The Securities and Exchange Commission is looking into the securities trading anomalies of state-owned Development Bank of the Philippines as reported by the Commission on Audit (COA).
A series of illegal transactions, called “wash sales,” took place from early January to March 2014 and had caught the COA’s attention.
DBP allegedly sold P14.3 billion worth of government securities to First Metro Investment Corp. and bought back the very same securities on the same day and at the same price at which they were sold. In effect, no real change in ownership took place.
The Philippine Securities Regulation Code prohibits “engaging in transactions in which there is no genuine change in actual ownership of a security, taking into consideration internal control systems adopted by the firm to prevent manipulative practices.”
According to SEC chair Teresita Herbosa, the regulator is now gathering facts, requesting documents, and inviting persons” for questioning.
The SEC action was prompted by a COA audit observation memorandum (AOM), citing the 28 trades undertaken by DBP.
In explaining away these transactions, DBP said it just implemented a strategy to “preserve capital and strengthen the bank’s long-term viability.”
“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,” the bank said.
Securities classified as “available for sale” or those lodged in the short-term trading portfolio are subject to mark-to-market valuation while those classified as held-to-maturity can be reported at amortized cost less impairment.
“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 DBP said.
“These trading losses should not be taken in isolation as the bank took trading opportunities to offset the 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 was earlier reported that the Bangko Sentral ng Pilipinas also initiated an investigation into the reported trading anomalies, which observers claimed to be a widespread practice among banks.