SEC-MRD Opinion No. 03 RE : Delivery versus Payment (DVP) – Deutsche Bank AG

SECURITIES ANd eXCHANGE COMMISSION Republic of the Philippines

SEC Building, EDSA, East Greenhills

Tel: (632) 584-2016 Email: mrd@sec.gov.ph Mandaluyong City, Metro Manila

Market Requlation Department

SEC-MRD Opinion No. 3 Series of 2008

Deccmber 18, 2008

DEUtSCHE BANK Ag Fax: 894-6901 26/F Ayala Tower One Ayala Triangle, Makati City Manilia Branch

Atfention: Atty. Rhoneil S. Fajardo. Country Chief Operating Officer Ms, Marla Corazon Ordonez, Investment Banking Operations

Subject: Delivery versus Payment {DVP}

Genilemen:

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

Market.

be delivery versus payment (DVP) scheme". ciearing and setttement arrangement in the exchange of assets subject of the trade shal In particular, you cited Section 20 (B) of the OTC Rules which requires that "the

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

No.1 dated 28 July 2008, we described the different approaches of achieving DVP in the domestic equities and fixed income markets. We also made a ruling on similar issue in securities transactions. We also discussed extensively the different settlement systems in SEC-MRD Opinion No.2 dated 8 October 2008. This is not the first time our office is addressing this issue. In SEC-MRD Opinion

First. the confirmation of the terms of trade by the market participants. Second, the calcuiation of the obligations of the counterparties resulting from the confirmation process The process of clearing and settfing securities trade includes several key steps.

4t{9

for the final transfer of funds (payment) in order to settle the obtigations which is known as settlement. which is known as clearance. Third, the final transfer of securities (delivery) in exchange

to ensure that counterparties are not exposed to principal risk, that is, the risk that the Couid make payment but not receive delivery. Icpss. Deiveory Versus Payment n Secunties Sallement Systems ensures that delivery occurs if and onfy if payment occurs. It is a procedure by which the buyer's payment for securities is due at the time of delivery. The purpose of DVP system is seller of a security could deliver bui not receive payment or that the buyer of a security {B!5. Sep{ember 1992}} A DVP system is a securities settlement system that provides a mechanism that

securities. When a central securities depository does not itself provide cash accounts for settiement, it first biocks the underlying securities in the account of the seller or his bank. The securities are delivered to the buyer or his custodian if and only if the central securities depository receives confirmation of settlement of the cash leg from the Settlement bank. (CPSS, Reconoondations For Securites Settionan! Systems (Bis. Novenbe: 2001) custodian. It then reguests transfer of funds from the buyer to the seller in the settlement Strictly speaking, DVP does not require simuttaneous final transfers of funds and

Based on your ietter and Manual of Procedures, your bank's settlement procedures can be described in general as follows: Bank Manila (DBMN) relative io your GS transactions with QIB clients achieve DVP] In your request, you seek confirmation that the settlenent procedures by Deutsche

ticket and trade confirmation contain the counterparty's name, sell/buy trade, trade date. settement date. international securilies identification number. nominal amount and saiesperson. the following are generated: trade ticket and tradc confirmation. The trade TRADE CAPTURE AND CONFIRMATION. Once a deaI is eniered by a DBMN

match all the details of the transaction per trade ticket. while the trade confirmation is sent via auto-fax to the counterparty on trade date. Counterparty may also refer to counterparty's designated custodian. setilemeni amount. Ther, the back-office personnel witl conduct a phone confirmation to

from counterparty), the following process is observed: CLEARING AND SETTLEMENT. In BUY Trades (where DBMN buys securities

will come from and where the funds should be remitted. 1.Counterparty delivers instruction to DBMN containing detaits where the security

Securities (RoSS) Telerate system facing DBMN. 2.Counterparty enters a Sell Value Received trade in Registry of Scripless

Deal Account in the amount of the payment due to the counterparty to earmark said amount in its favor. 3.DBMN credits the Accounis Receivable/ Accounts Payable {ARAP)-Unsettled

Settlement Systems (PhilPass), as well as DBMN's payment:to counterparty (whether va PhilPass or credit to counterparty's account). to earmark said funds. PhllPass is the real temporarily lodge the counterparty's payment made via the Philippine Payments and The ARAP-Unsettled Fixed Income/Debt Secorities (Fi/DS) Deal Account is used to

2

time gross settlernent system for peso payments operated by Bangko Sentral ng Pitipinas BP)

case of a DBMN sell deal) or to DBMN's account {in case of a DBMN buy deal). the funds Operations unit and shall always have zero "0" balance at end of day. will be released in favor of the seller. This account will be closely monitored by Fi/Ds Once the security has been delivered and posted to the counterparty's account (in

depending on counterparty's instruction either via MT103 in PhilPass or via credit to counterparty's deposit account with DBMN in IDMS. MT103 is swift message type 103 for corporate or non-bank counterparty used for single customer credit transfer. IDMS or integrated data management system is a back end settlement system used for customer 4.DBMN inputs the payment instruction into the rejevant cash settlement system,

set up. transaction processing, settiement and accounting entry generation. it is also used as a sub-ledger for all postings related to clients' cash account settlement.

5.DBMN accepts the sell notification of counterparty aiso via RoSS Telerate.

Telerate, the following manua! settlement procedures are observed: (a) DBMN prepares and faxes confirmation of purchase (COP) to counterparty and sends the original to the counterpariy: (b) Counterparty prepares a confirmation of sale (CoS) and faxes both the COS and COP to the Bureau of Treasury {BTR}. Counterparty will send the original COS & cOp to the BTR. In case of Ross Telerate system failure or where counterparty does not have Ross

case of manual settlement. by calling the BTR before 1:00 P.M. securities account by confirming if the status is "posted" in Ross Telerate system or, in the 6,DBMN checks if the security has been successfully delivered to DBMN's

fund and authorize the credit to counterparty's account in IDMS, if payment is via credit to said account, or the remittance to the Bsp account of counterparty's bank, if payment is via PhiIPass. If DBMN pays via MT103 in PhilPass, DBMN will then receive an'MT012f sender's notification message from the BsP to indicate that the Bsp has carried out instructions to pay counterparty. MT012f is swift message type sender notification usually received from BSP notifying that DBMN debit instruction had been effected. 7.Once confirmation of security delivery is done. DBMN will release the earmarked

8.If the security has not been delivered. DBMN shall reverse its payment instruction.

In SELL Trades (where DBMN seils securities to counterparty). the following process is observed:

securities, including payment details. In case of Ross Telerate system failure or where counterparty does not have Ross Telerate, counterparty prepares and faxes a coP to DBMN and sends the original COP to DBMN. 1.Counterparty delivers instruction to DBMN containing details on the settlement of

Unsettled FI/DS Deal Account with the amount of the funds received to earmark payment BSP}, DBMN has to check incoming MT103 or MT202 in MINT and debit the ARAP 2.1 If counterparty pays DBMN via PhilPass (by posting to DBMN's account with

3

to DBMN. MT202 is the swift message type for general financial institution transfers. MINT is platform which provides messaging layer for financial messages Swift, Fax and Telex formats.

account with DBMN in IDMS, DBMN has to block/earmark client's account in IDMS. 2.2 If counterparty pays DBMN via PhilPass via authority to debit counterparty's

facing the counterparty. Counterparty accepts the seli notification sent by DBMN also in 3.DBMN proceeds to input the Seil Value Received trade in RoSS Telerate System

Ross Telerate.

Telerate, DBMN prepares as COS and faxes both the COS and COP to BTR. DBMN will In case of Ross Telerate system failure or where counterparty does not have RoSs

send the original COS & COP to the BTR.

the case of manual seltiement, by calling the BTR before 1:00 P.M. securities account by confirming if the status is "posted" in the RoSs Telerate system or, in 4.DBMN checks if the security has been successfully delivered to counterparty's

funds and authorize the debit from counterparty's account in IDMS if payment is via debit to said account, or reverse the ARAP-Unsettied Fi/DS Deal Account if payment is via 5.Once confirmation of security delivery is done, DBMN will release the earmarked

remittance in PhilPass.

shall return funds received via PhilPass. 6.lf the security has not been delivered, DBMN shall not debit client's account and

The following cut-off times are observed:

ReceiptDelivery of securities in RoSS Telerate --- 1:30 P.M ReceipUPayment of cash - -1:30 P.M.

deail basis and will not involve netting or off-setting of transactions. Under the above transactions, whether buy or sell, settlement wilt be done on a per

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

DVP

facts you disclosed and described in the query and relevant solely to the particular issue raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances. (sec Memorantkm Circu#ar No 15{2(03}] It is understood though that the foregoing opinion is rendered based solely on the

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

Thank you.

Very truly yours.

VICENTE GRACIANO PFEUZMENO JR. Officer in Charge

F F P, Paid: OR # 0207178

V