BSP Liberalizes Rules on Derivatives Trading by Banks
Byline: LEE C. CHIPONGIAN
The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved last Friday a new circular liberalizing banks' derivatives trading, but the approved rules are less indulgent than originally planned.
BSP opened up derivatives trading to more players by allowing banks more control over their financial risk management and investment diversification. The circular also incorporated safeguards to prevent the likelihood of a subprime crisis.
While on paper the central bank relaxed its derivatives policy, the Monetary Board also approved new levels of discipline to screen banks that would be allowed to transact not just basic derivatives products, but also currency swaps, forwards, options, etc.
Under the new circular, BSP will screen banks based on three things -- sophistication, products and markets.
The first process is licensing where officials will review a bank's level of sophistication and whether or not the bank is capable of handling a derivative product, which is the second test. The last is the end-users or the markets -- either the bank will tap a BSP exchange or a BSP recognized over-the-counter unit.
Derivatives as defined by the BSP are financial instruments that "primarily derive its value from the performance of an underlying variable." Its trading is currently limited to banks but the BSP said it will no longer restrict the "level of risks assumed" by an authorized bank or the scope of its derivatives activities.
The new circular is part of the second wave of capital flow liberalization to further develop the financial markets, to allow the BSP more flexibility in managing monetary aggregates, and to allow investors to look for more opportunities to invest.
The first wave of foreign exchange (FX) liberalization was implemented last April 2, which included among other things increasing banks' dollar overbought positions and limiting oversold positions. The next phase, which was approved last week, further raised residents' dollar purchases without documentation. …