By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will allow fund managers to invest trust funds in financial derivatives, as part of efforts to deepen the local debt market.

The central bank issued Circular 999 last week, which will let financial firms place money from unit investment trust funds (UITFs) into hedge and feeder funds.

UITFs are pooled funds from depositors which are managed by a trust company or a bank’s trust department, with the latter deciding on where to invest the said funds in order to generate incomes for clients.

Existing rules allow asset managers to invest UITFs in bank deposits, government-issued debt papers, tradable securities issued by foreign countries, exchange-listed securities and debt papers, loans traded in an organized market, loans from repurchase agreements, and in shares in collective investment schemes.

BSP Governor Nestor A. Espenilla, Jr. issued the circular on March 14 allowing banks and non-banks offering UITFs to tap global investments which make use of financial derivatives as they deploy assets under management.

Derivatives are contracts signed by parties to acquire an asset at a predetermined future date and price. Under current rules, trust companies can only tap derivatives to hedge risk exposures.

“This is part of financial market liberalization as part of reform agenda. (It) allows more flexibility to funds in their use of derivatives to create better investment value propositions,” Mr. Espenilla said in a text message.

The government kicked off an 18-month reform plan for the local capital markets last year, with the goal of increasing the supply of short-term securities and creating “reliable financial benchmarks” for debt instruments. A deeper debt market is seen to provide a “second engine” to drive economic activity, with Mr. Espenilla citing the need to complement financing needs sourced from Philippine banks.

The central bank chief floated the idea of relaxing current regulations in 2017, saying that derivative investments for UITFs will “invigorate” the local trust industry and allow a more efficient management of investment portfolios.

“In the case of Feeder Fund or Fund-of-Funds, offshore/global funds which use financial derivatives for efficient portfolio management may be allowed as target fund: Provided, that financial derivatives shall not be extensively or primarily used as an investment strategy of the target fund and that the risk level of the target fund remain consistent with the objective and risk profile of the investor fund,” read the BSP issuance.

A feeder fund structure means 90% of investments are placed in a single collective scheme, while a fund-of-funds means that the pool is infused in more than one collective investment.

The use of financial derivatives should be used to help the investment fund reduce risks, trim costs or generate additional incomes “with no increase or a minimal increase in risk,” the BSP said.

Meanwhile, local players can also use hedging products, provided that these are disclosed in the UITF plan.

Hedge funds allow an institution to protect themselves against potential risks from adverse price movements. Mr. Espenilla previously said that hedging products on foreign exchange, currency forwards, and swaps are particularly needed.

RELATED ARTICLESMORE FROM AUTHOR