BSP Supervisory Framework on Hedging Activities Supervision Cimafranca.pdf · BSP Supervisory...
Transcript of BSP Supervisory Framework on Hedging Activities Supervision Cimafranca.pdf · BSP Supervisory...
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BSP Supervisory Frameworkon Hedging Activities
Conference on Gearing Up for External Competitiveness13 September 2010
Marco Polo Hotel, Davao City
ANNALIZA G. TAN-CIMAFRANCA, CIA, FRM
Head, Capital Markets Specialist Group
Supervision and Examination Sector
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Presentation OutlinePresentation Outline
� Overview of Philippine derivatives market
� Regulations governing Hedging Instruments
� BSP Risk Management and Sales and Marketing Guidelines on Hedging Instruments
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Figure 1. Derivatives Volume (USD Billions)
Philippine Banks Philippine Banks –– Outstanding DerivativesOutstanding Derivatives
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Overview of Philippine Derivatives MarketOverview of Philippine Derivatives Market
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Figure 2b. Derivatives by Product Type (2000)
92%
8%0%
FX Forw ards & Sw aps Options IRS
Figure 2a. Derivatives by Product Type (2009)
60%
16%5%
19%
FX Sw aps FX Forw ards IRS Options, etc
Philippine Banks Philippine Banks –– Outstanding DerivativesOutstanding Derivatives(Dec. 2000 vs. Dec. 2009)(Dec. 2000 vs. Dec. 2009)
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Regulation Governing Hedging InstrumentsRegulation Governing Hedging Instruments
� BSP Circular No. 594 - Guidelines on derivatives activitiesof Banks
� BSP Circular No. 668 - Guidelines on derivatives activitiesof Non-Bank Financial Institutions with Quasi-BankingAuthority
� Authority of Banks to offer hedging instruments
� Risk management guidelines
� Sales and marketing guidelines
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What are the allowed hedging instruments?What are the allowed hedging instruments?(Cir. 594)(Cir. 594)
� Universal banks and commercial banks cangenerally offer, among others, the followinginstruments without prior BSP approval:
� FX forwards, swaps, currency swaps up to 3
years
� Interest Rate Swaps and Forward Rate
Agreement up to 10 years
� Universal banks and commercial banks withappropriate derivatives licenses can offerother derivatives/hedging instruments
� Additional authority are granted upon on-site
validation of banks’ capacity
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Risk Management GuidelinesRisk Management Guidelines
� Ensure banks have capacity and ability to manage risks
arising from engaging in derivatives activities, including
offering hedging products to clients.
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Sales & Marketing GuidelinesSales & Marketing Guidelines
� Prescribe minimum standards on
sales and marketing practices to
protect clients.
� Ensure banks implement sound and
ethical sales and marketing
practices.
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Responsibilities of Banks OfferingResponsibilities of Banks OfferingHedging FacilitiesHedging Facilities
� A bank should ensure that:
� a client understands the nature of the transaction;
� the transaction meets the client’s objectives and risk tolerance; and,
� there is sufficient, accurate and comprehensible information disclosure regarding products offered.
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Client Suitability ProcessClient Suitability Process
� A bank should ensure that the derivatives are appropriatefor client’s hedging needs through a client suitabilityprocess.
� Obtain client information about financial situation,experience, and objectives relevant to desired hedgingproducts/services.
� A bank should ensure that the clients’ objectives areclearly identified.
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DisclosuresDisclosures
� To ensure clients understand the nature, benefits and
risks/costs of products.
� Banks must explain products they offer to enable clients to
make informed decision.
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DisclosuresDisclosures
� Minimum disclosures should be in writing; clients to signthe disclosure statement to affirm of their receipt andunderstanding.
� Product disclosures:� Nature of the products, including underlying (e.g. FX rate)� Tenor of instrument� Fees and charges� Benefits from the instrument� Risks
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Sales and Marketing PersonnelSales and Marketing Personnel
� Should be knowledgeable about
derivatives being sold.
� Bank should implement, and maintain a
comprehensive system of training of
personnel geared at enhancing technical
knowledge to enable them to understand,
explain the nature and risks of a bank’s
derivatives products and ensure client
suitability.
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Responsibilities of Board andResponsibilities of Board andSenior ManagementSenior Management
� BOD and SM are made liable
for acts committed by sales
and marketing personnel
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To hedge or not to hedge?To hedge or not to hedge?Advantages Disadvantages
• Protection against price
movements
• Not necessarily maximizes
revenue or minimizes cost
• Operational efficiency • Cash flow must be known
with reasonable certainty
• Improve budget forecasts • Some hedging instruments
involve cost (e.g. FX options)
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SummarySummary� BSP regulations provide dealer banks general authority to
sell hedging products to clients: (FX) Forwards and (FX,Interest rate) swaps with tenor restrictions
� (FX) options may likewise be offered by banks withappropriate derivatives licenses.
� Prudential regulations ensure:
� Banks have capacity to offer hedging facilities.
� Banks implement sound and ethical sales and marketing practices
to promote customer protection.
� The decision to hedge a particular exposure shouldconsider risk appetite, economic implication and financialsophistication