Market benchmarks/reference prices and computation method used to mark-to-market debt and marketable equity securities

CIRCULAR LETTER Series of 1999

TO              :      ALL COMMERCIAL/THRIFT BANKS/NON-BANK FINANCIAL INSTITUTIONS WITH QUASI-BANKING FUNCTIONS

This  Circular Letter establishes the market benchmarks/reference prices as well as computation method that will be used to mark-to-market  debt and marketable equity securities as required under BSP Circular No. 161, series of 1998.

General Principle

As a general rule, to the extent a credible market pricing mechanism as  determined by the Bangko Sentral ng  Pilipinas (BSP) exists for a given security, that  market price shall be the basis of mark-to-market.  However, in  the absence of  a  market  price,  a  calculated price shall be used as prescribed in this Circular Letter.

A financial institution may also be allowed, subject to the approval of the   Deputy Governor,  Supervision and Examination  Sector,  BSP,  to  use  its  own system for marking-to-market its securities holdings provided that this can be shown to be sufficiently transparent, objective, reliable and consistent. The system should be approved by the financial institution’s  board of directors (or equivalent management committee in the case of foreign bank branches).  The model should be vetted by the financial institution’s risk management group, internal audit group and systems group, properly documented and such documentation available for review by external auditors and the BSP.

Mark-to-Market Guidelines

To  ensure consistency, the following shall be used as bases in marking-to-market debt and equity securities:

Type of Security Market Price Basis

A.     Equity Securities Listed in the Stock Exchange

1.    Traded in the Philippines   Same day closing price as quoted at the Philippine Stock Exchange. In case of halt trading/suspension or  holidays, use the last available closing price.

2.    Traded Abroad   Latest available closing price from the exchange where the securities  are traded.

B.   Foreign Currency-Denominated Debt Securities Quoted in  Major Information Systems (Bloomberg, Reuters, Bridge)

1.    US Treasuries   Price as of  end of day, Manila time.

2.   US Agency papers such as Fannie Maes, Freddie Macs, Ginnie Maes, Municipal papers Latest  available price for  the day, Manila  time.  In  the absence of a price, use average quotes of  at least  three regular brokers/market  makers.*

3.   Brady Bonds   Same as B.2.

4.   For all US$-denominated government and corporate securities Same as B.2.

5.   Other foreign-currency securities Same as B.2.

C.   Peso-Denominated  Government Securities

1.  Short-term Domestic Government Securities

Price  as of  end of  day.  Use  the  following sources as discount rate/yield to maturity:

a) Weighted  average dealt rate for the day.

b) In the absence of a  same day dealt  rate,  use   end   of  day indicative  mid  rate  between best bid and best offer.

c) In  the  absence of a same day indicative mid rate, use end of  day best bid rate.

2.   Long-term Domestic Government Securities Same as C.1.

D.            Peso-Denominated  Private Debt Securities

1.   Short-term securities   Prices computed using the corresponding government security benchmark +  short- term risk premium

2.  Long-term Fixed Rate Securities Prices  computed using the corresponding  government security benchmark + long-   term risk premium

3.   Long-Term Securities - Floaters Prices computed  using the corresponding government security benchmark based on  the reset period + risk premium. (Please refer to Technical Annex for pricing formula.)

* Based on done rates if available.    If  done  rates  are not  available, use the mid rate between bid and offer.  If no mid rates are available, use the bid rate.

All the risk premia mentioned under Section D shall be recommended  by a Risk Assessment  Committee  (RAC) and updated regularly.  The RAC shall be convened by the Bankers Association of the Philippines (BAP) and composed of  representatives  from  the  BAP,  Investment  Houses Association of the Philippines, Money Market  Association  of the Philippines,  rating agencies and the BSP.

Other Guidelines

In   pricing    debt   securities,   interpolated   yields   shall   be  used   for securities with odd tenors.

The mark-to-market rules prescribed for securities from  Sections A to C (Equity Securities Listed in the Stock Exchange, Foreign Currency-Denominated Debt   Securities  Quoted in Major Information Systems and Peso-Denominated

Government Securities) shall take effect on April 1, 2001. The effectivity date of the mark-to-market rules prescribed for securities covered under Section D (Peso-Denominated Private Debt Securities) shall be announced later  thru a Circular Letter.

For strict compliance.

ALBERTO V. REYES Deputy Governor