Law Summary

1. Statement of Policy

• Legal Principle: The Bangko Sentral ng Pilipinas (BSP) encourages banks to diversify their investment portfolios to enhance earnings stability and control risks associated with maturity mismatches and exposure overconcentration.
• Key Definitions:
  • Expanded Foreign Currency Deposit Unit (EFCDU): A banking unit that can manage foreign currency deposits and investments.
• Important Requirements:
  • Banks are urged to diversify investments to mitigate risks.

2. Scope

• Legal Principle: Universal and commercial banks without expanded derivatives authority are permitted to invest in specified foreign currency-denominated structured products.
• Key Definitions:
  • Structured Products: Financial instruments whose revenue streams are linked to interest rate indices or foreign exchange rates, excluding asset-backed securities and credit-linked notes.
• Important Requirements:
  • Investments must be made in products of high credit quality.
  • Minimum return must not be below zero.
• Timeframes: None specified for this section.

3. Other Conditions

• Legal Principle: Specific conditions govern the investment in structured products.
• Important Requirements:
  • Maturity: Maximum investment maturity is 5 years.
  • Credit Quality: Issuers must be rated at least "A" by an acceptable international rating agency.
  • Booking: Investments must be recorded under specified accounts based on the nature of the investment.
  • Prudential Limits: Total investments in structured products cannot exceed 20% of the EFCDU's total investment portfolio.
  • Risk Management:
    • Investments must be board-approved, with internal limits and reporting.
    • Compliance with accounting standards is mandatory.
    • An independent risk management function is required.
    • Regular valuations and stress tests must be conducted.
• Timeframes: None specified for this section.

4. Capital Treatment

• Legal Principle: The capital treatment for these investments must align with existing regulations, as modified for structured instruments.
• Important Requirements: Compliance with current capital regulations is essential.
• Timeframes: None specified for this section.

5. Eligibility as EFCDU Asset Cover

• Legal Principle: Investments in structured notes qualify as asset cover for EFCDU liabilities but do not count towards the 30% liquidity cover.
• Important Requirements: Distinction between asset cover and liquidity cover must be maintained.
• Timeframes: None specified for this section.

6. Sanctions

• Legal Principle: Non-compliance with the Circular results in financial penalties.
• Penalties:
  • Fines of 0.1% of the outstanding investment per day, capped at P30,000 daily.
  • Potential temporary or permanent prohibition from making such investments.
• Important Requirements: Compliance is mandatory to avoid sanctions.
• Timeframes: Penalties accrue from the date of violation until compliance is achieved.

Effective Date

• The Circular takes effect fifteen (15) days after publication in the Official Gazette or a widely circulated newspaper.

Key Takeaways

• The BSP Circular No. 466 enables specific banks to invest in structured products without prior Monetary Board approval, aiming for diversified investment strategies.
• Strict conditions regarding credit quality, investment limits, and internal risk management processes are established to mitigate risks.
• Non-compliance can lead to significant financial penalties and operational restrictions.