BSP Circular Letter

December 29, 2000 BSP CIRCULAR LETTER TO : All Commercial/Thrift Banks/Non-Bank Financial Institutions With Quasi-Banking Functions This Circular Letter establishes the market benchmarks/reference prices as well as computation method that will be used to mark-to-market debt and marketable equity securities as required under BSP Circular No. 161, series of 1998. General Principle As a general rule, to the extent a credible market pricing mechanism as determined by the Bangko Sentral ng Pilipinas (BSP) exists for a given security, that market price shall be the basis of mark-to-market. However, in the absence of a market price, a calculated price shall be used as prescribed in this Circular Letter. A financial institution may also be allowed, subject to the approval of the Deputy Governor, Supervision and Examination Sector, BSP, to use its own system for marking-to-market its securities holdings provided that this can be shown to be sufficiently transparent, objective, reliable and consistent. The system should be approved by the financial institution's board of directors (or equivalent management committee in the case of foreign bank branches). The model should be vetted by the financial institution's risk management group, internal audit group and systems group, properly documented and such documentation available for review by external auditors and the BSP. Mark-to-Market Guidelines To ensure consistency, the following shall be used as bases in marking-to-market debt and equity securities: Type of Security Market Price Basis A. Equity Securities Listed in the Stock Exchange 1. Traded in the Same day closing price as quoted Philippines at the Philippine Stock Exchange. In case of halt trading/suspension or holidays, use the last available closing price. 2. Traded Abroad Latest available closing price from the exchange where the securities are traded. B. Foreign Currency-Denominated Debt Securities Quoted in Major Information Systems (Bloomberg, Reuters, Bridge) 1. US Treasuries Price as of end of day, Manila time. 2. US Agency Latest available price for the day, papers such as Manila time. In the absence of a Fannie Maes, price, use average quotes of at Freddie Macs, least three regular brokers/market Ginnie Maes, makers. * Municipal papers 3. Brady Bonds Same as B.2. * Based on done rates if available. If done rates are not available, use the mid rate between bid and offer. If no mid rates are available, use the bid rate. 4. For all US$- Same as B.2. denominated government and corporate securities 5. Other foreign Same as B.2. currency securities C. Peso-Denominated Government Securities 1. Short-term Price as of end of day. Use the Domestic following sources as discount Government rate/yield to maturity: Securities a) Weighted average dealt rote for the day. b) In the absence of a same day dealt rate, use end of day indicative mid rate between best bid and best offer. c) In the absence of a same day indicative mid rate, use end of day best bid rate. 2. Long-term Same as C.1. Domestic Government Securities D. Peso-Denominated Private Debt Securities 1. Short-term Prices computed using the securities corresponding government security benchmark + short- term risk premium 2. Long-term Prices computed using the Fixed Rate corresponding government Securities security benchmark + long- term risk premium 3. Long-Term Prices computed using the Securities- corresponding government Floaters security benchmark based on the reset period + risk premium. (Please refer to Technical Annex for pricing formula.) All the risk premia mentioned under Section D shall be recommended by a Risk Assessment Committee (RAC) and updated regularly. The RAC shall be convened by the Bankers Association of the Philippines (BAP) and composed of representatives from the BAP, Investment Houses Association of the Philippines, Money Market Association of the Philippines, rating agencies and the BSP. Other Guidelines In pricing debt securities, interpolated yields shall be used for securities with odd tenors. The mark-to-market rules prescribed for securities from Sections A to C (Equity Securities Listed in the Stock Exchange, Foreign Currency-Denominated Debt Securities Quoted in Major Information Systems and Peso-Denominated Government Securities) shall take effect on April 1, 2001. The effectivity date of the mark-to-market rules prescribed for securities covered under Section D (Peso-Denominated Private Debt Securities) shall be announced later thru a Circular Letter. For strict compliance. (SGD.) ALBERTO V. REYES Deputy Governor Technical Annex Valuation of Floaters Formula where: C1 = MV x Cpn x (1-Wht) x E/360 E = No. of days in a coupon period A = No. of accrued days DSC = No. of days from valuation date to next coupon date (DSC = E-A) F = No. of payments per year N = No. of coupon periods between valuation date and maturity date C = (Use the prevailing rate of the floating rate index + spread) x (1- Wht) x MV x E/360 MV = Par value Cpn = Current Coupon Rate Yld = Corresponding government security benchmark based on reset or repricing + long-term risk premium (gross) Wht = Withholding tax