SEC-MRD Opinion No. 01 RE : Delivery versus Payment (DVP)

SECURITIES AND EXCHANGE COMMISSION Republic of the Philippines

Tel: (632) 725-3702 Email: mrd@sec.gov.ph SEC Building, EDSA, East Greenhills Mandaluyong City, Metro Manila

Market Regulation Department

SEC-MRD Opinion No.1 Series of 2008

July 28, 2008

CITIBANK N.A. Philippine Branch 8741 Paseo de Roxas

Fax: 894-7398 Salcedo Village, Makati City

Attention: Atty. Angelica Pia Pena-Lacson, Director Atty. Ma. Judith L. Castillo, Vice President

Subject: Delivery versus Payment (DVP) IT

Gentlemen:

This refers to your request for opinion on the issue whether or not the

(QIBs) achieve delivery versus payment (DVP) and are compliant with SEC settlement arrangements of your bank (as dealer) with qualified institutional buyers Memorandum Circular No. 14, series of 2006, otherwise known as the Rules Governing the Over-the-Counter Market (OTC Rules).

"the clearing and settlement arrangement in the exchange of assets subject of the': trade shall be delivery versus payment (DVP) scheme". In particular, you cited Section 20 (B) of the OTC Rules which provides that

In reply, herein below is our response to your query:

First, the confirmation of the terms of trade by the market participants. Second, the The process of clearing and settling securities trade includes several key steps.

calculation of the obligations of the counterparties resulting from the confirmation process which is known as clearance. Third, the final transfer of securities (delivery) in exchange for the final transfer of funds (payment) in order to settle the'obligations

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that ensures that delivery occurs if and only if payment occurs. It is a procedure by A DVP system is a securities settlement system that provides a mechanism

which the buyer's payment for securities is due at the time of delivery.iThe purpose of DVP system is to ensure that counterparties are not exposed to principal risk, that

the buyer of a security could make payment but not receive delivery. is, the risk that the seller of a security could deliver but not receive payment or that

models are as follows: [1] A system that settles transfer instruction for both securities] There are several approaches to achieve DVP but the three most common

securities from the seller to the buyer (delivery) occurring at the same-time as final transfer of funds from the buyer to the seller (payment); [2] A system that settles and funds on a trade-by-trade (gross) basis, with final (unconditional) transfer of

securities transfer instruction on a gross basis with final transfer of securities from

settles funds transfer instructions on a net basis, with final transfer of funds from the buyer to the seller (payment) occurring at the end of the processing cycle; [3] A with final transfers of both securities and funds occurring at the. end of the the seller to the buyer (delivery) occurring throughout the processing cycle, but system that settles transfer instructions for both securities and funds on a net basis, prOCesSing Cycle. (CPSS, Delivery Versus Payntenf in Securities Setflement Systems (BIS, Sepfenuber 1992)]

and securities. When a central securities depository does not itself provide cash Strictly speaking, DVP does not require simultaneous final transfers of funds

seller or his custodian. It then requests transfer of funds from the buyer to the seller accounts for settlenent, it first blocks the underlying securities in the account of the

in the settlement bank. The securities are delivered to the buyer or his custodian if

Cash leg from the settlement bank. (CPSS, Reconmedations For Securities Settienrent Systems (Bis, November and only if the central securities depository receives confirmation of settlement of the 20

better appreciation of this concept and to address peripheral issues in your letter, fixed income markets in the country. allow us to describe the existing securities settlement systems in the (equities and Securities markets in different jurisdictions achieve DVP in several ways. For

settled through the facility of the Securities Clearing Corporation of the Philippines The trades at the Philippine Stock Exchange (PSE) for equities are cleared and

(SCCP) in continuous net settIement basis. This is a Model 3 DVP. Under the SCCP's system, all transactions that will settle on the same day are netted in a multilateral

to every seller and seller to every buyer in all exchange trades. (sccp Ruhs mid Oxrating cash element or both. And to eliminate the uncertainty in the clearing and settlement process, SCCP acts as the central counterparty to all trades that are eligible for settlement. In the netting process, the identity of the original parties disappears and the original contract is replaced by two new contracts, and SCCP becomes the buyer Prmdures, Ari} 2006} netting fashion to arrive at either a long or short position for either the security or

On the other hand, the trades at Philippine Dealing and Exchange (PDEx) for fixed income securities are cleared and settled via the PDEx settlement facility (called

Securities Settlement Corporation (PSSC). The eDVP system is a Model 1 DVP the Expanded DVP System or eDVP), developed and operated by the Philippine

implementation wherein each trade settles independently of other trades without any form of netting, thus, Model 1 DVP is referred to as trade-for-trade settlement or gross settlement.

settlement (RTGS) system for peso payments operated by Bangko Sentral ng Pilipinas depository system of the Philippine Depository & Trust Corporation (PDTC) and the Philippine Payments and Settlement Systems (PlilPaSS) which is the real time gross (BSP) and with the active participation of Cash Settlement Banks either through the eDvP system online confirmation facility or through an automated system interface The eDVP is made possibie through automated system interfaces with the

to their systems. The PDEx also has straight-through interface to the Registry of Scripless Securities (RoSS and RoSS-NoR) of the Bureau of Treasury (BTr) to handle pre- and post-settlement transfers to/from the RoSS/RoSS-NoR accounts.

open a depository settlement account with PDTC for their securities settlement. All PDEx trading participants are settlement Participants. They are required to

PDTC effects the securities settlement of trades by initially earmarking then

of settlement participants. Also, settlement participants who are PhilPaSS members eventually debiting and crediting the securities in the depository settlement accounts

are required to use their demand deposit accounts (DDA) as their cash settlement

they must designate a cash settlement account from any cash settlement banks account for settlement of trades. If settlement participants are not PhilPaSS members authorized by PDEx.

(a) Earmarking of securities in the seller's depository settlement account; (b) Debiting Generally, trades by both buyer and seller are settled in the following process:

of payment from the buyer's cash settlement account, if the buyer is not PhilPaSs

deposit account of its cash settlement bank and Crediting the PhilPaSS demand miember; (c) Debiting of PhilPaSS demand deposit account of buyer or demand

deposit account of the seller or demand deposit account of its cash settlement bank as applicable; (d) Crediting the payment to the seller's cash settlement account, if the seller is not PhilPaSS member; (e) Debiting of the seller's earmarked securities and

Fix'd tncome Securi ties Market ns amended, Pamary 2008} Crediting the same to the buyer's depository settlement account. (Rale 6, Pdex Rules for th

to the RoSS-PhilPaSS DVP system. On settlement day, settlement instructions are sent PDEx interbank government securities trades constitute settlement instruction

to RoSS. Trades are settled via RoSS-PhilPaSS DVP system wherein the securities are moved from the RoSS account of seller to RoSS account of buyer, while the cash are

result to PDEx. moved from BSP-DDA of buyer to BSP-DDA of seller. Then, RoSS sends settlement

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generally described in your letter dated 8 April 2008 and the safeguards outlined in your letter dated 16 June 2008, achieve DVP. Now, you seek confirmation that the settlement arrangements which you

dealer), as illustrated and explained in the said letters, relative to your government securities trades with QIB clients indeed achieve DVP and compliant with the OTC In response, we confirm that the settlement procedures of your bank (as

Rules. The letters are hereto attached for reference.

In general, based on your presentation of the various scenarios,: we note that

custodians, only upon confirmation that the corresponding funds are available to the securities are transferred to the accounts of the buyers directly or through their

settle their obligations with the sellers. Moreover, funds are immediately paid only after confirming that the securities have been transferred.

Specifically, with regard to QIB clients with RoSS accounts, we:observe that while funds are earmarked, there is no final transfer or delivery yet until after the

the BTr and no negative feedback is received by the seller from the BTr. If the BTr confirmation of purchase (COP) and/or confirmation of sale (COS) have been sent to

deemed implemented as the parties have already authorized the BTr to act in does not advise the seller prior to the cut off time, the securities transfer will be

accordance with their instructions. Funds will then be delivered simultaneously or as

off time can no longer be met, the parties will discuss alternative arrangements. In close to the cut off time as possible. If negative feedback is received and the BTr cut the meantime, funds previously earmarked will be released.

their third party custodians, while funds are earmarked, there is no final transfer or Similarly, as regards your QIB clients settling through the RoSS accounts of

delivery yet until after the parties have acknowledged the transactionfand Telerate

PM, the parties will discuss alternative arrangements. In the meantime, funds previously earmarked will be released. confirms the transfer of securities. Funds will then be delivered simultaneousiy or as close to the cut off time as possible. And if the securities transfer is not posted by 1:30

mentioned, DVP. does not require simultaneous final transfers of funds and effected oniy when payment occurs or assured within the settlement cycle. As earlier These procedures and safeguards ensure that each transfer of, securities is

securities. It is essential though that the securities are delivered to the buyer or his

Thus, in our view, the settlement arrangements described in your letters achieve DN custodian if and only if it is confirmed that the cash aspect of the transaction is paid.

the facts you disclosed and described in the query and relevant solely to the It is understood though that the foregoing opinion is rendered based solely on

binding upon the Commission in other cases whether of similar or dissimilar circumstances. (SEC Memiomndun Circular No. 15 (2003)) particular issue raised therein and shall not be used in the nature of a standing rule

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disclosed to your counterparties and form part of the client agreement.. settlement procedures be made part of your records and that the same shall be Finally, you are directed that the attached detailed description of the

1 For your guidance.

Very truly yours.

VICENTE GRACIANO P.FELIZMENIO!JR Officer in Charge

PAID: OR # 0157461, April 11, 2008 Filing Fee: P5, 000.00

per (ctter dated 16 June 2008 Detailed description of settlement procedures Attachment:

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