Rules on derivatives ready by Oct – BSP

Bank regulators said the new rules easing the regulatory framework on derivatives would not be ready until October, with deliberations on risk management and investor protection taking longer than expected.

The Bangko Sentral ng Pilipinas (BSP) said yesterday that several working drafts of the proposed rules and regulations have made the rounds with industry groups and other regulatory agencies, especially the Securities and Exchange Commission (SEC).

The new rules are originally scheduled for issuance in July this year.

“We’re holding a number of internal consultations and we’re working through various concerns regarding risk management and investor protection,” said BSP Deputy Governor Nestor Espenilla Jr.

“Derivatives are very powerful tools,” Espenilla added. “We have to be very careful on how to handle them so that we will avoid unintended consequences.”

The focus of current deliberations, according to Espenilla, addressed basic concerns on management of risks and investor protection.

Espenilla said the new derivatives rules would retain the current licensing structure but with a more liberal application to broaden the line of products that banks would be able to offer their clients.

“We’re doing it so more players would be able to participate and at the same time to make sure that investor interests are also looked after,” Espenilla said.

According to Espenilla, the BSP is discussing with the banking industries certain standards issues to ensure that banks issuing the instruments are capable of managing them.

“We’re talking about issues like what processes banks have to have to be able to handle the business,” Espenilla said.

“More importantly, there are client suitability rules that would put the affirmative responsibility on banks to make sure that their investors know the products and that they are investing on the product appropriate to them,” Espenilla added.

Under the new guidelines, Espenilla said banks would be allowed to issue a wider array of derivative instruments without prior approval from the BSP.

Espenilla said the BSP could afford to allow the banking industry this freedom since they have already begun to comply with the risk-based principles under the Basel 2 Convention.

“Basel 2 is an enabling condition,” Espenilla said. “It requires better capital and risk management and there is a new need for derivative products as a hedging tool and risk transfer.”

Under the BSP rules, derivative instruments were defined as financial instruments that primarily derive their value from the performance of an underlying variable.  The value of derivatives changes in response to the change in a specified indicator such as interest rates, asset prices, foreign exchange rates and the behavior of various indices.

The BSP was also considering allowing banks more flexibility in terms of tenors to give them and their clients longer-tenor insurance.