BSP expects banks to clean up their holdings of government securities

About P200 billion worth of undocumented trading of government securities and debt papers are expected to surface as banks start to clean up their portfolio following the clamp-down of the Bangko Sentral ng Pilipinas (BSP).

The BSP said yesterday that it expects banks to start cleaning up their holdings of government securities and other debt papers to ensure their compliance with new regulations as well as the demands of the market.

BSP Governor Rafael B. Buenaventura told reporters yesterday that there would be a surge in the banks’ holding in government securities following the January deadline set by the BSP.

Buenaventura said the BSP still has to finalize its figures but he said that banks would be compelled to stop the undocumented trades since the BSP held their respective chief officers personally responsible for ensuring that the practice has stopped.

"We’ll see that in the reports for the last two months," Buenaventura said.

As the BSP tightened on the undocumented sale of these instruments, the BSP directed the chief executive officers of all banks and non-bank financial institutions to undertake a certification every six months, stating that the bank had not been involved in such activities.

The circular stemmed from the BSP’s policy to phase out undocumented repurchase agreements known as "repo" of government securities, commercial papers and other negotiable and non-negotiable securities or instruments.

Banks are also required to shift from common trust funds (CTFs) to unit investment trust funds (UITFs) which are subject to minimal reserves provided they are marked to market.

According to BSP Deputy Governor Alberto V. Reyes, there was no formal estimate of how much undocumented repos are transacted in the market but he said the "usual estimate was close to P200 billion."

"Just imagine how risky that is," Reyes said. "They are not subject to reserves and we have no way of regulating them since they are undocumented."

The shift from CTFs to UITFs as well as the opening of the Philippine Fixed Income Exchange, Reyes said, was expected to smoke out these transaction and make them formal.

"There is nothing wrong with repurchase agreements," Reyes said. "But it should be done in an orderly fashion with all the precautions in place."

According to Reyes, it was unlikely for banks to continue undocumented repos since the punitive sanctions have become more severe. More important, however, bank clients could now demand transparency since the Fixed Income Exchange will allow them to actually take possession of their assets.

Buenaventura explained that banks have been able to do undocumented repos in the past because clients were hostage of their banks because of the absence of a functioning, centralized and open secondary market.

Despite pressures from traders and even treasury officials, the BSP has been steadfast in its decision to crack down on informal trading of government securities and such.

Beginning January 3, 2005, banks engaged in Treasury bill (T-bill) trading have also been required to use accredited third-party custodian to handle their tradable government securities.

According to Buenaventura, banks had the option of not using third party custodians but they would not qualify for reserve-free UITF.

Buenaventura said banks that refuse to use custodians would also not qualify for the reduced reserve requirement for formal buy-backs or repurchase agreements known in the industry as "repo."

"It’s really up to them but it will not be cost effective for banks to not comply with the third party custodian requirement," Buenaventura said. "We will crack down on informal repos and there will be no postponing it."