Business World, 19 June 2013


Second of 3 parts

The following subsequent actions show that the BSP, in connivance with SEC, actively provided the PDS Group the fig leaf of legality which allowed it to virtually monopolize government securities (GS) trading. With no public discussion and scrutiny, the PDS Group successfully inserted itself in GS trading system where once it did not exist, where it was never proven necessary, and where it was never proposed, required or demanded by the trading participants.

July 23, 2003 — BSP implemented Circular No. 392, entitled “Delivery of Securities,” which requires the use of BSP-accredited third-party custodian.

Sept. 23, 2003 — The Philippine Depository & Trust Corp. (PDTC) was incorporated. It is the depository and custodian of the fixed income securities exchange.

Feb. 18, 2004 — The PSSC was incorporated; it is the clearing and settlement entity of the Exchange. [Note: The trilateral monopoly — PDEx, PDTC, and PSSC ­– is now complete.]

April 17, 2004 — BSP issued Circular No. 428 entitled “Rules and Regulations That Shall Govern Securities and Custodianship And Securities Registry Operations of Banks and Non-Bank Financial Institutions (NBFIs) under BSP Supervision” which enumerates the pre-qualification requirements for a securities custodian and extends the policy’s coverage to securities defined by the SRC, whether exempt or not.

Note: it was the BSP’s twin circulars 392 and 428 that initially mandated the connections to the Registry of Scripless Securities (RoSS) facility. The RoSS facility is owned by the Bureau of the Treasury (BTR). These circulars mandated a third party custodian and paved the way for the monopoly to facilitate control of the government infrastructure, BTR’s RoSS.

Treasurer sacked for doing the right thing?

Pursuant to the provisions of BSP Circulars 392 and 428, the Bureau of Treasury gave the PDS Group access to RoSS. Then National Treasurer Norma Lasala refused to implement the Circulars; thereafter, she was sacked from her position.

The BSP continued to support the plan of the BAP and the PDS Group of creating fixed income exchange. For example,

• On Nov. 16, 2004, BSP issued a circular letter announcing that on Oct. 22, 2004, it issued a permit to operate to PDTC which authorized the latter to perform quasi-banking functions, securities custodianship and security registry operations, among others. The circular letter stated that PDTC started operations on Oct. 25, 2004. A prior requirement for quasi-banking function is that the NBFI should “have a CAMELS composite rating of at least “4” (as rounded off) in the last regular examination.” Unless the BSP acted with extreme haste, it would be highly improbable that in such a short time, two days at most, a “regular examination” of PDTC could have been conducted prior to the start of its operations.

• The permit was issued despite the existence of Circular 348 detailing among other qualifications of banks desiring to perform trust and other fiduciary business that the applicant has been duly licensed or incorporated as a bank or created as such by special law or charter. PDTC does not meet the requirements.

• BSP accredited PDTC as a securities custodian despite the fact that it was not qualified to be such since it could not possible have attained at the time of its application the CAMELS “4” rating required by Circular 428. The circular stated that the applicant for accreditation must ” …have a CAMELS composite rating of at least 4 (as rounded off) in the last regular examination” (underscoring supplied. PDTC was incorporated on Sept. 23, 2003. Circular 428 was issued on April 27, 2004.

• PDTC is the only non-bank entity accredited by the BSP as a securities custodian. The other BSP-accredited third-party securities custodians are banks with CAMELS 4 rating: Hongkong Shanghai Banking Corp., Deutche Bank, Bank of the Philippine Islands, Standard Chartered Bank, and Citibank, N. A.

• Circular 459 of Nov. 11, 2004 set as one of the preconditions for the exercise of quasi-banking functions that the NBFI “must have complied with the minimum adjusted capital accounts of at least ₱650 million or such amounts as may be required by the Monetary Board in the future.” Yet, PDTC was severely undercapitalized and did not meet the other qualifications mandated by the BSP on NBFIs with quasi-banking functions and for entities with trust licenses.

• Circular 481 of March 21, 2005 deferred the implementation of the minimum capital requirement for NBFIs to operate as quasi-banks under Circular 459 until policy guidelines are adopted. Yet, unequivocal policy guidelines on quasi-banks already existed in Circular 348.

• On Jan. 12, 2007, Circular 557 entitled “Lifting of Moratorium on the Grant of Licenses in Quasi-Banking Functions to Investment Houses and Finance Companies lifted the moratorium in granting licenses to engage in quasi-banking activities. This is a less strict version of Circular 459 and PDTC was assured of meeting the capital requirement. The minimum adjusted capital was reduced from ₱650 million to ₱300 million. Moreover, the transitory provision gives investment houses and finance companies two years to meet the minimum capital requirement. This move exposed the market to greater risk as size of capital was among the basis for setting financial strength.

March 14, 2005 — Then Senator Aquilino Pimentel, Jr. delivered a privilege speech before the Senate calling for the suspension of BSP Circulars 392 and 428. He said that both Circulars were intended “(1) to unduly favor a private entity, PDTC and (2) that their implementation would be grossly disadvantageous to the government and to the people.”

July 26, 2006 — Memorandum of Agreement for Real Time Gross Settlement via DVP of Trades of Government Securities on PDEx Trading System among BSP, BTR, PDEx and PSSC. The MOA gave a new lease of life to the nearly bankrupt PDEx. The MOA gave the PDS Group the operational interconnectivity with the RoSS and Real Time Gross Settlement (RTGS), wedging themselves as an intermediate link between the banks and these electronic platforms. This privileged status now enables PDEx to collection transaction fees from banks. These mandatory fees now total hundreds of millions of pesos every year, which fees did not have to be paid at all before.

Note: the MOA did not speak of any compensation in favor of the Bureau of the Treasury, the legitimate owner of the RoSS, in exchange for the access by PDEx and PSSC to the RoSS. No consideration was stipulated in favor of the government despite the fact that PDEx and PSSC, through their interface with RoSS, will force trading participants (buyers and sellers on government securities in the secondary market) to use its trading system, and consequently charge them hefty “fees.”

The 2006 MOA is grossly disadvantageous to the government since while it does not receive any compensation from PDEx and PSSC, it contains a provision which hold the two private-sector entities “free and harmless from any and all direct losses, claims, damages, liabilities and expenses, or actions with respect to, arising out of, or by virtue of the use of the RoSS by third parties.”

The Bureau of Treasury used to charge institutional users of RoSS and its client sub-accounts and earned about ₱20 million annually from these user fees. With the entry of PDEx, the BTR’s revenues and other possible sources of revenues fell. PDEx collected fees from merely uplifting accounts from the RoSS, to fees corresponding to the total amount of transactions turned over daily (ad valorem) by the individual institutions, and for merely posting transactions that did not even go through the proprietary systems of PDEx. It collected other fees such as membership fees or capital calls to cover losses of the operations of PDEx.

PDEx recorded gross incomes of more than a billion pesos from 2005 to 2010, collected from trades supported by the RoSS infrastructure. Yet, there was zero payment to the government.

Feb. 28, 2007 — BSP Governor Tetangco issued Memorandum No. 2007-006 instructing all banks and BSP-supervised financial intermediaries that the benchmark for peso-denominated government securities shall be computed and published by a calculation agent recognized by BAP. The instruction further states that all data on done and firm bids/offers must be sourced from trade executions and reporting systems (CTRS) that are part of a regulated and organized market duly licensed by the SEC.

As a result of the memorandum, the trading of government securities and the calculation of the benchmark was forced out of Bloomberg’s platform and migrated to the PDEx platform.

March 12, 2007 — The Bankers Association of the Philippines (BAP) directed all its members that the calculation of the benchmark for peso government bonds shall be done by PDEx. In a letter dated March 19, 2007, PDEx, apprised the BSP that BAP appointed it (PDEx) as the latter’s calculating agent pursuant to the BSP Memorandum No. 2007-006. Thus, the monopolistic loop has been closed.

Comments: Contrary to his official statement, the BSP Governor appears to be an active participant in granting the PDS Group virtual monopoly power on government securities trading. During the hearing of the Senate committee on banks, financial institutions and currencies (subcommittee on fixed income exchange securities market) he told Senator Escudero that: the BSP did not actively push for PDEx, but when it came about, BSP welcomed it as a good development for increased transparency in the market. Seriously?

The incontrovertible truth is that the BSP has supported the concept of fixed income exchange from the very beginning — with the PDS Group as the only implementing entity.

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