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Manila Bulletin devider Business devider BSP expands UITF access to its securities

BSP expands UITF access to its securities

Published Oct 18, 2022 03:51 pm

The Bangko Sentral ng Pilipinas (BSP) has expanded the access of trust entities with non-resident funds to the BSP securities to mop up more excess liquidity or money supply.

Signed by BSP Deputy Governor-in-charge Chuchi G. Fonacier on Oct. 14, the new circular allows unit investment trust funds (UITFs) of eligible trust departments of banks, regardless of whether the UITFs have funds from non-residents, to invest in BSP securities via the secondary market.

BSP building and logo/Reuters

Basically, the BSP’s Monetary Board has decided that trust entities’ UITFs with minimal non-resident funds can participate in the central bank securities facility. They may purchase securities in the secondary market for any UITF in which the share of net assets of non-residents does not exceed ten percent of the net assets of the fund, said the BSP.

Before approving Circular No. 1157 last Friday, trust entities can only invest in the BSP securities through their UITFs if there are no non-resident participants in said UITFs.

“Expanding the coverage of participants in the secondary market trading of BSP securities enhances the BSP’s capability to absorb liquidity and helps transform the BSP securities as a primary tool for liquidity management,” said the BSP in a separate statement on Tuesday, Oct. 18.

The measure is also aimed at ensuring the tradability and viability of BSP securities as a highly liquid instrument, thus allowing for better price discovery and monetary policy transmission.

“The implementation of this policy supports the BSP's prevailing monetary policy stance to increase liquidity absorption amid an elevated inflation environment, consistent with the BSP's exit from monetary accommodation measures in response to the pandemic,” said the BSP.

With the circular, the BSP will closely monitor trust entities’ sources of funds invested in BSP’s facilities through periodic supervisory reporting requirements.

“The BSP may revisit the access of trust entities with non-resident funds to the secondary market for BSP securities depending on the results of its periodic monitoring and in line with the BSP’s prevailing stance of monetary policy and corresponding liquidity management strategies,” said the BSP.

Based on the circular memo, Fonacier said trust entities that will transact BSP securities in the secondary market is required to submit a Letter of Undertaking (LOU) to the BSP to “signify its commitment to comply with the conditions for participation (and in addition) in view of the revised terms and conditions, existing participants shall update their submitted LOUs.”

Fonacier said the BSP prohibits funds from non-residents being accepted in BSP monetary operations such as the term deposit facility (TDF), overnight deposit facility (ODF) and the BSP securities, but in the secondary market, trust entities through UITFs with non-resident participants will be allowed to sell or buy BSP securities if it meets BSP conditions.

“The TDF, ODF, and BSP-SF (securities facility) are monetary instruments deployed by the Bangko Sentral for the purpose of managing domestic liquidity in the financial system. These facilities should not be made available for opportunistic investment activities funded from non-resident sources,” Fonacier explained. She added that placements in the TDF, the ODF and the BSP securities are contractual in nature and governed by the intent of the contracting parties.

The BSP is currently monitoring 30 trust entities with UITF operation. The UITF industry is a P1.3-trillion market.

It was August this year when BSP Governor Felipe M. Medalla first revealed that they will allow trust units of banks or stand-alone trust companies to buy BSP bills in the secondary market to counter the effect of higher excess liquidity.

This excess liquidity will come from an expiring Covid-related relief measure which authorized banks to use loans to micro, small and medium enterprises and large enterprises that are not affiliated with conglomerates as alternative compliance with the reserve requirement (RR).

When this reserve eligibility measure expires by Dec. 31, 2022, the BSP was planning to reduce the RR ratio a month ahead or at the same time when the relief measure lapses. However, Medalla said they also had to consider the current high inflation scenario when reducing the RR ratio and they had to rethink this plan.

As the relief measure winds down, the new circular improves BSP’s ability to control money supply through their open market facilities in particular through the issuance of central bank bills.

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