Bureau of the Treasury’s Role in the Issuance and Servicing of the Borrowings of the Government

DOJ OPINION NO. 005, s. 2005 January 17, 2005 Hon. Juanita D. Amatong Secretary Department of Finance Roxas Blvd. corner Pablo Ocampo Sr., Streets Manila Madam : This has reference to your letter dated December 23, 2004, requesting this Department for a legal opinion on certain issues relating to the role of the Bureau of the Treasury (BTr), an agency under the Department of Finance (DOF), in the issuance and servicing of the borrowings of the Republic of the Philippines (Government, for brevity). You state that the DOF received from banks and institutions, which have been accredited by the Bangko Sentral ng Pilipinas (BSP) as securities custodians under BSP Circular No. 428, series of 2004, requests to open omnibus client securities accounts and to interconnect their computer systems to the BTr's registry of scripless securities called the "RoSS" (Registry of Scripless Securities) in order for them to seamlessly and efficiently comply with the requirements of said circular. You further state that the Treasurer of the Philippines (TOP) has been consistently refusing to permit the opening of nominee accounts as well as the interconnection and her position was articulated in the attached Memorandum for the Record dated December 15, 2004 submitted to your Department. Specifically, legal opinion is requested on the following issues, to wit: 1. Section 129 of R.A. No. 7653 (the new Central Bank Act) mandated a phase-out of the fiscal agency functions of the Bangko Sentral as provided in Sections 117, 118, 119 and 120 as well as in other pertinent provisions of the Act and transferred the same to the Department of Finance. The Department of Finance, for its part, under Department Order No. 141-95 made the Bureau of Treasury the official registry of ownership of or interest in scripless securities floated by the Republic of the Philippines. Is there legal basis for holding that the Bureau of the Treasury is the "sole" registry for scripless government securities? If the function of a registrar can be adequately performed by a private entity, and considering that the Bureau of Treasury has been performing such registry function upon a mere issuance or delegation by the Department of Finance, may the Department of Finance delegate the same, subject to proper safeguards, to a qualified and competent private entity, without violating any law or regulation? 2. When the Bureau of the Treasury is the registrar (and thus acts in the interests of the issuer or borrower), does it ipso facto include the authority to also act as custodian of the securities, as agent on behalf of the owners or purchasers of the securities? Is there not an irreconcilable conflict of loyalties involved in acting at the same time for the issuer of the indebtedness and for the owner of the right or choice of action against the same issuer? aTICAc 3. May the Bureau of the Treasury exercise regulatory or supervisory authority over and rule on the capability of custodian banks and institutions which are presently under the regulation and supervision of the Bangko Sentral? 4. Given that the Bangko Sentral, through the Monetary Board of which the Secretary of Finance is the cabinet member designated by the President pursuant to Section 6 of R.A. No. 7653, has laid down the criteria for accreditation of custodian, may the Bureau of the Treasury nevertheless require the Bangko Sentral to justify to it the criteria used for such accreditation? 5. Since the Bangko Sentral is charged with the responsibilities of providing policy directions in the areas of money, banking and credit, which includes the country's payment system, would that automatically include oversight over the government securities settlement system which is considered by international authorities such as the BIS Committee on Payment and Settlement System (CPSS) and the International Organization of Securities Commissions (IOSCO) to be a critical sub-component of a national payments system? Can the BTr when operating as government securities registrar be compelled, subject to proper safeguards and coordination, to interconnect with other participants in the system to achieve an efficient and seamless government securities settlement system? 6. Finally, since a credible official registry function for scripless government securities is a critical element in our ability to issue debt and it is desirable to have an independent review of such function for compliance with sound risk management practices, may Bangko Sentral perform such review of the BTr's RoSS system? Hence, this request. The pertinent provisions of R.A. No. 7653 (the New Central Bank Act) provide as follows: Sec. 129. Phase-out of Fiscal Agency Functions Unless circumstances warrant otherwise and approved by the Congress Oversight Committee, the Bangko Sentral shall, within a period of three (3) years but in no case longer than five (5) years from the approval of this Act, phase out all fiscal agency functions provided for in Sections 117, 118, 119 and 120 as well as in other pertinent provisions of this Act and transfer the same to the Department of Finance . Sec. 117. Issue of Government Obligations The issue of securities representing obligations of the Government, its political subdivisions or instrumentalities, may be made through the Bangko Sentral, which may act as agent of, and for the account of, the Government or its respective subdivisions or instrumentality, as the case may be : Provided, however, that the Bangko Sentral shall not guarantee the placement of said securities, and shall not subscribe to their issue except to replace its maturing holdings of securities with the same type as the maturing securities. Sec. 118. Methods of Placing Government Securities The Bangko Sentral may place the securities to which the preceding section refers through direct sale to financial institutions and the public . The Bangko Sentral shall not be a member of any stock exchange or syndicate, but may intervene therein for the sole purpose of regulating their operations in the placing of government securities. The Government, or its political subdivisions or instrumentalities, shall reimburse the Bangko Sentral for the expenses incurred in the placing of the aforesaid securities. Sec. 119. Servicing and Redemption of the Public Debt The servicing and redemption of the public debt shall also be effected through the Bangko Sentral : (Emphasis supplied) B. BANGKO SENTRAL SUPPORT OF THE GOVERNMENT SECURITIES MARKET "Sec. 120. The Securities Stabilization Fund . There shall be established a "Securities Stabilization Fund" which shall be administered by the Bangko Sentral for the account of the Government. The operations of the Securities Stabilization Fund shall consist of purchases and sales, in the open market, of bonds and other evidences of indebtedness issued or fully guaranteed by the Government. The purpose of these operations shall be to increase the liquidity and stabilize the value of said securities in order thereby to promote investment in government obligations. cADSCT The Monetary Board shall use the resources of the Fund to prevent, or moderate, sharp fluctuations in the quotations of said government obligations, but shall not endeavor to alter movements of the market resulting from basic changes in the pattern or level of interest rates. The Monetary Board shall issue such regulations as may be necessary to implement the provisions of this section. In our Opinion No. 95, s. 1995, this Department had the occasion to state that: "Section 129, supra , directs that within a period of three to five years from the approval of R.A. No. 7653, the fiscal agency functions of the BSP under Sections 117, 118, 119 and 120 and other pertinent provisions thereof shall be transferred to the DOF. In particular, the functions to be transferred pertain to the authority of the BSP: (a) to act as agent for and in behalf of the Government or its political subdivisions or instrumentalities in the issuance of securities (Section 117); (b) to place such securities through direct sale to financial institutions and the public (Section 118) ; (c) to service and redeem securities (Section 119); and (d) to administer the Securities Stabilization Fund (Section 120)." It is significant to note that the function of a register is not among those expressly mentioned by R.A. No. 7653 for phase out from the BSP and transfer to the DOF. However, it may be argued that the registry function is implied in the power to borrow, for it is in the interest of the issuer to maintain a list, at any one time, of the people that the issuer owes so that the issuer can deal with them efficiently and effectively as it services the securities. But the need to keep a record that may be implied in the functions sought to be phased out and transferred by Section 129 of R.A. No. 7653 does not necessarily require that the DOF, or its agency, the BTr do the physical task of being the register of the government issuances. It may not be amiss to state that the necessity to have an accurate record of its creditors does not necessarily imply that the record must be kept by the issuer itself. Applied to the instant case, it appears indubitable that there is nothing in Section 129 of R.A. No. 7653, or any of its provisions, which requires that only the DOF or the BTr for that matter can keep a register of the owners of its securities. It is elementary in the rules of the statutory construction that when the language of the law is clear and unequivocal, the law must be taken to mean exactly what it says. As oft repeated, when the law is clear, it is not susceptible to interpretation only application. 1 This is also justified by the familiar rule of statutory construction that the express mention in the law of one thing implies the exclusion of another thing upon which it is to apply or operate. " Expressio unius est exclusio alterius ". 2 Not being included among the enumerated powers under R.A. No. 7653 which the Congressional Oversight Committee has transferred to DOF and eventually delegated to the BTr, the DOF or BTr is not the sole register of the ownership of government securities. Thus, the undersigned is consequently of the view that the first query must be answered in the negative. Anent your sub-question on the first query on whether the DOF may delegate the same, subject to proper safeguards, to a qualified and competent private entity, considering that at present the BTr has been performing such registry function by virtue of Department Circular No. 141-95, we rule in the affirmative. At the outset, it bears stressing that a Secretary of a Department shall have supervision and control over the bureaus, offices, and agencies under him. In administrative law, the "power of control" is defined as "the power of an officer to alter or modify or nullify or set aside what a subordinate officer had done in the performance of his duties and to substitute the judgment of the former for that of the latter" 3 It includes the authority to order the doing of an act by a subordinate or to undo such act or to assume a power directly vested in him by law . 4 Control is a stronger power than mere supervision, which means "overseeing or the power or authority of an officer to see that subordinate officers perform their duties". 5 As head of the administrative agency, the Secretary of Finance has the authority to change, alter, amend, or correct the rules and regulations duly promulgated by the DOF. TCcSDE It may thus be posited that the Secretary of Finance as alter ego of the President may withdraw the delegation of the power to act as registry of scripless securities from the BTr by simply issuing another Department Order revoking Department Order No. 141-95, and transferring the same to another unit under the DOF or to a qualified and competent private entity by virtue of her constitutional power of control over her subordinates. 6 As aptly stated by an eminent jurist, such acts of the secretaries of departments, if "performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive." 7 As regards your second query, there is a recognized difference between the function of a "registrar" and the function of a "securities custodian". A "registrar" is the agent of the issuer. It maintains "a registry which records solemnly and permanently the right of ownership and other real rights". 8 On the other hand a "custodian" is an agent of the owner or buyer of the securities. In Opinion No. 125, s. 1950, this Department has had the occasion to define "custodian" as one having the "custody", and "custody" means to have watch, care, or charge of something. 9 It means keeping, guarding, care, watch, inspection, preservation, or security of a thing. 10 And "to care" means "to look to, to take care, perform what is needed for the well-being or condition of." 11 Moreover, this Department agrees with the following view of the BSP on the services of a custodian, contained in its letter addressed to the Secretary of Finance dated January 6, 2005, when it said: "9. The truth of the matter, however, is that the business is serving the interest of securities owners has evolved to such as extent as to attach to the bare-boned service of "safekeeping" other important services to the securities owners, such as administration of dividends or interest earnings, representing the owners in corporate actions, notification of arising rights, such as conversion or voting rights, mark to market valuation, statement rendition, collateral management, and, lately, securities lending which enhances the owners' yields over the ( sic ) beyond the dividends and interests." "10. Many of these add-on services of a custodian cannot be properly performed by the issuer. For instance, an issuer-registrar is bound to protect the issuer's "par value" and cannot freely "mark to market" without impairing his interest as issuer. In like manner, an opportunity for conversion may be good for the owner (and therefore should be so advised by the custodian) but not for the issuer-registrar." Based on the foregoing, it is clear that a registrar cannot perform the dual roles of being a registrar and a custodian of government securities at the same time. There will be an irreconcilable conflict of loyalties, that is anathema to agency, if the same institution were to act as registrar and custodian of the same security. Regarding issues 3, 4, 5 and 6, since they are interrelated, we shall discuss them jointly. Section 20, Article XII (National Economy and Patrimony) of the 1987 Constitution partly provides: "SEC. 20. The Congress shall establish an independent central monetary authority , the members of whose governing board must be natural-born Filipino citizens, of known probity, integrity, and patriotism, the majority of whom shall come from the private sector. They shall also be subject to such other qualifications and disabilities as may be prescribed by law. The authority shall provide policy direction in the areas of money, banking, and credit . It shall have supervision over the operations of banks and exercise such regulatory powers as may be provided by law over the operations of finance companies and other institutions performing similar functions . xxx xxx xxx." (Emphasis supplied) Also, Republic Act No. 7653 12 reiterates the policy and objective of the BSP, it provides thus: "SEC. 1. Declaration of Policy . The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. In line with this policy, and considering its unique functions and responsibilities, the central monetary authority established under this Act, while being a government-owned corporation, shall enjoy fiscal and administrative autonomy." ADSIaT "SEC. 3. Responsibility and Primary Objective . The Bangko Sentral shall provide policy directions in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions , . . .. The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth of the economy. It shall also promote and maintain monetary stability and the convertibility of the peso." (Emphasis supplied) The above-quoted constitutional and statutory provisions indubitably confirm the legal authority of the BSP over banks and non-bank financial institutions (NBFIs). Clearly, the issuance of rules and regulations by the BSP governing securities custodianship and securities registry operations of banks and NBFIs under its supervision is an exercise of a right authorized by law. Hence, the BTr cannot exercise regulatory or supervisory authority over and rule on the capability of custodian banks and institutions under the regulatory and supervisory authority of the BSP. To do so would subject the BTr for a direct attack for an ultra vires act, that is, for acting outside of its function. Executive Order No. 449 13 provides: "SEC. 1. Restatement of the functions of the Bureau of the Treasury . The Bureau of the Treasury, hereinafter referred to as the Bureau, shall have the following functions: xxx xxx xxx 6. Issue, service, redeem government securities for account of the NG as may be authorized by the President pursuant to law; xxx xxx xxx 8. Act as principal custodian of financial assets of the NG, its agencies and instrumentalities; xxx xxx xxx." (Emphasis ours) The clear and explicit language of E.O. No. 449, earlier quoted, leaves no room for doubt. The power and function of the BTr under the above-quoted provision is limited to the Government's issuance, servicing and redemption of government securities and to act as principal custodian of the financial assets of the National Government, its agencies and instrumentalities. It is a settled rule in statutory construction that where a statute or rule, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to other matters. 14 It is likewise noted that the designation of the Secretary of Finance by the President to sit as member of the Monetary Board pursuant to Section 6 of R.A. No. 7653 was instituted primarily to achieve coordination and harmonization of economic and fiscal policies between the NG and the BSP. Hence, to allow the BTr to require the BSP to justify to it the criteria used in the accreditation of banks and NBFIs as custodian would defeat the very purpose of such designation of the DOF Secretary in the Monetary Board. Moreover, it would not be in accord with the constitutional provision that the BSP, acting through the Monetary Board, is an independent central monetary authority . This conclusion finds its support in the Records of the Constitutional Commission, dated August 13, 1986, which reads: "A central monetary authority has been retained as a constitutional body but with some innovations. One of these innovations is that majority of the members of the authority's governing board should not occupy any other position in the Government. The Authority is projected to be one which is free from both local and foreign interest intervention or even from the State or the Government . The central monetary authority is independent of the Executive . Majority of the members of the Authority are free from the influence of the President, hence, the requirement that they be selected from the private sector. This ensures that the Executive does not have a systematic control of monetary policy which could be disastrous to the country . AEIHaS There is a distinction between fiscal and monetary policies. Monetary policy is more an accommodating rather than an initiating function. It is the fiscal policy that initiates so that it is necessary that direct control and interference of people who are directly identified with the Executive is reduced in order to avoid an imbalance as a result of the monetary policy being completely subservient to the fiscal or budgetary requirements of the government." (Emphasis supplied) It is a settled rule that the actual proceedings or reports of the Constitutional Commission (ConCom) may be looked into and availed of to assist in determining the intent of the law under consideration. 2006cda The independence of the BSP from the Executive Department should not be a stumbling block in facilitating the interconnection between the RoSS and the other third party custodian. The Secretary of Finance, taking into consideration the avowed policy of the BSP Circular, 15 may, in her discretion, issue a department order allowing the opening of omnibus client securities accounts and the interconnection of the RoSS to the computer systems of the accredited custodians of the BSP with the end in view of achieving an efficient and seamless government securities settlement system. Parenthetically, the above-stated position is amply supported by the DOF's authority mandated by law to be primarily responsible "for the sound and efficient management of the financial resources of the Government, its subdivisions, agencies and instrumentalities" and "for the formulation, institutionalization and administration of fiscal policies in coordination with other concerned subdivisions, agencies and instrumentalities of government." 16 The above discussions do not take into account the financial and technical aspects of the subject matter of your query which are within the official competence and jurisdiction of the DOF and BSP pursuant to the Administrative Code of 1987 and the BSP Charter, respectively. Very truly yours, (SGD.) RAUL M. GONZALEZ Secretary Footnotes 1. Sec. of Justice Op. Nos. 78, 43 and 19, s. 2002, Ramos v . Court of Appeals , 108 SCRA 728; Pascual v . Pascual-Bautista , 207 SCRA 561). 2. Acosta v . Flor , 5 Phil 18; Central Barrio vs . City Treasurer of Davao , G.R. No. L-25811, April 3, 1968; Chi Len vs . Galang , G.R. No. L-11931, October 27, 1958). 3. Araneta v . Gatmaitan, 101 Phil 328; Gascon v . Arroyo, 178 SCRA 582; Lacson-Magallanes Co . , Inc . v . Pao, 21 SCRA 895. 4. Philippine Political Law by Justice Isagani Cruz, 1998 Edition, p. 212. 5. ibid ., p. 212. 6. Villena v . Secretary of Interior , 67 Phil 451. 7. Philippine Political Law by Justice Isagani Cruz, 1998 Edition, p. 213. 8. Heirs of Rosendo Sevilla Florencio v . Heirs of Teresa Sevilla De Leon , G.R. No. 149570, March 12, 2004. 9. New York Auction Co . v . Fidelity and Guaranty Co ., 183 N.E. 358, 359, 26 N.Y. 186). 10. Cutter v . Howe , 122 Mass. 541, 543. 11. 12 C.J.S., p. 1146. 12. The New Central Bank Act. 13. Realigning the organization of the Bureau of Treasury, dated October 17, 1997. 14. Callanta vs . Carnation Phils . , Inc ., 145 SCRA 268. 15. It is the policy of the BSP to promote the protection of investors in order to gain their confidence and encourage their participation in the development of the domestic capital market. . . . to enhance transparency of security transactions with the end in view of protecting investors. (Section 1, Circular No. 428, series of 2004). 16. Sections 1 and 2, Chapter 1, Title II, Book IV of the 1987 Administrative Code of the Philippines.