BSP expands list of derivative products that banks can sell

The Bangko Sentral ng Pilipinas (BSP) has expanded the range of derivative products that could be sold by banks without prior approval.

New regulations issued by the BSP showed that banks have also been given more leeway in managing their risks from changes in interest rate, foreign exchange rate and other financial variables.

BSP Governor Amando M. Tetangco Jr. said this was particularly important to exporters and overseas Filipinos clamoring for means to protect themselves from the depreciation of the dollar and the appreciation of the peso.

Under the new regulations, Tetangco said banks are now allowed to engage in any financial derivative transactions for the purpose of hedging it’s own risks, provided they meet the hedging requirements under the Philippine Accounting Standards (PAS).

According to Tetangco, the range of generally authorized activities has been expanded in terms of instruments and tenors.

Under previous regulations, a Universal Bank (UB) or Commercial Bank (KS) could only deal (whether as dealer or end-user) with foreign exchange or FX forwards and FX swaps with a tenor of one year or less.

However,  under the new circular, Tetangco said a UB or KS is now allowed to deal with currency swaps, interest rate swaps, forward rate agreements and analogous financial futures with longer tenors.

Tetangco said the BSP has also classified end-users according to financial sophistication in order to determine the requisite level of disclosures and other investor protection measures.

“The lower the financial sophistication, the more stringent the requirement for investment protection measures such as disclosures,” Tetangco explained.

As a precaution, Tetangco said generally authorized derivative activities are limited to derivative instruments traded in an organized market. He said “organized market” was defined under the rules as an exchange or BSP-recognized over-the counter (OTC) market.

“The organized market has to be governed by transparent and binding market conventions on price transparency, trade reporting, market surveillance and orderly conduct or operations,” Tetangco said.

To avoid undue speculative activity in the foreign exchange market, Tetangco said that under the new rules, derivatives involving foreign currency and other foreign currency-denominated assets would remain subject to pertinent FX rules and regulations.

“These same regulations have been simultaneously liberalized to accommodate higher threshold for purchases of foreign exchange from the banking system,” he said.