The BSP’s Monetary Board approved the rules and regulations allowing UITF to be created by authorized trust entities as an alternative scheme that would ultimately replace CTFs.
The UITF can be compared to a mutual fund that pools the investments of small investors into a larger fund under the professional management of the trust entity.
Because the pool is larger and managed by professional fund managers, it has access to investment opportunities not normally available to individual retail players.
According to the BSP, it expects the UITFs to completely replace CTFs over time.
Unlike CTFs, the UITFs are not subject to reserve requirements of the BSP and will not be considered in the calculation of a bank’s single borrower limit.
The BSP said it agreed to this favorable treatment because UITFs carried what it considered clearer safeguards that effectively distinguish it from deposit substitutes.
Under BSP-approved rules, Deputy Governor Alberto V. Reyes said UITFs would ensure the market valuation of the asset pool by investing only in securities that have an active market with transparent pricing.
"They are prohibited from directing extending traditional loans although they may invest in tradable loans in the future once a market for these is established," Reyes said.
The BSP also prohibits UITFs from investing in real estate and other illiquid investments.
According to Reyes, all UITFs are required to fully inform their prospective investors of their investment strategy including what kind of investments they plan to put the money into.
"Investors must also understand that their principal is not guaranteed by the trustee and it is not covered by deposit insurance," he said.
Reyes pointed out that this fundamental difference makes UITF investments inherently riskier than deposits although such investments may be rewarded with potentially higher return’s compared to deposits.
According to Reyes, the key enhancement of the UITF is in the way it can utilize investor participation expressed in terms of net asset value per unit.
"Under the scheme, investors may buy as many units as they like," Reyes explained. "On the other hand, the NAV will be strictly market-determined based on the daily mark-to-market of the asset pool divided by the number of units outstanding."
Reyes said investors could freely join or exit based on the quoted NAV per unit.
To allow flexibility, Reyes said UITFs could be offered in dollar-denominated forms for investors with independent dollar sources.
At present, Reyes said CTFs total about P260 billion. "We expect this to grow significantly in the future as CTFs are replaced by UITFs," he said.
Reyes said this resource pool could then serve as a major institutional player in the domestic capital market although he added that the BSP did not expect UITFs to eventually replace deposits.