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Regulatory Framework for Derivatives

- FX Derivatives

Ma. Marisol A. De Villa-Go Capital Markets Specialist Group

19 November 2014

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Promote capital markets development by expanding the range of derivatives products available for banks and clients allowing more flexibility to market players to participate in the derivatives market.

Strengthen supervisory framework for derivatives activities of banks.

Protect the public by providing sales and marketing guidelines.

Regulatory Framework for Derivatives

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Statement of Policy

Banks may engage in derivatives activities provided that they:

Understand, measure, monitor and control the risks assumed from the derivatives activities;

Adopt effective risk management practices; and

Maintain capital commensurate to the risk exposures assumed.

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Banks Engaging in Derivatives Activities

AUTHORITY

1. Dealer

2. End-User

3. Broker

Clients

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Banks Engaging in Derivatives Activities

AUTHORITY

1. Dealer 2. End-User

3. Broker

Clients Dealer Broker

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Generally Authorized Derivatives Activity (GADA) - derivatives activities which banks can engage in without prior BSP approval

Additional Derivatives Authority - derivatives activities that are not included among those generally authorized, may be allowed provided the participant obtains prior additional authority from the BSP to establish capacity to engage in such activities

Authorized Derivatives Activities

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Universal and Commercial Banks as dealer of :

FX Forwards, FX Swaps, and Currency Swaps with maximum tenor of 3 years

Interest Rate Swaps, Forward Rate Agreements with maximum tenor of 10 years

Thrift banks, rural banks and cooperative banks:

May enter into derivatives for hedging purposes only (end-user)

For purposes other than hedging, they may apply for a Type 3 license (end-user authority).

Generally Authorized Activities

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List of UBs and KBs – www.bsp.gov.ph

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2

3

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TYPE 1 – Expanded Dealer Authority UB/KB

TYPE 2 – Limited Dealer Authority UB/KB

TYPE 3 – Limited End-User Authority any bank

TYPE 4 – Special Broker Authority any bank other than UB/KB

Additional Derivatives Authority

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Approved Additional Licenses – www.bsp.gov.ph

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1

3

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Summary - Authorized Activities

FX Forwards

(simple)

FX Swaps

(simple)

Longer maturity FX

Forwards and FX

Swaps

FX OptionsOther FX

derivatives

Type 1 Authority Type 1 Authority Type 1 Authority

Type 2 authority for

FX forwards and FX

swaps

Type 2 authority

for FX Options

Type 2 authority

for that FX

derivative

Type 1 Authority Type 1 Authority Type 1 Authority

Type 2 authority for

FX forwards and FX

swaps

Type 2 authority

for FX Options

Type 2 authority

for that FX

derivative

Thift/Rural/

Coop

not

authorized

not

authorizednot authorized not authorized not authorized

Type of

Bank

Generally Authorized

Derivatives ActivitiesAdditional Derivatives Authority

Universal

(UB)

Commercial

(KB)

up to 3 years up to 3 years

up to 3 yearsup to 3 years

As Dealer of As Dealer of

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Some questions on approved derivatives authority

1. Although all universal and commercial banks are generally authorized to engage in FX forwards and swaps up to 3 years, why do most UB/KBs offer only tenors of up to 1 year?

2. Why do authorized banks offer FX options to other clients but not to me?

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Client Suitability Guidelines

Client Information

Client Classification

Suitability Review

Disclosures

Financial Promotion

Product Disclosures

Sales and Marketing Personnel

Sales and Marketing Guidelines

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BSP’s expectation on dealer banks in the client suitability review process

Gather information, evaluate and determine which derivatives products are suited for the client

Role of clients in the client suitability review process

Provide related information so that banks can evaluate and determine which derivatives products are suited for the client

Sales and Marketing Guidelines

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Disclosures

Financial Promotion

Product Disclosures

Sales and Marketing Guidelines

Information pertaining to the FX instrument: Uses and advantages Disadvantages and risks Scenario analysis

Gains and losses under different FX prices

Legal documents Risk disclosure statement Product disclosure statement Contracts

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Top 5 Products as to Outstanding Notional As of 31 August 2014 (In PHP Billions)

Philippine Derivatives Market

FX Forwards, 1,722.0 (56%)

Interest Rate Swaps, 768.8

(25%)

Currency Swaps, 323.8

(11%)

FX Options, 142.6 (5%)

Others, 97.2 (3%)

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Thank You !!!