Amendments to Derivatives Regulations of Banks, Quasi-Banks and Trust Corporations

BANGKO SENTRAL NG PILIPINAS OFFICE OFTHE COVERNOR CIRCULAR NO. III9 Series of 2O2l Subject Amendments to Derivatives Regulations of Banks, Quasl-Banks and Trust Corporatlons The Monetary Board, in its Resolution No. 585 dated 12 May 20.21, approved amendments to the regulations governing the derivatives activities of banks under Sections 613 and 622 of the Manual of Regulations for Banks (MORB) and of quasi-banks and of trust corporations under Sections 613-Q and 3O2-T of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). Manual of Regulations on Foreign Exchange Transactions (FX Manual), and other related provisions set out-in this Circular. These amendments demonstrate the continuing commitment of the Bangko Sentral to support the development of the Philippine financial markets by further expanding the menu of financial derivative instruments available to banks, quasi-banks, trust entities and their clients for risk management and diversification of exposures, and at the same time ensuring the prudent use of the same. Section l. Section 613 of the MORB is hereby amended to read, as follows: "613 DERIVATIVES ACTIVITIES XXX Defrnltlon of terms. a. Credit default swaps (CDS) - refers to a credit derivative wherein the protection buyer may exchange the reference asset or any deliverable obligation of the reference entigr for cash equal to a specified amount, or get compensated to the extent of the difference between the par value and market value of the asset upon the occurrence of a defined credit event. b. Credit derivative - a contract wherein one party called the protection buyer or credit risk seller transfers the credit risk of a reference asset or assets issued by a reference entity or entities, which it may or may not : . . I . . _ o\A{h; lo'another party called the protection seller or credit risk buy.er.. . :. .:: : -. - -.|n.'retdrn. the- prot_ection buyer B.ays a premiUrn .o.I"interest-related. . ""',"":':;..:.'.'.'.'.::i.,;:j.-r:-:-:,:-i-'..'..:::,:' , .-i-.-'-,--.tt;:i::,::.::'::::::::ii:it ,.,.,.,.,.,-..|..:..::::J:..-........---:--.- aaara' I I r r r '- ;-::---:--- *.;:;1:;i::::::':"i 'o.' o o. I l.i. ...1.t-.t.t. : l: j:'-i'.I ; i-lt-.t.t.t --a'a-----. "'l'i''''' at at atata

payments to the protection seller reflecting the underlying credit risk of the reference asset/s. c. Credit-linked note (CLN) - refers to a pre-funded credit derivative instrument wherein the note holder acts as a protection seller while the note issuer is the protection buyer. As such, the repayment of the principal to the note holder is contingent upon the non-occurrence of a defined credit event. All references to CLNs shall be taken to generically include similar instruments, such as credit-linked deposits (CLDs). Unless otherwise stated in this section, the term shall refer only to plain vanilla CLNs. Plain vanilla CLNs are composed of a debt or deposit instrument and a CDS. Non-plain vanilla CLNs are those that are leveraged and/or include features of other SPs (e.9., coupon payments linked to interest or FX rate movements) and/or contains more than one (l) embedded derivative. d. Currency swaps-XXX e. Financial futures- refers to standardized forward contracts traded on exchanges. For purposes of this section, "analogous financial futures" pertain to exchange-traded contracts similar to the instruments being referred to. For instance, interest rate futures are considered analogous to forward rate agreements. Forward FX contracts- XXX g. Forward rate agredment (FRA)- XXX h. FX options- XXX FX swaps- XXX Clobal peso notes (GPN)- refers to obligations of the issuer to pay the prevailing USD equivalent of the nominal PhP amount from the computed coupon interest and bullet principal. They are effectively PhP-denominated bonds with settlement in USD at the prevailing USD/PhP rate. k. lnterest rate swaps (IRS)-XXX l. Non-deliverable fotward (NDF)- refers to a forward FX contract where only the net difference between the contracted forward rate and the market rate shall be settled at maturity. m. Non-deliverable swap - refers to a variation of an FX swap agreement where the exchange of currencies will occur only at the start or at the end of the contract. Page 2 of18

n. Structured product (SP) - XXX ROP'; Paired Warrants Program - refers to instruments that gives the holders the right to convert or exchange their Republic of the Philippines (ROP) Global Bond holdings into Peso CS at pre- determined tenors and exchange prices (par for par) at pre-agreed coupons. This right can only be exercised upon a ROP Event of Default on its foreign currency debt. Cenerallyauthorizd deriuatives actiuities.A bank may engage in the following derivatives activities without need of prior Bangko Sentral approval: Provided,That it obserues the provisions of Appendix?Z and meets the fol lowing conditions: a. UBs and KBs maytransact in the following derivatives in the capacities specified: (1) As a dealer. A UB or KB may originate, distribute or act as market maker for the following financial derivatives Provided, That the UB or KB complies with applicable market conventions and mechanisms for transparency and disclosure: (a) Deliverable FX forwards, FX swaps, currency swaps and analogous financial fu tu res; (b) Non-deliverbble FX fotwards and FX swaps; and (c) Interest rate swaps, forward rate agreements and analogous financial futures; Provided, further That the issuance of a sub-participation in any derivatives held as an end-usershall be deemed as undertaking the role of a dealer: Provided, finally,That the dealer UB or KB observes the provisions of Section 612 and other pertinent securities laws, rules and regulations. (21 As end-user. (a) A, UB or KB may enter in any financial derivatives transactions for the purpose of hedging its own risks: Provided, That it observes all the requirements for hedging transactions under existing accounting standards. (b) A UB or KB may enter into financial derivatives transactions in order to take positions for its own account in financial instruments enumerated under ltem "(l)" above. lt can also take long positions in naked FX options. <.y Page 3 oflS

(c) RBU and EFCDU of UBs and KBs may invest, for their own account, in the following SPs: (i) xxx (ii) xxx Provided, That the bank shall comply with the following conditions: (aa) Total carrying value of all investments in SPs shall not exceed loOo/o of the bank's qualiffing Tier I capital; and (bb) xxx. XXX (d) Global peso notes booked under the RBU; and (e) Transactions involving warrants issued under the ROP's "Paired Warrants Program". (3) As a broker. XXX b. TBs, RBs and Coop Banks may transact in the following derivatives transactions as end-user: (I) with Bangko Sentral - authorized dealers and brokers sotely for hedging purpos6s: Provided,That they obserye alr the requirements for hedging transactions under existing accounting standards. (2) Transactions involving warrants issued under the Rop's 'paired Warrants Program". c. A trust department of a UB or KB may transact as an institutional counterparty in the following financial derivatives instruments on behalf of its trustor/principal/s as may be authorized by such trustor/principal/s: Provided, That the trust department observes the relevant provisions of Appendix ZZ and Appendix 86: (l) Any financial derivative instrument solely for hedging purposes: Provided. That the trust department observes all the requirements for hedging transactions under existing accounting standards; (2) Deliverable FX forwards, FX swaps, currency swaps; (3) Interest rate swaps, fonryard rate agreements and analogous financial futures; -JL Page 4 ofl8

(4) Principal-protected foreign currency-denominated SPs, the revenue streams of which are linked to interest rate indices, interest rate instruments, listed equity shares or indices, FX rates, credit rating or index, or gold: Provided, That the maximum contractual maturity shall be five (5) years; and (5) Plain vanilla single-name CLNs where the reference asset is an obligation issued or guaranteed by the Republic of the Philippines. Provided, That the total carrying value of investment in SPs and CLNs shall not exceed fifty percent (5O9o) of such trustor/principal's assets being managed by the trust department. Actiuities reguiring addltional deriuatives authoritlt A bank shall apply for prior Bangko Sentral approval of additional derivatives authority to engage in all other financial derivatives activities not expressly allowed under this Section on Generally authorized derivatives activities and those that are not part of Activities requiring notification. A bank may apply for two (2) or more additional authorities. A bank applying for additional derivatives authoriMes must have and maintain a risk management system commensurate to the additional authoriVies being applied for, in accordance with the provisions of Section 612, Appendix?? and meet other conditions specified under this Section. A trust department shall apply for prior Bangko Sentral approval of additional derivatives authority as an end-user to engage in all other financial derivatives activities not expressly allowed under Generally authorized derivatives activities and those that are not part of Activities requiring notification. A trust department applying for additional derivatives authority/ies as an end-user must have and maintain a risk management system commensurate to the additional authority/ies being applied for, in accordance with the provisions of AppendixZ2 and Appendix 86, and meet other conditions specified under this Section. a. Classification of additional derivatives authority (l) Type I - Expanded dealer authorigt XXX (3) Type 3 - Limited user authority Any bank may apply for a Type 3 authority. A UB or KB with a Type 5 authority may transact, as an end-user, in specific types of derivatives products, with specific underlying reference, as applied for by the bank. qL Page 5 ofl8

A TB, RB or Coop Bank with a Type 3 authority may transact, as an end-user for purposes other than hedging, in specific types of derivatives products, with specific underlying referencez Provided, That the applicant bank agrees to be covered by all regulations prescribing capital for market risk, notwithstanding any provision to the contrary. Atrustdepartmentof a bank mayapplyfora Type5 authority. A trust department of a bankwith a Type5 authority mayenter into derivatives transactions, as an end-user, oh behalf of its trustor/principal/s as may be allowed by the trustor/principal/s, in specific types of products, with specific underlying reference, as applied for by the trust department. (4) Type 4 - Special broker authority XXX A bankwith additionalType 1,2or 4 authorities shall be responsible for complying with pertinent securities laws, rules and regulations. For purposes of this Section, the types of derivatives are classified as follows: forwards, swaps, options, and structured products. Underlying reference pertains to the following: interest, FX, equity, credit and commodity. b. Qualification requirements. XXX Application procedures. XXX 0) e copy of the board resolution xxx Xxx (5) The Bangko Sentralwill not accept applications lacking xxx (6) A bank whose application for additional authority/ies xxx (71A bank that holds an additional derivatives authority xxx Activities requiring notification. A bank or its trust department shall notiff the Bangko Sentral prior to engaging in any of the derivative instruments below: a. Any variant of a stand-alone derivative (i) which a UB or KB is allowed to transact in as part of its Generally authorized derivatives activities as dealer; (ii) for which a bank has an existing type 2 or type 3 additional

derivatives authority; (iii) which a trust department of a UB or KB is allowed to transact in as part of its Generally authorized derivatives activities; or (iv) for which a trust department has an existing type 3 add itional derivatives authority. For this purpose, a variant refers to an instrument where the features of the authorized product are altered to effect a change in the timing and amount of cash flows, the commencement of the contract, or the basis of payments (e.g., amortizing or accreting notional amount). The adoption of a different underlying for a previously-authorized product (e.g., a different reference entity of a credit default swap, if the latter has been approved under a Type 2 or Type 3 authorityiwould likewise result in the creation of a variant; b. A structure or combination of (i) two or more separate stand-alone derivatives contracts, or (ii) stand-alone derivatives contract/s and a plain vanilla cash instrument, where the instruments are offered or distributed together, and where (all of) the derivative(s) is (are) either part of a UB/KB's Generally authorized derivatives activities as dealer or its existing type 2 or type 3 additional derivatives authority, or part of a trust department's existing type 3 additional derivatives authority. The notification requirement does not apply to banks that have been granted a Type I expanded dealer authority. The bank or trust department shall only transact in the instruments that are the subject of its notification to the Bangko Sentral in the capacity allowed for the previously-authorized product. It is understood that the determination of a specific product as a structure or a variant, as defined under this Section, shall be made in accordance with a bank's/trust department's internal risk management processes and shall involve the risk manag€ment unit. A bank or trust department that intends to engage in a variant or a structure as described in these provisions shall notiff the appropriate supervising department of the Bangko Sentral in writing within ten (lO) days from the approval of the same by the appropriate committee of the Bank/trust department and submit the following: a. A copy of the resolution of the appropriate board/management committee (or the equivalent management review body in the case of branches of foreign banks or trust departments) approving the bank's/trust department's intention to engage in the specific derivatives prod uct(s I b. A certification signed jointty by the president, treasurer or trust officer, as applicable, and chief risk officer of the bank, stating that: (.,*4 Page 7 oflS

(l) The bank has reviewed the product(s) and has deemed that such would qualiff as a variant(s) or a structure(s) as described under this framework; and (2) The bank continues to comply with the prudential criteria under Section lll; c- The list of financial derivative variants and/or structures that the bank intends to enter into or offer, the reasons for doing so and the target market for the same, if any; and d. Fleferences !o existing product and/or operations manuals covering the process flows and relevant risk management processes governin! the products subject of the notification to the Bangko Sentral. ln tra -g rou p t ra nsactio ns. XXX Accounting guidelines. A bank that engages in derivatives activities must strictly account for such transactions in accordance with the guidelines in Appendix2T. Sanctions. XXX' Section 2. Section 613-Q of the MORNBFI is hereby amended to read as follows: "615-Q DERTVATTVES ACTtVtTtES XXX hfinition of terms Credit default swaps (CDS)- refers to a credit derivative wherein the protection buyer may exchange the reference asset or any deliverable obligation of the reference entity for cash equal to a specified amount, or get compensated to the extent of the difference between the par value and market value of the asset upon the occurrence of a defined credit event b. Credit deriuative- a contract wherein one party called the protection buyer or credit risk seller transfers the credit ris* of a reference asset or assets issued by a reference entity or entities, which it may or rnay not own, to another par[r called the protection seller or credit risk buyer. In return, the protection buyer pays a premium or interest-related -t\ Page I oflS

payments to the protection seller reflecting the underlying credit risk of the reference asset/s. b. Credit-tinked note (CLN) - refers to a pre-funded credit derivative instrument wherein the note holder acts as a protection seller while the note issuer is the protection buyer. As such, the repayment of the principal to the note hotder is contingent upon the non-occurrence of a defined credit event. All references to CLNs shall be taken to genericatly include similar instruments, such as credit-linked deposits [Cf-Os). Unless otherwise stated in this section, the term shall refer only to plain vanilla CLNs. Plain vanilla CLNs are composed of a debt or deposit instrument and a CDS. Non-plain vanilla CLNs are those that are leveraged and/or include features of other SPs (e.9., coupon payments linked to interest or FX rate movements) and/or contains more than one (I) embedded derivative. currency swap shall refer to an arrangement in which two parties exchange a series of cash flows in one currency for a series of cash flows in another currency, at specified exchange and/or interest rates and at an agreed interuals over an agreed period' d. Financial futures- refers to standardized folward contracts traded on exchanges. For purposes of this section, 'analogous financial futures" pertainlo exchange-traded contracts similar to the instruments being referred to. For insiance, interest rate futures are considered analogous to forward rate agreements. e. Foreign exchange swapshall refer to a transaction involving the actual exchinge of trJo (2) currencies (principal amount only) on a specific date at a rate agreed on deal date (the first leg), and a reverse exchange of the same two (2) currencies at a date further in the future (the second leg) at a rate (different from the rate applied to the first leg) agreed on deal date, Foreign exchange forward shall refer to a contract to purchase/sell a specified amount of currency against another at a specified exchange rate for delivery at a specified future date three (3) or more business days afiter deal date. g. Forward rate agreement {FRAIshall refer to an agreernent fixing the interest rates for a specified period whereby the buyer receives (or pays) and the seller pays (or receives) the interest rate differential if the reference rate rises above (or falls below) the contract rate' respectively. h. lnterest rate swap (tRS)shall refer to swaps to an agreement in which the parties agree to exchange interest cash flows on a principal -}{ Page 9 oflS

amount at certain times in the future according to an agreed upon formula. i. Structured product (SP)shall refer to a financial instrument where the total return is a function of one (l) or rnore underlying indices, such as interest rates, equities and exchange rates. lt is composed of a host contract (e.9., plain vanilla debt or equity securities) and an embedded derivative (e.g.,swaps, fonryards or options) that reshape the risk-return pattern of the hybrid instrument. For purposes of guidelines under this Section, the term SP does not include asset-backed securities. Cenerally authorizd deriuatives actiuities.A QB may transact in the following fi nancial derivatives instruments with Bangko Sentral-authorized dealers and brokers as an end-user without need of prior Bangko Sentral approval: a. Deliverabfe FX fonnrards, FX swaps, and currency swaps; b. Interest rate swaps, forward rate agreements and analogous financial futures; and c. Any financial derivative instrument solely for hedging purpos€s: Provided, That the QB observes all the requiremenls ior' hedging transactions under existing accounting standards: prouided, fuiner That it observes the provisions of Appendix e-I9. A trust department of a QB may transact, as an institutional counterpar$r, in the following financial derivatives instruments with the Bangko Sentral-approved authorized dealers and brokers, on behalf of its trustor/principal/s as may be autho rized by such trustor/ principals/s without need of prior Bangko Sentral approval: Prouided, That it obserues the provisions of Appendices e-19 and e-49: a. Any financial derivative instrument solely for hedging purposes: Provided, That the trust department observes all the requirements for hedging transactions under existing accounting standaidu, b. Deliverable FX forwards, FX swaps and currency swaps; and c. Interest rate swaps, forward rate agreements and analogous financial futures. Activities rquiring additional defiuatives authoritlr.A eB may apply for prior Bangko Sentral approval of additional derivatives authority to engage in all other financial derivatives activities not expressly allowed under Generally authorized derivatives activities and those that are not part of Activities requiring notification. A eB may apply for two (zl or more additional authorities. A QB applying for additional derivatiu.r "uihorityfes a3 Page lO oflS

must have and maintain a risk management system commensurate to the additional authorityles being applied for, in accordance with the provisions of Section 6I2-Q, Appendix Q-19 and meet other conditions specified under this Section. ,A, trust department of a QB shall apply for prior Bangko Sentral approval of additional derivatives authority as an end-user to engage in all other financial derivatives activities not expressly allowed under Generally authorized derivatives activities and those that are not part of Activities requiring notification. A trust department applying for additional derivatives authority/ies as an end-user must have and maintain a risk managernent system commensurate to the additional authorityles being applied for, in accordancewith the provisions of Appendices Q-19 and Q-49 and meet other conditions specified under this Section. a. Classification of additional derivatives authority XXX For purposes of this Section, the types of derivatives are classified as follows: forwards, swaps, options, and structured products. Underlying reference pertains to the following: interest, foreign currencies/ foreign exchange, equity, credit and commodity. b. Qualification requirements. A QB or its trust department applying for additional authoritlr to engage in additional derivatives activities shall: XXX c. Application procedures. The applicant shall submit to the appropriate supervising department of the Bangko Sentral a written application for additional derivatives authority/ies accompanied by: XXX Activities requiring notification. A QB or its trust department shall notiff the Bangko Sentral prior to engaging in any of the derivative instruments below: a. Any variant of a stand-alone derivative for which a QB has an existing type 2 or type 3 additional derivatives authority; or for which a trust departnrent has an existing type 5 additional derivatives authority. For this purpose, a variant refers to an instrument where the features of the authorized product are altered to effect a change in the timing of cash flows, the commencement of the contract, or the basis of payments (e.9. amortizing or accreting notional amount). The adoption of a different undertying for a previously-authorized product /^.ja Page 11 oflS

(e.9., a different reference entity of a credit default swap, if the latter has been approved under a Type 2 or Type 3 authority) would likewise result in the creation of a variant; b. A structure or combination of (i) two or more separate stand-alone derivatives contracts, or (ii) stand-alone derivatives contracVs and a plain vanilla cash instrument, where the instruments are offered or distributed together, where (all of) the derivative(s) is (are) part of a QB's existing type 2 or type 3 additional derivatives authority or part of a trust department's existing type 3 additional derivatives authority. The QB or trust department shall only transact in the instruments that are the subject of its notification to the Bangko Sentral in the capacity allowed for the previously-authorized product. It is understood that the determination of a specific product as a structure or a variant, as defined under this Section, should be made in accordance with a QB's/trust department's internal risk management processes and should involve the risk management unit. A QB or trust department that intends to engage in a variant or a structure as described in these provisions shall notiff the appropriate supervising body of the Bangko Sentral in writing within ten (lO) days frorn the approval by the appropriate committee of the QB/trust department of QB and submit the following: a. A copy of the resolution of the appropriate board/management committee approving the QB or its trust department's intention to engage in the specific derivatives product{s); b. A certification signed jointly by the president, treasurer or trust officer, as applicable, and chief risk officer of the eB, stating that: (t) The QB/trust department has reviewed the product{s) and has deemed that such would qualiff as a variant(s) or a structure(s) as described under this framework; and (2) The QB/trust department continues to comply with the prudential criteria under Section lll-e; c. The list of financial derivative variants and/or structures that the QB/trust department intends to enter into or offer, the reasons for doing so and the target market for the same, if any; and d. References to existing product and/or operations manuals covering the process flows and relevant risk management processes governing the products subject of the notification to the Bangko sentral. I n tra -g ro up tra nsa ctio ns. XXX L)L

Accounting guidetfnes. A QB that engages in derivatives activities must strictly account for such transactions in accordance with relevant existing accounting standards. Sanctions XXX" Section 3. Section 622of the MORB is hereby arnended as follows: "€l22 NON-DELIVERABLE FOREICN EXCHANGE FORWARD CONTRACTS INVOLVING THE PHILIPPINE PESO policy Statement The Bangko Sentral ng Pilipinas is cognizant that Non-Deliverable Folwards (NDFs) may,directly or indirectly, create system- wide risks even if there is no delivery of principal amounts and even when NDFs are used as a hedge. To mitigate the buildup of systemic risks and protect against undue concentration in market usage, the following prudential guidelines are set in place. Definition of Terms. As used in this Section, the following terms are defined accordinglY: a. peso Non-Deliverable Forwards (Peso NDF) - refers to a forward foreign exchange (FX) contract involving the value of the Philippine peso against a foreign currency at a specified maturity date on an agr".J notional amount. Only the net difference between the contracted forward exchange rate and the spot exchange rate between the Philippine pesoand the foreign currency at the fixing date shall be se*teO. tiOfs may be transacted by a bank with offshore or onshore counterparties. b. peso NDF Purchase from Non- Flesidents - refers to an NDF contract undertaken by the bank with a non-resident counterparty to receive foreign currency at an agreed fotward exchange rate with the Philippine peso over a specified tenor' c. peso NDF Sate to Non-Residents - refers to an NDF contract undertaken by the bankwith a non-resident counterparty to deliver foreign currency at an agreed forward exchange rate with the Philippine peso over a specified tenor. d. Onshore Non-Deliverable Folward - refers to an NDF contract undertaken by the bank with a resident counterparty' lt may be an NDF Purchase or an NDF sale. /_k Page 13 oflS

e. Fixing Date - refers to the date atwhich the difference between the prevailing market exchange rate and the agreed upon exchange rate or the reference rate is calculated. f. Settlement Date - refers to the date at which the payment of the difference between the contracted fonvard exchange rate and the spot exchange rate between the Philippine peso and the foreign currency at the fixing date is due to the party receiving payment. g. Resident - as defined in the Manual of Regulations on Foreign Exchange Transactions (FX Manual ). h. Non-resident - as defined in the FX Manual. Licensing Reguiremenf. Only UBs and KBs are allowed to engage in NDFs, pursuant to the provisions of Section 6IE. otherRequirements.All NDF contracts with residents shall be settled in Philippine pesos. NDF contracts shall not be pre-terminated before their fixing date. Bank Limits on Peso NDF Exposures.To mitigate any potential build- up of systemic risks, a bank's total gross exposures to all forms of peso NDF transactions' i.e., the sum of sales and purchases for both onshore and offshore transactions, shall be limited to a fixed percentage of the bank,s capital base. The said limit is twenty percent (zovoiof unimf,aired capital for domestic banks. Foreign bank branches shall have a limit equal to toO percent of their unimpaired capital as defined under Section IOS {Capital Flequirements). Bilateral Netting. A bank with purchase and sell positions against a counterparty which are maturing at the same fixing date may consolidate said positions for the purpose of bilateral net settlement. Reportorial Reguiremenfs. All NDF transactions shall be covered by the Report on Non-Deliverable Forward (NDF) Transactions Against pesos. NDF transactions shall tikewise be included in the calculation of tne capital adequacy ratio (cAR) and reflected in the cAR reports. Sanctions. In addition to the sanctions that may be imposed by the Bangko Sentral under Section oo2, any violation of the provisions of this Section shall constitute grounds for the following: a. First Offense (l) Reprimand for the directors/officers responsible for the violation with a warning that subsequent violations witl be subject to more severe sanctions. ,g Page 14 oflS

{2) Banks in breach of the limits shall be required to submit a remedial plan to comply with the limits. b. Subsequent Offense - A bank will be subject to any or all of the fotlowing, as may be recommended by the appropriate superuising department of the Bangko Sentral to the Monetary Board: (l) Restriction or prohibition on the bank from requesting new authority and/or licenses of any sort; (2) Restriction or prohibition on the bank from declaring dividends; and (3) lssuance of an order requiring the bank to cease and desist from conducting business in an unsafe or unsound manner and may further order that irnmediate action be taken to correct the conditions resulting from such unsafe or unsound banking." Section 4. Section 3O2-T of the MORNBFI is hereby amended as follows: 3,O2 . T APPLICABLE REGULATIONS ON TRUST AND OTHER FIDUCIARY ACTIVITIES Trust operations and investment management activities of trust corporations shall be subject to the applicable regulations in Parts Five (Foieign Exchange Operations), Six (Treasury and Money Market Operations), Seven (Electronic Operations and Other Services) and Nine (Anti-Money Laundering Operations) of the MORNBFI, unless otherwise provided in this Manual. The provisions of Section 613 of the MORB that are applicable to trust departrnents of universal and commercial banks shall apply to trust corporations. In addition to the provisions in the "T'regulation, trust operations and other fiduciary activities, including investment management shall be subject to the following regulations provided under Part Four of the MORNBFI, in so far as applicable to the TC: XXX" Section 5. Section 125 of the MORB is hereby amended as follows: "I25 BASEL III RISK.BASED CAPITAL XXX Capitat treatment of exposuresfinvestments in certa in products. The guidelines on the capital treatrnent of bank's exposures/investments in the following products are in Part Vl: ,s Page 15 oflS

a. Structured products in Sec. 525-A (Capital treatment of banks' exposures to structu red productsl. b. Investment in securities overlying securitization structures in Sec. 627- A (Capital treatment of investments in securities overlying sec u ri tiza tio n st ru ctu resl. XXX" section 6. section 625-A of the MORB is hereby amended as follows: "625.A CAPITAL TREATMENT OF BANKS' EXPOSURES TO STRUCTURED PRODUCTS The following rules and regulations shall govern the capital treatment of banks' exposures to structured products. a. Banking book XXX b. Trading book.XXX" section 7. section 72of the FX Manuar is hereby amended as follows: Section 72. Authorized Transactions XXX 2. UBs/KBs, which are authorized to operate under the expanded foreign currency deposit system may engage in the following transactions in any acceptable foreign currency: XXX g. Engage in foreign exchange trading, and subject to section 615 of the MORB, engage in derivatives transactions: XXX l. Invest in foreign currency denominated structured products issued by banks and speciat purpose vehicles (SpVsi of high credit quality subject to the provisions in section 6ts of the MORB: XXX' Page 16 oflS

Section 8. The Sections/Appendices and references to Sections of the MORB and MORNBFI are hereby deleted/renumbered as follows: Deleted/ Renumbered Section Section 6?3-A Guidelines on the lnvestments of Universal Banks and Commercial Banks in Credit-Linked Notes (CLNsI Structured Products and Securities Securitization Section 624-A Credit-Linked Notes and Similar Credit Derivatives Products Section 626-A Expanded Foreign CurrencY Deposit Unit lnvestrnents in Foreign CurrencY Denominated Structured Products Appendix 27 Guidelines on the Adoption I References to Section of Philippine Financial i OZ+-n and 625-4 shall Reporting Standards (PFRS I instead refer to 9) - Classification and I Section 613 Measurement Appendix 64 and Regulatory Requirements Deleted references to Annex B in lnvesting in Credit- "structured products", Linked Notes, Structured "credit-linked notes", Products and Securities and Sections 624-4, Overlying Securitization 625-Aand 526-A Structures by Universal Banks and Commercial Banks Appendix 65 Guidelines on I Accounting Treatment for j lnvestments in Credit- Linked Notes (CLNs) and Other Structured Products Appendix IO4 Guidelines for the Treatment of Non- Deliverabfe Folwards Involvrng the PhiliPPine Involving ne Peso Section 621-Q Forward and SwaP Deleted Transactions Section 8Ol-N Forward and SwaP Deleted Transactions Pagel7 of18

Section 9. This Circular shall take effect fifteen (I5) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: BENJAMIN E. DIOKNO Covernor 0? -Itrile eoel zozr Page 18 oflS