Business World,  19 September 2012


The Bureau of the Treasury (BTr) is the official registry of scripless government securities (GS). The BTr function cannot be delegated to any other institution, especially a private one, since “the same is tantamount to abandonment by the government of its public function to safeguard the integrity of the information and data relative to public debts,” said former National Treasurer Norma Lasala.

Lasala said that the assignment of the registry function of the Bureau of Treasury to the Philippine Depository and Trust Corp. (PDTC) is “an ultra vires act that is illegal and void ab initio.”

For doing the right thing, Lasala was unceremoniously removed from office barely four months after she was appointed National Treasurer. This unfortunate incident happened during the reputedly corrupt Arroyo regime. Today, this highly anomalous arrangement continues.

A new administration headed by the upright Benigno Aquino III was installed in July 2010, some two years and three months ago. A new Congress assumed power. New Department of Finance (DoF) authorities were installed. And new heads of the Commission on Audit, the Ombudsman and the Securities and Exchange Commission were appointed. But, surprise, surprise, nothing has changed.

What happened to Daang Matuwid (Straight Path)?

The creation of Philippine Dealing and Exchange Corp. (PDEx) and, subsequently, the Philippine Depository and Trust Corp. (PDTC), was justified as an appropriate response to the Asian financial crises. Really? As far as I know, the government securities market was performing well before and after the Asian financial crisis.

It was the strong-peso policy before the Asian crisis that was partly to blame for the contagion that reached Philippine shores. Before the crisis, the then Bangko Sentral governor prodded Filipino businessmen to “borrow in dollars and invest in pesos, “purportedly to support his strong peso policy. That was a flawed policy based on the myth that a strong peso means a strong economy.

As an aftermath of the Asian financial catastrophe, the peso depreciated from ₱24/$1 to ₱55/$1. Filipino businessmen who borrowed heavily from abroad and then invested the same in real estate lost tons of money. With the rising costs of amortizing their dollar debt combined with the moribund real estate market, many Filipino investors ended in financial ruin. Yet, the credibility and integrity of government securities were intact before and after the crisis.


The potentially biggest financial scam in Philippine history — where PDEx and PDTC are involved in secondary trading and the inventory of government securities — should be addressed once and for all.

The assignment of responsibilities for financial transactions should be clearly defined and implemented accordingly. The handling of government securities, including the registry function, should remain where it should be — the Bureau of Treasury.

Delegating a purely Treasury function to a private institution constitutes dereliction of duty on the part of the National Treasurer and the Finance Secretary. Granting private institution(s) a cloak of legitimacy in the registry function of government securities constitutes abuse of authority on the part of the Securities and Exchange Commission (SEC).

Furthermore, granting the PDEx the authority to charge ad valorem fees — a tax in reality because of its coercive nature — is tantamount to abuse of authority. Under the 1987 Constitution, Congress has the sole authority to pass tax measures.

Clearly, the Securities and Exchange Commission should be responsible for ensuring the integrity of corporate bonds and other fixed income securities. But it should have nothing to do with government securities; that’s purely Bureau of Treasury function.

And consistent with the policy of the State to promote free market and discourage monopolistic practice, the SEC should see to it that the responsibility to operate as securities depository (of corporate bonds and private security instruments) should not be monopolized by one firm.

But that was not the case under former SEC Chairman Fe Barin. The delineation of responsibility remained murky until she retired. The issue of whether or not PDEx could concurrently operate an Exchange and an Over-the Counter market and be Self Regulatory Organization (SRO) in both markets remained unresolved. To date, this incestuous arrangement continues to hold.


But there’s a glimmer of hope. The new SEC Chairman Teresita Herbosa, who has no link with the Bangko Sentral ng Pilipinas (BSP) and the Bankers Association of the Philippines, and who appears to be straight and smart, has opined that “PDTC does not operate under an exclusive license.” She adds, however, that “the entry additional securities depository is subject to the requirements for registration as well as to the Commission’s policy determination on the advantages of having such additional securities depository on the efficient functioning of our capital market having in mind the promotion of interests of investors, maintenance of market integrity and systemic risks.”

President Aquino’s two other “angels” — Commission on Audit Chairman Grace Tan and Ombudsman Head Conchita Carpio Morales — have a role to play in cleaning up this financial mess.

The assignment of the registry function — exclusively at the moment — to the Philippine Depository and Trust Corp. (PDTC), a private organization, is “illegal and void ab initio” said former Treasurer Lasala. That the PDTC is allowed access to government facility — the Registry of Scripless Securities (ROSS) — without compensating the Philippine government is disadvantageous to the Filipino people. The CoA should look into this.

PDEx, which is allowed by the Department of Finance (?) to collect ad valorem fees, is raking in hundreds of millions, if not billions, of pesos. For a revenue-scarce government, it boggles my mind why Finance authorities have allowed this irregular and financially disadvantageous arrangement to persist. The Ombudsman should look into this.

Because of the uncertainty on how much PDEx will charge in future GS trading, presumably it can increase or decrease its ad valorem fees without government imprimatur, then potential buyers will adjust their purchase price of government securities. Not only will it be costly, it will be inefficient as well. [If the ad valorem fees are subject to government approval, will the approving agency please stand up!]

The exorbitant “tax” on trading government securities relative to the yield may lead to the so-called “lock-in” effect, essentially discouraging rather than encouraging secondary trading of government securities.

Clearly, the current arrangement does not constitute real reform. It reeks of rent-seeking which started under the former corrupt regime, but has been allowed to mature under the supposedly “clean” regime. Incredible but apparently true.

From the public policy viewpoint, it makes trading of government securities costlier and more inefficient. With the huge and rising stock of government securities, the level of rent-seeking could rise exponentially. The DoF authorities should look into this.