Regular reporting of securities holdings; and
c. Capability to choose most competitive counter-parties as to sale, pledge, transfer, and lending of securities.

Moreover, Circular No. 392, which amends CBP No. 437-74, seeks to address the changes in the legal framework brought by the developments in the market, i.e., where purchase of securities may be evidenced not only by transfer of certificates but also by electronic book-entry transfer of ownership in the books of the registrar for said security.

As an investor, therefore, of securities which is dematerialized or scripless, you have the option to require your dealer/broker to deliver the securities to you by requiring them to have the securities registered directly in your name in the registry of said securities or by requiring them to have the securities registered in the name of the BSP-accredited third-party custodian of your choice who in turn will credit your securities account with them.

The registry is a BSP-accredited bank or non-bank financial institution (“NBFI”) designated or appointed by the Issuer to (1) maintain the securities registry book; (2) record the (a) issuance of the securities and (b) subsequent transfers of ownership thereof and (3) issue registry confirmation to the buyers/holders of security.

The custodian, on the other hand, is a BSP-accredited bank of NBFI designated by the investor to safekeep the security by allowing it to hold title to the security, either in a nominee or trustee capacity, to enable it to perform the following administrative functions/services related to investing in a security or various securities: i) Mark to market valuation of security that will enable the client to know the value of his investment at any period in time; ii) compute and collect the interest due on the security; iii) render statements on outstanding securities under safekeeping; iv) represents the client (per its instruction) in the events of default or breach of contract of the Issuer; and v) lend the security of the clients as “agent” that will enable you to earn additional income on the security.

The registrars and custodians underwent a rigorous evaluation process by the BSP to determine whether they have the following: i) adequate capital to cover for potential operating risks related to performing its custody functions; ii) competent management team to manage the company with responsibility and proper corporate ethics, iii) robust technology system to operate the custody business efficiently; and iv) favorable track record or significant experience in the custody business or related business. They will also undergo regular audit from the BSP to ensure that they comply with the BSP rules and regulations and will be subject to penalties and administrative sanctions for any violation thereof.

As of date, BSP has accredited the following registrars and custodians: Bank of the Philippine Islands, Citibank N.A., Deutsche Bank, Hongkong and Shanghai Banking Corporation, Philippine Depository and Trust Corporation and Standard Chartered Bank. The Bureau of the Treasury (BTr), as operator of the Registry of Scripless Securities (RoSS), which serves as the official registry for the government securities, is not subject to BSP accreditation and is exempted from the independence requirement under Circular No. 428. Please note however, that the BTr, as registry, cannot act as custodian of government securities pursuant to the opinion of the Secretary of Justice rendered on 17 January 2005 due to irreconcilable conflict of loyalties that is an anathema to agency if the same institution were to act as registrar and custodian at the same time.

The custodian shall render reports on you account balances on a quarterly basis, or at such interval as you may require. Moreover, the custodian shall issue to you a confirmation of any transfer of ownership as it occurs, in either electronic or printed form. Said reports shall be delivered/mailed directly at your address unless you give a written instruction directly to the custodian to deliver the said reports to you designated person/entity. You are, however, required to acknowledge in the written instruction that you are designating another person/entity to receive the periodic reports from the custodian, notwithstanding contrary advice of the BSP.

Please note that the above-mentioned arrangements may change once the BSP issues more detailed implementing rules and guidelines to the above-mentioned circulars. We will update you if and when these developments occur.

Please fill up and sign the required documentation of your chosen custodian and we will forward the same to them so that your securities account can be opened as soon as possible. You may, however, designate/appoint an agent for this purpose.

If you have any further questions, please call us so that we can refer the matter to the appropriate custodian/registrar.

Very truly yours,


Grow up to be...
Isn't he cute?


Anonymous ROTTWEILER said...

Dear Nina,

What CAPITAL ADEQUACY are they talking about? PDTC CANNOT even meet a FIVE HUNDRED MILLION CAPITALIZATION!!!! Who are these guys fooling?

6:02 PM

Anonymous THE AMBULANCE DRIVER said...

Yeah I noticed that too, Rottweiler. I also noticed another thing. The letter to the investor referred to an opinion rendered by the DOJ. Repeat, it was a MERE OPINION. I may not be a lawyer but I know an opinion, even of the DOJ is not supposed to be controlling. Especially this particular DOJ opinion which has been questioned by the BTr people in several letters that the DOJ has chosen to ignore.

And you know what? I also learned that THAT DOJ OPINION was rendered after the PDTC GUYS ACCOMPANIED BY THEIR PATRONS, THE BSP BIG WIGS made a "pressure" presentation at the DOJ! Kulang na lang PDTC ANG SUMULAT NG OPINION. No wonder it turned out like that.

6:10 PM

Anonymous Anonymous said...

Does the DOJ realize how they have been used for these guys?

By their lack of vigilance and faithfulness they are now PARTNERS IN CRIME of these guys.


6:14 PM

Anonymous the Joker said...

I am not sure when the DOj was granted the right to construe the law. Last I checked that function belonged to the courts of law.

Regardless of the procedure, the DOJ opinion does not carry the infallibility that the BSP and most especially the PDS group wishes the investor to believe. The DOJ opinion itself has an "out clause" as a conclusion just incase the implementation of "reform" should prove disastrous.

Let us examine this proposed circular letter.

1. Rule number two declares anathema attempts to join the functions of a custodian with those of a registry. Regardless of justification set forth by the DOJ, the DOF, the BSP or the PDS Group for separating custody from registry, the conflict of interest stemming from commercial intent remains. Why does the BSP frown on a sovereign institution, backed by the credit of the Rwpublic acting as both registry and custodian while tacitly permitting a private entity barely able to raise capital to be both registry and custodian?

2. Rule number three if completely stated enunciates the third-party; non-affiliated with the seller rule. Viewing this rule against the very first item the BSP uses to justify its circular, that of placing the security in the complete control of the investor - is laughable. I as an investor should have unqualified power over my securities and be able to lodge my assets where ever I please without any qualification from the BSP. The qualification of "not affiliated with the seller" appears even more ludicrous when the institution I have chosen to deal with is not only licensed to hold my current and savings accounts but also accredited by the BSP to act as a securities custodian.

3. The entire letter annexed to the circular is nothing more than the spoonful of sugar that makes the poison taste sweet. Putting my investment portfolio under my control is lip service in the face of the misery brought by the fact I cannot hold it with my choisen institution, which is actually an accredited custodian. The third-party not affiliated with the seller reagulation is for me not a protection against fraud or whatever other fear the PDS Group or the BSP would like me to feel. The regulation is a direct interference with my rights of ownership and an encroachment on my desire to reward my bank with trust for its continued judicious managment of my assets.

4. I am aware of certain unsound banking practices the BSP is trying to clamp. Much as I appreciate the concern of the BSP and its MB for the potential impact of unsound banking practices on the financial system and on the economy, I condemn the fact that the BSP is in the process of abdicating its inability to police the financial industry with a regulation that punishes the investor for the activities of the intermediary. Securities custody is an asset management activity that rightfully belongs to a bank. Sub-custody and diurectregistration are globally accepted practices. Third-party, not affiliated with the seller custody cannot be justified as best practice as is not in practice anywhere in the world. If a bank operates in a way that is harmful or destructive of the trust relationship involved, revoke the bank's trust licenses. That is fair enough but to categorically require third party delivery is nothing more than admission on the part of the BSP that it is, by resulting to radical legislation, incapable of continuing its mandate to properly regulate the banking industry.

8:26 PM

Anonymous Anonymous said...

Dear Joker,

Thanks for your excellent explanation. Do you think you could send such a brilliant analysis to the MONETARY BOARD? Do you think the Monetary Board could review its position as it did with the Cash center project?

3:28 PM

Anonymous ROTTWEILER said...

Ano? Asa ka pa?! Grrr

3:30 PM

Anonymous Anonymous said...

Dear Rottweiler,

The fact is we do not have a lack of brilliant minds in the monetary board. We just lack principled men.

3:34 PM

Anonymous THE AMBULANCE DRIVER said...

teka nga . . .

Lahat ba ng OPINYON ng DOj ay sinusunod ng mga nasa katungkulan? O yung pabor lang sa kanila-- yung gusto lang nilang sundin?

3:40 PM

Anonymous Anonymous said...

True or False

________1. BSP prepared the query to the DOJ re Btr being custodian and registry and enticed DOF to sign the same.

________2. BSP espoused the cause of PDTC before the DOJ and enticed DOJ to render an opinion citing existence of conflict of interest for Btr if it were custodian & registry of GS.

________3. BSP & PDTC made the presentation to DOJ AND NOT DOF & BTr who are the parties in interest.

________4. Someone at the DOF got/will get a monetary board seat as a "reward".

________5. A handful of BSP henchmen got promoted also as "rewards".

________6. Third party rule is a solution to our country's fiscal crisis.

________7. Third party rule is the best thing that ever happened to the GS & capital market.

________8. Investors are jumping up and down in glee because of the capital market reforms introduced by the BSP.

________9. The BSP has outsourced its circular-writing function to the PDS/PDTC/PDEX.

_______ 10. There has been a merger of fundtions among the BSP, PDS, BAP and the DOF.

________ 11. The above merger of function is part of the revised edition of the Manual on Good Governance.

________ 12. Because of such friendly alliance among the BSP, PDS, BAP, DOJ and the DOF, the Philippines will make it to the Guinnes Book of Records as the most frequently downgraded country in the world.

________ 13. The alliance among the above organizations is what has been called as "team playing" by this administration.

Please send in your answers to the above quiz to any of the following addresses:


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