Reverse Repurchase Agreements (REPO)

CIRCULAR LETTER Series of 2002

TO: ALL INVESTMENT HOUSES AND FINANCING COMPANIES WITH QUASI-BANKING FUNCTIONS

To properly monitor transactions involving reverse repurchase agreements with the Bangko Sentral ng Pilipinas (BSP), all investment houses and financing companies with quasi-banking functions (IH/FC with QB) shall record properly its Reverse Repurchase Agreements (REPO) with the Bangko Sentral ng Pilipinas sold to clients.

When an IH/FC sells an outstanding reverse REPO agreement with the BSP to a client, the securities under REPO support two loan transactions — the IH/FC's claim on the BSP under the original REPO and the client's claim on the IH/FC under the new REPO. The IH/FC's claim on the BSP arising from the reverse REPO should not be offset against its loan payable to clients in the subsequent sale of the REPO because the counter-parties to the two transactions are different. Thus, the IH/FC's reverse REPO transaction with the BSP shall remain to be recorded as "Government Securities Purchased under Reverse Repurchase Agreements with BSP" under "Trading Account Securities — Loans". The IH/FC's payable to clients arising from the subsequent sale of the reverse REPO shall be recorded as "Reverse Repurchase Agreements with BSP Sold to Clients" under "Bills Payable — Others". The subsequent sale of the reverse REPO agreements is not subject to reserve requirements. The pro-forma accounting entries are in Annex "A".

Accordingly, the Manual of Accounts for Investment Houses and Financing Companies with quasi-banking functions is hereby amended as shown in Annex "B". Annex "C" is the revised Schedule 5 ("Schedule of Bills Payable and Bonds Payable") of the Statement of Condition (BSP 7-26-02). This Circular Letter shall take effect immediately.

NESTOR A. ESPENILLA, JR. Sector-in-Charge