Amendments to the Relevant Regulations on Foreign Currency Deposit System - Phase 2

BANGKO SENTRAL NG PILIPINAS CIRCULAR NO. 1134 Series of 2021 OFFICE OF THE GOVERNOR Subject: Amendments to the Relevant Regulations on Forcign Currency Deposit System - Phase 2 The Monetary Board, in its Flesolution No. 1742 dated 16 December 2C,21, approved the second phase of amendments to the relevant provisions of the Manual of Regulations on Foreign Exchange Transactions (FX Manual) and the Manual of Regulations for Banks (MORB)governing the Foreign Currency Deposit System aimed at promoting effective risk management in banks by relaxing and streamlining the requirements of foreign currency denominated transactions. Sestion l. Section lOl of the MORB, as amended by Circular Nos. 1069 and 'llO5 dated 27 December 2Ol9 and 02 December 2O2O, respectively, is hereby amended to read. as follows: IOI CLASSIFICATIONS, POWERS AND SCOPE OF AUTHORITIES OF BANKS a. xxx b. Powerc and scope of authorities. The following are the powers and scope of authorities of banks. (1) Universal Banks (UBs). A UB shall have the authority to exercise, in addition to the powe6 and serices authorized for a KB as enumerated in Item "b (2)" and those provided byother laws, the following: xxx (2) Commercial Banks (KBs). xxx It may also exercise or perform any or all of the following: (a) xxx; xxxl (g) xxx; (h) xxx;and (i) accept foreign currency deposits as provided under Republic Act (R.A.) No. 6426 or known as the Foreign currency Deposit Act of the Philippines, as amended, and as allowed under existing regulations. {3) Thrift Banks (TBs). In addition to the powers provided in other taws, a TB may perform any or all of the following services:

(a) xxx xxx (h) accept foreign currency deposits as provided under R.A. No. 6426. as amended, and as allowed under existing regulations; xxx (6) lslamic Banks (lBs), ln addition to the general powers granted to corporations, lBs shall have such powers as shall be necessary to carry out the business of a bank in accordance with Shari'ah principles. lBs may perform the following services: (a) xxx: xxx (d) accept foreign currency deposits as provided under R,A. No. 6426, as amended, and as allowed under existing regulations; xxx (7) Digital banks. A digital bank may perfiorm any or all of the following services: (a) xxx xxx (c) accept foreign currency deposits, as provided under RA. No. 6426, as amended, and as allowed underexisting regulations; xxx Section 2. Section lll of the MORB, as amended by Circular Nos. lO3l, tO86 and ll2l dated 07 February 2019, 06 May 2O2O and 8 June 2021. respectively, is hereby amended to read as follows: TII LICENSING xxx Type of License of Permissible ActMtieC. The type of license attached to permissible activitles of the Bangko Sentral - supervised financial institutions (BSFls) shall be as followsr TYpeof Permissible Aetivity Related Scctions License rApplication flled wlth the Bangko Sentral xxx

Xxx xxx A FCDU operation of Rural Bank (Rtsycoop Bank Part lV Chapter lll Section 7 of the FX Manual B Xxx xxx Xxx xxx EFCDU operation of Universal/Commercial Bank Part lV. Chapter lll c (U/KB) and lslamic Bank (lB) Section 71 ofthe FX Manual FCDU operation of Thrift Bank (TB) and Digital Bank xxx Seetion 3. Sections 7l and 72 of the FX Manual are hereby amended to read, as followsl ?1 QUALIFICATION REQUIREMENTS. l. A UB/KB and lB may be authorized to operate an EFCDU while a TB, Digital Bank, and RB/Coop bank may be authorized to operate an FCDU: Provided, That the prudential criteria and the pre-qualification requirements for the corresponding license type under Section'lll and Appendix 5 of the MORB, respectively, are met. 2. A bank seeking to operate an FCDU or EFCDU shallsubmit the following documents to the appropriate superuising department of the BSP: a. Application letter for a type A license or notification letterfor a type C license, as applicable, signed by the president, or officer of equivalent rank, with justiftcation on how the license is aligned with the bank's business model and strategic direction; b. Corporate secretaffs certificate on the approval of the board of directors {or equivalent management committee in the case of foreign bank branches) to operate an FCDU or EFCDU; and c. Certification signed bythe president, orthe officerof equivalent rank, and the chief compliance officer certiffing that the bank has complied with all the prudential criteria and the pre-qualification requirements for the grant of authority to operate an FCDU or EFCDU. 72. AUTHORIZED TRANSACTIONS l. A TB, Digital Bank, or FIB/Coop Bank which is granted authoriry to operate an FCDU is authorized to engage in the following transactions in any acceptable foreign currency: Provided, That, these are allowed under the bank's existing powers and scope of authoritiesr

a. Accept deposits and trust accounts xxx b. Deposit, regardless of maturity, with foreign banks abroad, OBUs and other FCDUs/efCOUs; c. Invest in readily marketable foreign currency denominated debt instruments subject to the requirements under existing regulations. xxx d. Grant short-term fioreign currency loans as may be allowed by BSp regulations xxx; e. Borrow, subject to existing rules on foreignforeign currency borrowings, (i) from EFCDUs, foreign banks abroad and OBUs, regardless of maturity: and (ii) from other FCDUs, on short-term maturity; f. Engage in foreign currency stand-alone derivatives refurencing currency pairs not including the Philippine peso, as specifically allowed under Section 613 of the MORB and other existing regulations; g. Engage in securities lending activities as lender Provided, That it shall comply with the Securities and Exchange Commission (SEC) regulations on securities lending transactions and/or with the guidelines of the organized market in which the deal is transacted; The foreign currency denominated debt securities lent or used as collateral by the borrowing bank in securities lending and borrowing transactions shall be considered as eligible asset cover for the lOOg6 cover requirement, h. Engage in repurchase agreements involving foreign currency denominated debt securities pursuant to Section 2t+2 of the MORB, subject to the following conditions: I) The borrowings shall only be from FCDUs/EFCDUs, non-resident financial institutions and OBUs; 2) The maximum term of the repurchase agreements shall be one (l) year; 3) The borrowingsshallbe booked under"Bills Payable"and included in the computation of the total FCDU/EFCDU liabilities. subject to the mandatory IOO percent asset cover; and 4) The foreign currency-denominated debt securities sold or used as additional collateral in repurchase agreement shall be considered as eligible asset cover fior the l0096 cover requirement. i. Purchase foreign currency denominated debt securities under resale agreements from other banks' FCDU/EFCDU, non-resident financial institutions and OBUs, subject to the following conditions: Page 4 of9

I ) That the maximum term of the resale agreements shall be one (l) yeart and 2) That such debt securities purchased under resale agreements shall be classified as Loans and Fleceivables Arising from Repurchase Agreements/Certificates of Assignment/participation with Recourse and Securities Lending and Borrowing Transactions. j. lssue capital instruments subject to the requirements under existing regulations; k. Except RBsrcoop Banks, engage in USD-denominated repurchase agreements (R/P) with the BSp as provided under section 601 of the MORB. The Monetary Board may at its discretion impose the sanctions for violations of the provisions on the terms and conditions of the USD-denominated R/P agreement with the Bsp under section 60l of the MORB to a bank and/or its directorA, officerA, or employees found to be responsible for violation of ltem '1(k), of this Section. 2. A UB/KB which is authorized to operate under the expanded foreign currency deposit system may engage in the following transactions in any acceptable foreign currency : a. Acceptdepositsand trustaccountsxxx; b. Deposit with foreign banks abroad, OBUs and other FCDUs/EFCDUs; c. Invest in fioreign currency-denominated debt instruments; d. Grant foreign currency loansas may beallowed bythe Bangkosentrah e. Borrow from other FcDUs/EFcDUs and from non-residents and oBUs, subject to existing rules on fioreign borrowings; f' Engage in foreign currency stand-alone derivatives referencing currency pairs not including the philippine peso, as specifically allowed under section 613 of the Manual of Regulations for Banks and other existing regulations; g, Engage in foreign exchange trading; h. on reguest/instructions of its foreign correspondent bank, it may: l) issue letters of credit for a non-resident importer in favor of a non-resident exporte4 2) pay, accept, or negotiate drafts/bills of exchange drawn under the letter of credit; and 3) make payment to the order of the non-resident exporter. Page 5 of9

Provided, That the foreign correspondent bank shall deposit sufficient foreign exchange with the EFCDU issuing the letter of credit to cover all drawings; i. Engage in direct purchase of export bills of resident exporters subject to the following conditions: r) Export transactions covered by usance or sight letters of credit shall be allowed to be purchased by EFCDUs; and 7l Export bills negotiated/purchased by the bank's Regular Banking Unit (RBU) and outstanding in its books shall not be allowed to be purchased by its EFCDUs. j. Engage in securities lending activities as lender: Provided,That it shall comply with the SEC regulations on securities lending transactions and/or with the guidelines of the organized market in which the deal is transacted; k. Engage in repurchase agreements involving foreign currency denominated debt securities pursuant to Section 242 of the MORB and subject to the conditions as enumerated in ltem l.h of this Section, except ltem l.h(21 l. Invest in foreign currency denominated structured products issued by banks and special purpose vehicles (SPVs) subject to the provisions in Section 613 of the MORB; m. Purchase foreign currency denominated debt securities under resale agreements from other banks' FCDU/EFCDU, non-resident financial institutions and oBUs. Such debt securities purchased under resale agreements shall be classified as Loans and Receivables Arising from Flepurchase Agreements, Certificates of AssignmenVParticipation with Recourse, and Securities Lending and Borrowing Transactions. lssue capital instruments subject to the requirements under existing regulationsr Engage in USD-denominated repurchase agreements (R/P) with the Bangko Sentral as provided under Section 60l of the MORB. The Monetary Board may at its discretion impose any or all of the sanctions fior violations of the provisions on the terms and conditions of the USD-denominated R/P agreement with the BSP under Section 5ol of the MORB to a bank and/or its directorA, officer/s, or employees found to be responsible for violation of ltem 2(o)" of this Section. Page 5 of9

3. The foreign currency funds of the bank's FCDU/EFCDU may be lent to the bank's RBU: Provlded That no interest shall be charged on the lending: Prouided, further, That the loan shall be for a period of one fl) year or less, in the case of FCDU. EFCDU. however. will be allowed to lend to RBU in tenors that are more than one ('l) year. Balance of FCDU/EFCDU loan to RBU shall be settled on gross basis by way of actual transfer of foreign currency assets from the RBU books to the FCDU/EFCDU books: Provided, That no gain or loss shall be recorded on the transfer of foreign currency assets from RBU to FCDU/EFCDU to facilitate settlement of FCDU/EFCDU loans to RBU. The lending from FCDU/EFCDU to RBU shall be booked as "Loans to RBU by FCDU/EFCDU" in the FCDU/EFCDU books and "Loans by RBU from FCDU/EFCDU" in the RBU books. The "Loans to RBU by FCDU/EFCDU'account balance shall qualiff as eligible asset cover for FCDU/EFCDU liabilities. Section 4. Sections 73,82 and 84 of the FX Manual are hereby amended to read, as follows: 73 FOREIGN CURRENCY COVER REQUTREMENTS AND R|SK MANAGEMENT ON FOREIGN CURRENCY TRANSACTIONS AND POSITIONS. Depository banks under the foreign currency deposit and expanded foreign currency deposit systems shall maintain at all times a l0096 cover for their foreign currency liabilities, xxx 1. For banks authorized to operate an FCDU: a. xxx; xxx; i. Accounts receivable, including those arising from sale of financial assets under the trade date accounting pending actual settlemenVdelivery of the underlying securities (Accounts payable arising from the purchase of financial assets under the trade date accounting pending actual settlement/receipt of the underlying securities shall require corresponding asset cover) k. Loans to RBU: Provided, That the conditions under Section 72 are complied with: l. xxx; m. Such other assets as may be determined by the Monetary Board as eligible asset cover. Page 7 of9

2. For banks authorized to operate an EFCDU - The foregoing accounts, regardless of maturity, and in the case of investment in foreign currency denominated debt instruments, regardless of maturigr and marketabili$, shall be considered as eligible asset cover. In addition, the following shall also be considered as eligible asset cover: a. Loans and Receivables granted by EFCDU: Provided, That all applicable banking rules and regulations are complied with including single borrower's limit as provided in Section 362 of the MORBr b. Outstanding Export Bills Purchased in the EFCDU books xxx. xxx 3.The tOO% asset cover shall be unencumbered, except as otherwise provided in second paragraph of ltem f of Section 73.1. xxx 4. A bank should have a risk management framework commensurate with the size, nature, complexity and risk profile of its foreign currency denominated positions and foreign exchange (FX) activities. This framework should cover all material risks from foreign currency denominated transactions including market risk, liquidity risk and operational risk, among others, in accordance with the existing risk management standards in the MORB. A bank should have strong governance arrangements that ensure the material risks are properly identified, measured, monitored and controlled and are integrated to the over-all risk management process. 5. The Due from Other Banks - Non-resident (DFOB-Non-Resident) account representing cover for foreign currency liabilities of FCDU/EFCDU shall be kept separate and distinct from the DFOB - Non Resident account for the regular banking unit (RBU). 82.TAXES The foreign currency denominated transactions shall be subject to tax treatment pursuant to the provisions of the National Internal Flevenue Code, as amended and its lmplementing Rules and Regulations. 34.ACCOUNTING AABs shall maintain a separate accounting - for FCDU/EfCOU transactions covered by these rules that will enable preparation of the FCDU/EFCDU Balance Sheet and lncome Statement, aswell as reports for risk management and tax purposes. Page 8 ofg

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