SEC-MRD Opinion No. 04 RE : Delivery versus Payment (DVP) – Metropolitan Bank & Trust Company

SECURITIES AND EXCHANGE COMMISSION SEC Bldg. EDSA, Greenhills, Mandaluyong City Department of Trade and Industry Republic of the Philippines

MARKET REGULATION DEPARTMENT

SEC-MRD Opinion No.# Series of 2009

7 August 2009

Metrobank Piaza, Sen. Gil Puyat Avenue, Makati City METROPOLITAN BANK & TRUST COMPANY FAXEDONSIWLJC2A By: -&h4al M.. 33-42 x

Attention: Ms. Mariquita L. Age Ms. Josefina T. Tuplano Senior Vice Presidents, Trust Group

Subject: Delivery versus Payment (DVP)

Gentlemen

otherwise known as the Rules Governing the Over-the-Counter (OrC) Market. government securities (GS) transactions outside of the eDVP system of PDEX achieve delivery procedures of your bank with qualified institutional buyers (QIBs) with regard to your versus payment, and hence compliant with SEC Memorandum Circular No. 14, series of 2006. This refers to your request for opinion on the issue whether or not the settlement

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 requires that "the clearing

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

:nt'd 28 fuly 2008, we described the different approaches of achieving DVP in securities transactions. We also discussed extensively the different settiement systems in the domestic equities and fixed incone markets. We also made a ruling on similar issue in SEC-MRD Opinions No. 2 mnd 3 dated 8 Octoher and 13 Novenber of 2008 respectively. This is not the first time our office is addressing this issue. In SEC-MRD Opinion No.1

conlirmation of the terms of trade by the market participants. Second, the calculation of the ohligations of the counterparties resulting from the confirmation process which is known as "lenrance. Third, the final transfer of securities (delivery) in exchange for the final transfer of funcls (payment) in order to settle the obligations which is known as settlen'tent. The process of clearing and settling securities trade includes several key steps. First, the

Fayment for securities is due at the time of delivery. The purpose of DVP system is to ensure that receive delivery. ICPSS, Delivery Versus Payment in Securities Settlement Systems (BIS, Septembxer tounterparties are not exposed to principal risk, that is, the risk that the seller of a security could detiver but not xeceive payment or that the buyer of a security could make payment but not 192 th.it delivery oxccurs if and only if payment occurs. It is a procedure by which the buyer's A DVP system is a-securities settlement system that provides a mechanism that ensures

hltp://www.sec.gov.ph +(632) 584-5703 mrd@sec.gov.ph

Confirmation of settlement of the cash leg from the settlement bank. (CPSS, Reconimiendations For scttlement, it first blocks the underlying securities in the account of the seller or his custodian. It are delivered to the buyer or his custodian if and only if the central securities depository receives St'etrit ic's Settlerent Systens {BlS, November 2001)} securities. When a central securities depository does not itself provide cash accounts for Then reuuests transfer of funds from the buyer to the seller in the setienent bank. The securities Strictly speaking, DVP does not require simultaneous final transfers of funds and

Cross T'rade or Dealer Qi Facility system of PDEx. Moreover, you stated that the transactions ate settled on a delivery-versus-payment system called DVp-RoSS facility. Your settlement procectures, as provided in your Manual of Procedures can be described as follows: Bank and Trust Company (MBTC) relative to your GS transactions with QIB clients achieve DVP. are non "Trading Participants are mapped by its counterparty (the Dealing Participant) in the Based ou your letter and Manual of Procedures, you describe that GS Transactions of QIBs who In your request, you seek confirmation that the settlement procedures by Metropolitan

A. Input and Matching of GS Transaction

the DVP-RoSS Facility: following transaction details in the Telerate Moneyline System, the main component of The Seller, thr'ough its Treasury Operations Department, initiates the input of the

g. Rate C. Interest Indicator (Buy or Seli) e. Settlement Mode (DVP or Value Received) f. Face Value a. Counterparty b. Value Date d. ISIN RTGS facility, i.e. debit to an account, check payment. "Value Received" is indicated if the cash settlement is cione outside PhilPaSS.

encoding the settlement amount. transaction and if complete and in order, acknowledges and confirms the transaction by ? in the Telerate MoneyLine System, the Buyer : verifies the details of the GS

3 The Seller then sees the confirmation of the Buyer in the system, checks the settlement amount encoded by the latter and if correct, authorizes the GS transaction.

jrocessed as follows: B. GS Transaction Settlement - The transaction authorized by the Seller will be

the GS is indeed free and available for trading. I The DVP-RoSS system checks the Securities Account of the Seller to determine if

the cut-off time. liquiclity or collateral purposes until such amount has been unblocked through the DVP RoSS system. If the securities account of the Seller is insufficient to settle the Cs traisaction, it shall be put on queue until the securities account is properly funded before from the Sccurities Account of the Seller. The Seller expressly warrants and confirms that such blocked face value of the security shall not be used for any other purpose, i.e. 2 If availablc, the DVP-RoSS system temporarily earmarks and blocks the amount

3 Once the GS has been earmarked/blocked in the Securities Account of the Seller. the GS transaction shall be transmitted to PhilPaSS for the cash (peso) settlenent. The settlement instruction authorizes the BSP to debit the be Buyer's Demand Deposit Account {DDA} and credit the Seller's DDA for the value of the GS transaction. The PhilPaSS checks if the Buyer's DDA has sufficient has sufficient balances to effect the Peso debit. if the Buyer's DDA is adequate, PhilPaSS immediately debits the Buyer's DDA and credit the Seller's DDA.

If the Buyer's DDA balance is insufficient, the GS transaction shall be held in queue untit the: balance of the Buyer becomes sufficient for settlemient until the cut-off time for peso funding of [DVP-RoSS transactions.

4 Once the peso settlement is done, the PhilPa$S sends an electronic settlement confirmation to the DVP-RoSS System. Settlements at the PhillPaSS shall be final and irrevocable.

5 As soon as the electronic confirmation of the 'Peso ieg of the GS transaction is received from PhilPaSS by the Buyer, the DVP-RoSS System immediately debits the Securities Account of the Seller and credits the Securities Account of the Buyer in the Ross.

6 The DVI system tags the transaction "Completed"

For a Non-Trading Participant QIB's that have Securities RoSS Accounts but do not have the T'elerate MoneyLine Terminal, the following are observed for settlement of securities:

BTr forms are used: the Seller prepares the Confirmation of Outright Sale of Government Securities (COS-yellow form) while the B{uyer prepares the Confirmation of Outright Purchase of Government Securities (COP-green form). The following details are indicted in both forms:

ta C E. C Transaction Number - provided by the GS Seller that shall also be used by the GS Details of the security (ISIN, Ter'm, Issue Date and maturity Date) Buyer Settiement Amount Value Date Test Key Face Amount

2. The Buyer forwarcs the COP to the Seller.

3 the cop. The Seller matches the details of the GS transactions as indicated in the COS and

If in order, the Seller initially faxes the COS and COP to the Registry of Scripless Securities (B'TRy-RoSS). The original copies of the COS and the COP are submitted to the BTRy-RoSS not later that the following banking day.

5 transaction details in the Telerate MoneyLine System. The transaction is processes The BTRy-RoSS checks the COS and the COP. If in order, encodes the GS

similar to the above procedures.

the GS Buyer a copy of the COS and COP. 6 The BTRy-RoSS stamps the COS and COP "Posted"; provides the GS Seller and

7 The Cash portion is settled in the following mode:

h Seller debits the account of Buyer QIB (if QIBihas a settlement account with the Seller's Bank) Assumed by Seller if it has a Bills Purchased line (against check payments) for the C Payment can be done via RTGS transfer through the QIB depository bank. Buyer QIB Client

done on a per deai basis and will not involve netting or off-setting of transactions. Under the aforementioned Manual of Procedures, it appears that settlements will be

aspect of the transaction is paid. Thus, in our view, the settlement arrangements described in sexcurities are deliverect to the buyer or his custodian if and only if it is confirmed that the cash your letter and Manual of Procedures achieve DVP. when payment occurs or assured within the settlement cycle. As earlier mentioned, DVP does not require siinultaneous final transfers of funds and securities. It is essential though that the "These procedures and safeguards ensure that each tr'ansfer of securities is effected only

tases whe ther of similar or dissimilar circumstances. [SEC Menorandum Circular No. 15 (2003)] you. disclosed and described in the query and relevant solely tothe particular issue raised thercin Hnd shall not be used in the nature of a standing rule binding upon the Commission in other It is understood though that the foregoing opinion is rendered based solely on the facts

Hnd form part of the client agreement. QiBs be imade part of your records and that the same shall be.disclosed to your counterparties Finally, you are directed that MBTC's Manual of Procedures for GS transactions with

Hor your guidance.

Very

JOSe P. AQUINO Director

F Fo: P5.000.00 Prmd: OR # 0319545