DBP rebukes traders for ‘breach of ethics’

THE DEVELOPMENT Bank of the Philippines (DBP) has imposed administrative sanctions for “breach of ethics and professionalism” on three treasury group officers directly involved in the bank’s P717-million loss due to so-called “wash sales.”

In a report to the Commission on Audit—whose resident auditor first flagged the bank’s questionable practices in 2014—DBP president and CEO Gil Buenaventura said that treasurer and senior vice president Mariquita Agena, senior assistant vice president Rustum Corpuz Jr. and senior assistant vice president Francis de los Reyes were “formally charged” for violating the bank’s Code of Ethics and Professionalism.

Despite their actions having resulted in massive losses for the government-owned bank, the charges brought against them were administrative in nature. The three officers are part of DBP’s treasury group whose proposal to deal with the bank’s ballooning paper losses were approved by its Risk Oversight Committee, composed of bank directors and its most senior officers.

“The officers who have been formally charged are given such appropriate number of days within which to reply to the charges,” Buenaventura said in his March 31, 2015, letter to COA. “Each of these officers may desire to further elaborate on their defenses and/or circumstances to better appreciate their participation and/or responsibility in the alleged offenses charged against them.”

In his letter, the DBP chief revealed that the Bangko Sentral ng Pilipinas has also learned about the anomalies involving the sale of P14.3 billion worth of government securities to First Metro Investment Corp., only to be bought back on the same day at a P717-million loss.

The BSP had asked DBP’s board to investigate the transactions “for possible imposition of sanctions against erring officers,” Buenaventura said. It remains unclear whether the BSP was satisfied with the results of DBP’s internal investigation and the sanctions it imposed on the officials involved.

“Wash sales” are prohibited by banking and securities regulations because they distort financial markets by misleading third parties as to the volume and price of the securities being traded, when in fact, no real change in ownership of the securities occurs at the end of the day.

Buenaventura outlined a string of recommendations to prevent a repeat of the wash sales, including requiring all of DBP’s trust and treasury traders to reaffirm “their fealty and observance of all known securities laws with full support of the board and senior management.”

In a separate statement, the bank explained that COA’s findings on the “wash sales” were based on an audit observation memorandum that was “still subject to DBP’s explanation.”

“DBP implemented a strategy to preserve capital and strengthen the bank’s long-term viability,” the statement said. “Due to adverse market conditions affecting all banks, mark-to-market losses in the bank’s investment securities portfolio in early 2014 grew to levels that would have affected its core capital and would have resulted in reduced capital ratios.

“In order not to breach regulatory capital adequacy ratios, the bank had to cut losses and sold illiquid and out-of-the-money government securities and booked trading losses on said securities,” the bank explained.

“These trading losses should not be taken in isolation as the bank took trading opportunities to offset these trading losses and ended the year with net trading gains of over P400 million, which contributed to the bank’s net income of P4.6 billion for 2014,” it added.

Meanwhile, bank documents obtained by the Inquirer showed the internal debate that occurred when DBP’s treasury officials sought the risk oversight committee’s approval to implement its strategy of selling its money-losing bonds and buying them back to be lodged in a separate portfolio.

Agena, who heads the bank’s treasury group, said that they were surprised by the decision of the US Federal Reserve to implement a tapering of its quantitative easing program, which resulted in an uptrend in interest rates, causing, in turn, DBP to book floating losses on its bond portfolio.

However, the same minutes of the meeting of Feb. 12, 2014, indicated that both risk oversight committee vice chair Jose Luis Vera and bank chair Jose Nuñez Jr. pointed out to Agena that the US Fed’s taper strategy should not have come as a surprise since the bank had already been discussing its implications as early as May 2013.

Despite these early discussions, the bank still ended up with massive losses in its bond portfolio, which management decided to remedy through the methods questioned by COA and the BSP.