SEC-MRD Opinion No. 05 RE : Delivery versus Payment (DVP) – ING Bank NV

Republic of the Philippines Department of Trade and Industry. SECURITIES AND EXCHANGE COMMISSION

SEC Bldg. EDSA, Grecnhills, Mandaluyong City

MARKET REGULATION DEPARTMENT

SEC-MRD Opinion No. Series of 2009

11 August 2009

Ing BAnK nV Manila Branch 21 / F Tower One and Exchange Plaza Ayala Triangle, Makati City tax: 815-1116

Attention: Mr. Efren E. Reues VP -- Head of Operations/IT

Subject: Delivery versus Payment (DVP)

Centlemen:

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

procedures of your bank with qualified institutional buyers (QIBs) with regard to your

governiment securities (GS) transactions outside of the eDVP system of PDEX achieve

delivery versus payment, and hence compliant with SEC Memorandum Circular No. 14, stries of 2006, otherwise known as the "Rules Governing the Over-the-Counter (OTC)

Market.

In particular, you cited Section 20 (B) of the OTC Rules which requires that "the

clearing and settiement arrangement in the exchange of assets subject of the trade shall be

delivery versus payment (DVP) scheme".

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

This is not the first time our office is addressing this issue. In SEC-MRD Opinion No.1

tnted 28 July 2008, we described the different approaches of achieving DVP in securities

transactions. We also discussed extensively the different settlement systems in the domestic

Cquities and fixed income markets. We also made a ruling on similar issue in SEC-MRD Opinions No. 2 and 3 dated 8 October and 13 November of 2008 respectively.

The process of clearing and settling securities trade includes several key steps. First,

the confirmation of the terms of trade by the market participants. Second, the 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 which is known as settlement.

A DVP system is a securities settlement system that provides a mechanism that

ensures that delivery occurs if and only 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

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to ensure that counterparties are not exposed to principal risk, that is, the risk that the seller

of a sccurity could deliver but not receive payment or that the buyer of a security could

make payment but not receive delivery. [CPSS, Delivery Versus Payment in Securities

Settlenent Systems (BiS, September 1992)]

Strictly speaking, DVP does not require simultaneous final transfers of funds and

securities. When a central securities depository does not itself provide cash accounts for

scttlement, it first blocks the underlying securities in the account of the seller or his

custodian. It then requests transfer of funds from the buyer to the seller in the settlement

bank. The securities are delivered to the buyer or his custodian if and only if the central

S@:curities depository receives confirmation of settlement of the cash leg from the settlement

bank. /CPSS, Recornmendations For Securities Settlement Systems (BIS, November 2001)

In your request, you seek confirmation that the settlement procedures by ING Bank

N.V. relative to your GS transactions with QIB clients achieve DVP. Based on your letter and

manual of procedures, your bank's settlement procedures can be described in general as

foliows:

L Process of clearing and settling securities trades outside the e DVP

system involves three key steps:

2 The agreement of the terms of the trades with the couinterparties

which are usuaily consummated over the phone;

D The clearing stage wherein calculations of the final trade obligations and the ING's sending of confirmations for the acceptance by the counterparties are

undertaken. This stage ensures that the full details of a trade, e.g., the description of the security, the final amount, and the settlement details are agreed upon by both

parties by way of a trade confirmation and that ING sends and requests the

counterparty to accept. Acceptance is by way of signing on the confirmation and returning a copy to ING, or by confirming the agreement/acceptancc over a recorded telephone line; and

The settlement stage wherein the final transfer of securities (delivery)

in exchange for the final transfer of funds (payment) are then executed.

Settlement of trades that are done outside of the eDVP system are usually

executed through the Philippine Payment and Settlement Systems (PhilPaSS) which

is the real time gross settlement (RTGS) system for the peso payment, while the

Registry of Scripless Securities (RoSS) of the Bureau of Treasury (BTr) handles the

transfers of securities.

3 As a gencral rule, ING instructs the BTr to transfer the securities directly to

the accounts of buyers or through their custodians only upon ING's confirmation of

the receipt of funds. Conversely, funds are immediately paid to sellers only after

confirming that the securities have been transferred to the Bauk's account.

Specifically, QIB clients with RoSS accounts need to prepare the Confirmation

of Purchase (COP) that is duly signed by their authorized signatories. This form is

then sent to ING together with"their payment via the RTGS. Upon the ING's

verification of the receipt of funds, ING now prepare the Confirmation of Sale (COS) and sends both the COP and the COS to the BTr which will be the basis of the BTr to act in accordance with the instructions indicated in both forms, which

from RoSS on the postings of securities and the BTr cut-off time can no longer be incidentally, should have matching details. If in case a negative feedback is received

met, ING will discuss with the counterparty an alternative arrangement. In the meantime, funds previously remitted to the Bank will be returned via the RTGS.

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

These procedures and safeguards ensure that each.transfer of securities is effected only when payment occurs or assured within the settlement cycle. As earlier mentioned. DVP coes not require simultaneous final transfers of funds and securities. It is essential though that the securities are delivered to the buyer or his custodian if and only if it is confirmcd 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 DVP.

It is understood though that the foregoing opinion is rendered based solely on the (acts you disclosed and described in the query and relevant solely to the particular issue raised therein and shali not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances. (SEC Merorandun Circu{ar No. 15 (2003)}

QIBs be made part of your records and that the same shall be disclosed to your Counterpar'ties and form part of the client agreement. Finally, you are directed that ING's Manual of Procedures for GS transactions with

For your guidance.

Very y truly yours

JOSE'P. AQUINO Director

Prid: OR # 0324178 Fiig Fee: P5,000.00