BSP orders termination in 1 yr of common trust funds

The Bangko Sentral ng Pilipinas (BSP) has given common trust fund (CTF) investors one year to terminate their investments and convert them into the new unit investment trust funds (UITFs).

The BSP’s Monetary Board approved the phase-out of CTFs within a year in favor of UITFs which bank regulators consider safer than controversial CTFs.

BSP Deputy Governor Alberto V. Reyes said over the weekend that banks will stop issuing new CTFs in six months and the exit mechanism will be available for a year to allow investors to convert.

To encourage banks and their clients to shift to UITFs, Reyes said the central bank would start raising the reserve requirements on CTFs to make them less attractive.

"Reserves will be raised to put CTFs on par with bank deposits," he said.

Under existing rules, the BSP requires banks to set aside reserves of 19 percent of their deposits and 10 percent of their trust funds as a buffer against withdrawals.

After the transition period, Reyes said CTFs would be phased out completely.

Reyes said the BSP’s estimates indicate that trust funds have pooled together roughly P260 billion worth of investments. Eventually, he said this would be replaced by the UITFs.

The UITF could be compared to a mutual fund that pools the investments of small investor 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. The BSP 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 carry what it considered clearer safeguards that effectively distinguish it from deposit substitutes.

Under the rules approved by the BSP, 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 directly 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 returns compared to deposits.

According to Reyes, the key enhancement of the UITF is in the way it could utilize investor participation expressed in terms of net asset value per unit.