MANILA, Philippines — The cap imposed by regulators that limits financial institutions’ exposures to too much credit risk from a single entity will be lifted temporarily for debt securities used by banks involved in providing liquidity in the trading markets.
In a statement, the Bangko Sentral ng Pilipinas (BSP) said its Monetary Board approved the exclusion of debt securities acquired as a result of banks’ market-making activities from the single borrowers limit for 90 and 60 calendar days.
BSP said this move is part of its “commitment to contribute to capital market development in the country.”
“Market makers” refer to financial institutions that ensure the smooth operation of a trading system by being a ready buyer for securities that are being sold or a ready seller for those that are being sought by buyers. To perform this role effectively, these banks usually have to hold large inventories of securities for buying and selling.
The new policy provides that debt securities acquired from market-making activities from Aug. 1, 2020, to July 31, 2021, will be excluded from the single borrower’s limit computation for 90 calendar days from the time of acquisition of the securities.
And beginning Aug. 1, 2021, these debt securities will only be excluded from the single borrower’s limit computation for a period of up to 60 calendar days.
BSP Governor Benjamin Diokno explained that “the [single borrower’s limit] relief will provide [banks] with additional latitude to engage in market-making activities and enable them to continue providing prices for the debt securities in the secondary market as well as to make available an exit mechanism for investors to liquidate their holdings”.
He further highlighted that this initiative “will ultimately promote liquidity and price transparency in the market”.
BSP emphasized that the debt securities acquired from the market-making activities will only be excluded from the single borrower’s limit computation if these are executed in accordance with the rules and guidelines of the Securities and Exchange Commission and the market or exchange where such securities are traded or enrolled.
The application of single borrower’s limit relief shall also be subject to the market-making positions will be taken up in the trading book; the market-making positions will be properly identified and segregated from the market maker’s proprietary positions; and the market value of the subject debt securities and the number of days the securities have been outstanding from the date of acquisition will be periodically monitored.