DOJ Opinion No. 044, s. 2004

DOJ OPINION NO. 044, s. 2004 May 5, 2004 Secretary Juanita D. Amatong Department of Finance Manila M a d a m : This refers to your request for a confirmatory opinion on the authority of the Department of Finance (DOF) and/or the Bureau of the Treasury (BTr) to directly enter into financial derivatives transactions 1 pursuant to and contemplated under the International Swaps and Derivatives Association, Inc. (ISDA) Master Agreement without being subject, as a prior statutory or regulatory condition, to the requirement to obtain specific Presidential approval in the form of a Full Powers Authority or a Special Authority for each transaction. You state that pursuant to its fiscal and cash management function, the BTr, as a line agency under the DOF, intends to enter into financial derivatives transaction ( e . g . currency and/or interest rate swaps) with financial institutions for the purpose of obtaining foreign currencies to finance or service foreign obligations and/or expenditures incurred by the National Government pursuant to law. The envisioned derivatives transactions are also designed to reduce the borrowing costs of the Republic as well as for hedging purposes to minimize risks. You also state that as a condition for entering into a financial derivative transaction such as a currency swap, the Republic is required to execute an ISDA Master Agreement, which is the standard document most commonly used by market participants in derivative transactions, to govern the terms and conditions of the transaction to be entered into with its counterparty. Through the execution of a Schedule to the ISDA Master Agreement, the contracting parties shall tailor the standard agreement to their needs, which then sets up the contractual framework under which the parties can then enter into specific derivatives transactions. Upon the execution of any derivatives transaction under the framework, the parties then enter into a short agreement known as a Confirmation documenting the terms of the transaction. The ISDA Master Agreement, the relevant Schedule and the Confirmation, if any, executed by the parties comprise the entire ISDA Agreement. iatdc2004 By way of an illustration, you state that in a derivatives transaction involving a Currency Swap , the contracting parties to the ISDA Master Agreement may swap currencies ( e . g . US$ to PhP: PhP to US$) and agree that at some future date, they will again swap currencies ( i . e . US$ to PhP: PhP to US$) at a predetermined exchange rate. In cases of interest rate swaps, the parties may change the interest rate basis of a pending obligation from fixed to floating rate or vice-versa. The ISDA Master Agreement, however, allows for financial derivatives transactions other than currency swaps and/or interest rate swaps. According to you, the financial derivatives transaction contemplated in your query will not be the first of its kind for the Republic. In July 2001, the National Government, through a favorable opinion from this Department and a Presidential Full Powers, entered into a currency swap simultaneously and in connection with a borrowing transaction. The swap was a single transaction wherein the proceeds of the simultaneous loan transaction constituted the underlying asset for the currency swap. Since the overall transaction involved a borrowing by the Republic under R.A. No. 245, 2 a request for the President to issue an authority to execute an R.A. No. 245 borrowing included a request for authority to enter into a currency swap. Both requests were granted and the approval was embodied in a single Presidential Special Authority authorizing the Secretary of Finance to borrow (peso loan transaction) and thereafter to enter into the currency swap transaction using the proceeds of the loan. You state that the May 31, 2001 opinion rendered by this Department for the said transaction, which was also used in support of the DOF's request for Presidential Authority, confirmed, among others, the validity, legality and enforceability of the swap transaction under the ISDA Master Agreement and the relevant Schedule executed by the Republic with the counterparty and stated that while the contemplated issuance of Notes therein ( i . e ., a borrowing transaction) was supported by R.A. No. 245, as amended, the swap transaction, on the other hand, found legal basis in the Administrative Code of 1987. Moreover, this Department, in its Opinion No. 14, series of 1996, affirmed the basic authority of the Republic to enter into a swap transaction pursuant to its general authority to contract as embodied in the Administrative Code of 1987. As such, you state that the DOF/BTr are of the view that where a transaction such as a financial derivatives transaction is not inextricably linked to, or does not involve, any borrowing under R.A. No. 245, the requirement for specific prior presidential approval under the said statute does not apply. Since the financial derivatives transactions subject of your query and contemplated under the ISDA Master Agreement are not borrowing transactions under R.A. No. 245, as amended, or similar statutes in respect of which prior Presidential approval is required, but are transactions that relate to, and are part of the DOF/BTr's mandate to manage the cash resources of the Government, the DOF/BTr is not required to seek Presidential approval for it to enter into such transaction. DCcHIS The position of the DOF/BTr rests on the following laws, rules and regulations: 1. Pursuant to Section 129 of Republic Act No. 7653, 3 the fiscal agency function of the Bangko Sentral ng Pilipinas (BSP) has been transferred to the DOF. The BTr, being a bureau under the DOF, and in accordance with E.O. No. 449, 4 s. 1997, is mandated to exercise the fiscal agency functions, which includes, among others, the servicing and redemption of public debt. 2. Under E.O. No. 449, s. 1997, the BTr is mandated, among others, to manage the National Government's cash, control and service public debt, both domestic and foreign. 3. Section 47, Chapter 12, Book I of E.O. No. 292 5 provides that contracts or conveyances may be executed for and in behalf of the Government or any of its branches, subdivisions, agencies or instrumentalities, including government-owned or controlled corporations, whenever demanded by the exigency or exigencies of the service and as long as the same are not prohibited by law. You likewise added that in entering into contract, the contracting party representing the Government is guided, in the absence of specific laws, rules or regulations on the matter, by the general applicable laws such as the Code of Conduct and Ethical Standards of Public Officials and Employees and the Anti-Graft and Corrupt Practices Act so that unnecessary losses to the Government would be avoided and to ensure that the contract is neither grossly disadvantageous to the Government nor prohibited by law. Hence, this query. This Department is of the view that in the absence of an express provision of law or presidential imprimatur authorizing the DOF/BTr to enter on its own into a financial derivatives transaction, the same could be done only with prior Full Powers or Special Authority from the President. While this Department agrees with your view that under Section 129 of R.A. No. 7653, all fiscal agency functions of the BSP as provided for in Sections 117 ( Issue of Government Obligations ), 118 ( Methods of Placing Government Securities ), 119 ( Servicing and Redemption of the Public Debt ) and 120 ( The Securities Stabilization Fund ) as well as in other pertinent provisions of the said R.A. have been transferred to the DOF and that under E.O. No. 449, s. 1997, the BTr is mandated, among others, to manage the National Government's cash, control and service public debt, both domestic and foreign, unlike Section 70 6 of R.A. No. 7653 which, as cited by this Department in its Opinion No. 14, s. 1996, authorizes the BSP "to enter into a foreign exchange transaction, including a currency swap," no such express provision of law or presidential imprimatur was given to the BTr to enter into financial derivatives transactions such as currency swap which would have the effect of dispensing with the need for a prior Presidential approval such as a Full Powers Authority or Special Authority. It is clear from Section 51, Chapter 12, Book I of E.O. No. 292 that "(C)ontracts in behalf of the Republic of the Philippines shall be executed by the President unless authority therefor is expressly vested by law or by him in any other public officer ." Please be guided accordingly. Very truly yours, (SGD.) MA. MERCEDITAS N. GUTIERREZ Acting Secretary Footnotes 1. A derivatives transaction is any transaction entered into by the parties to a Master Derivative Agreement which may be a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction , cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or a combination of such transactions (see page 2 of the query). 2. An Act Authorizing the Secretary of Finance to Borrow to Meet Public Expenditures Authorized by Law and for Other Purposes. 3. The New Central Bank Act; approved on June 14, 2003. 4. Realigning the Organization of the Bureau of Treasury. 5. Administrative Code of 1987. 6. SEC. 70. Purchases and Sales of Foreign Exchange . The Bangko Sentral may buy and sell foreign notes and coins, and documents and instruments of types customarily employed for the international transfer of funds. The Bangko Sentral may engage in future exchange operations. xxx xxx xxx In order to maintain the convertibility of the peso, the Bangko Sentral may, at the request of any banking institution operating in the Philippines, buy any quantity of foreign exchange offered, and sell any quantity of foreign exchange demanded by such institution, provided that the foreign currencies so offered or demanded are freely convertible into gold or United States dollars. This requirement shall not apply to demands for foreign notes and coins. xxx xxx xxx