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BSP amends derivatives regulations

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Bangko Sentral ng Pilipinas main office in Manila — BW FILE PHOTO

THE BANGKO SENTRAL ng Pilipinas (BSP) has amended its regulations on derivatives activities of banks and nonbanks, updating definitions as well as notification requirements.

BSP Circular No. 1194 Series of 2024 dated May 29 said the Monetary Board approved amendments to the derivatives regulations for banks under specific sections in the Manual of Regulations for Banks and for quasi-banks and trust corporations under the Manual of Regulations for Non-Bank Financial Institutions.

The amendments define credit derivatives as a “contract wherein one party called the protection buyer or credit risk seller transfers the credit risk of a reference asset or assets issued by a reference entity or entities. which it may or may not own, to another party called the protection seller or credit risk buyer.”

“In return, the protection buyer pays a premium or interest-related payments of the protection seller reflecting the underlying credit risk of the reference asset/s,” it added.

Meanwhile, the BSP said credit default swaps and total return swaps are considered as credit derivatives under the regulations.

The amendments also revised the definition of FX options as a “contract that gives one party the right but not the obligation to buy or sell one currency against another by a certain time for a certain price.”

Meanwhile, a non-deliverable swap refers to a “variation of an FX swap agreement wherein there is no exchange of the two currency cash flows; instead, the net difference between the contracted rate in the swap contract and the spot rate is paid by one party to the other.”

The list of derivatives that banks can transact in was also amended. As a dealer, universal and commercial banks may originate, distribute or act as a market maker for: deliverable FX forwards and FX swaps; non-deliverable FX forwards and FX swaps; currency swaps; interest rate swaps and forward rate agreements; interest rate and currency futures; or any financial derivative traded in an organized market where the bank is recognized as a dealing participant or member.

Banks must comply with the “applicable market conventions and mechanisms for transparency and disclosure” to transact in these derivatives.

The BSP also amended its rules on derivatives activities requiring notification, with banks and their trust departments being required to notify the central bank prior to engaging in select derivative instruments.

These include any variant of a stand-alone derivative which a universal or commercial bank is allowed to transact in as part of its generally authorized derivatives activities as dealer or any variant of a standalone derivative which a bank has an existing type 2 or type 3 additional derivatives authority, among others.

“The notification requirement does not apply to banks that have been granted a Type I expanded dealer authority,” it added.

Meanwhile, quasi-banks or their trust departments are also required to notify the central bank before engaging in certain derivative instruments.

“The quasi-bank or trust department shall only transact in the instruments that are the subject of its notification to the Bangko Sentral in the capacity allowed for the previously authorized product,” it added. — Luisa Maria Jacinta C. Jocson

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