Prudential Requirements for Designated Clearing and Settlement Banks

BANGKo SenrnaL NG PII.IPINAS OFFICE OF THE GOVERNOR CIRCULAR NO. 1107 Series of 2O2O Subject: Prudential Requirements for Designated Clearing and Settlement Banks The Monetary Board, in its Resolution No. 1606 dated 1,0 December 2O2O, approved the prudential requirements for designated clearing and settlement banks for purposes of compliance with directors, officers, stockholders and their related interests (DOSRI) regulations, as well as foreign currency deposit unit (FCDU) asset cover and minimum capital requirements. Section 1. Section 342 of the Manual of Regulations for Banks (MORB) on the transactions, covered and not covered is hereby amended to read, as follows: Sec. 342 TRANSACTIONS, COVERED AND NOT COVERED XXX Transdctions not covered. The terms loans, other credit occommodations and guorantees as used herein shall not refer to the following: XXX e. Interbank call loan transactions; and f. Short-term exposures of designated clearing and settlement bank to other financial institutions that own or control directly or indirectly such clearing and settlement bank, pursuant to its function as designated clearing and settlement bank. The term designated clearing and settlement bank shall refer to the designated settlement bank as defined under ltem "j(L)" of Section 362 (Exclusions from loan limit). For purposes of this Section, short- term exposures shall cover payment transactions pertaining to fund transfer services, check clearing, foreign exchange trades, security trades, security custody services, and other short-term payment transactions that pass through a clearing and settlement account. An exposure is considered short- term if the placement of funds into a clearing and settlement account does not exceed five (5) banking days. The designated clearing and settlement bank shall adopt appropriate control measures to ensure that the account opened in financial institutions that own or control directly or indirectly such clearing and settlement bank is maintained exclusively for facilitating the clearing and

settlement of short-term transactions as described in this Section, and said account is not subject to a minimum balance requirement. Applicobility to credit card operotions. xxx XXX Section 2. Section 73 of the Manual of Regulations on Foreign Exchange Transactions (MORFXT) on Foreign Currency Cover Requirements is hereby amended to read, as follows: Section 73. Foreign Currency Cover Requirements. Depository banks under the foreign currency deposit and expanded foreign currency deposit systems shall maintain at all times a LOO% cover for their foreign currency liabilities, except for USD-denominated repurchase agreements (R/P) with the BSP. xxx. The foreign currency cover shall consist of the net carrying amount of the following: L. For banks authorized to operate an FCDU: xxx l. Due From Head Office/Branches/Agencies Abroad - FCDU, up to the extent of the Due To Head Office/Branches/Agencies Abroad - FCDU. Any resulting balance of Net Due From Head Office/Branches/Agencies Abroad - FCDU shall not be eligibfe for IOO% asset cover: Provided. That in the case of a designated clearing and settlement bank, Due From Head Office/Branches/Agencies Abroad - FCDU representing deposits placed in the Head Office up to the extent of the deposits maintained by other resident banks in the designated clearing and settlement bank (as defined under ltem "f" of Section 342 of the MORB on Trsnsoctions not covered/ relative to its function shall be considered as eligible asset cover for the L00% asset cover requirement; Provided further, That the designated clearing and settlement bank shall adopt appropriate control measures to ensure that such deposits placed in the Head Office are appropriately accounted for and segregated from the other items in the Due From Head Office/Branches/Agencies Abroad - FCDU account; and Section 3. Section 103 of the MORB is hereby amended to read, as follows: Sec 103 LIBERALIZED ENTRY AND SCOPE OF OPERATIONS OF FOREIGN BANKS. xxx

Copitol requirements of foreign banks. A. XXX b. For foreign bank branches (L) xxx XXX (a) Any Net due from head office, branches and subsidiaries outside the Philippines, excluding accumulated net earnings, shall be deducted from capital. For designated clearing and settlement banks, such Net Due from head office, branches and subsidiaries account shall also exclude deposits placed in the Head Office up to the extent of the deposits maintained by other resident banks in the designated clearing and settlement bank relative to its function as clearing and settlement bank (as defined under ltem "f" of Section 342 of the MORB on Transoctions not covered): Provided, That the designated clearing and settlement bank shall adopt appropriate control measures to ensure that such deposits placed in the Head Office are appropriately accounted for and segregated from the other items in the Due From Head Office/Branches/Agencies account. XXX Risk-based capitol for foreign bonk bronch A. XXX XXX c. Any Net due from head office, branches and subsidiaries outside the Philippines, excluding accumulated net earnings shall be deducted from CET1 capital. For designated clearing and settlement banks, such Net Due from head office, branches and subsidiaries account shall also exclude deposits placed in the Head Office up to the extent of the deposits maintained by other resident banks in the designated clearing and settlement bank relative to its function as clearing and settlement bank: Provided, That the designated clearing and settlement bank shall adopt appropriate control measures to ensure that such deposits placed in the Head Office are appropriately accounted for and segregated from the other items in the Due From Head Office/Branches/Agencies accou nt.

d. xxx XXX Section 4. Appendix 59 of the MORB is hereby amended to read, as follows: Appendix 59 RISK-BASED CAPITAL ADEQUACY FRAMEWORK FOR THE PHIL!PPINE BANKING SYSTEM XXX Part ll. Qualifying capital XXX Section B. Branches of Foreign Banks CET 1 Capital XXX Regulatory adjustments to CET1 capital 11. The regulatory adjustments to CETL capital are provided in paragraph 4, as applicable. ln addition, the Net due from head office, branches and subsidiaries outside the Philippines, excluding accumulated net earnings shall be deducted from CETl capital. For designated clearing and settlement banks, such Net Due from head office, branches and subsidiaries account shall also exclude deposits placed in the Head Office up to the extent of the deposits maintained by other resident banks in the designated clearing and settlement bank relative to its function as clearing and settlement bank (as defined under ltem "f" of Section 342 of the MORB on Transactions not covered): Provided, That the designated clearing and settlement bank shall adopt appropriate control measures to ensure that such deposits placed in the Head Office are appropriately accounted for and segregated from the other items in the Due From Head Office/Branches/Agencies account: Provided further, That such deposits placed in the head office which are excluded in the Net Due from account shall be risk weighted based on the credit rating of the head office following the applicable risk weights provided in Part V of this Appendix.

Section 5. The amendments to the reporting templates of the Foreign Currency Cover Requirements, and the Risk-Based Capital Adequacy Ratio to implement the above changes, including the guidelines for designated clearing and settlement banks are provided in Annex A. Section 6. This Circular shall take effect fifteen (15) calendar days after its publication either in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: c c (.' BENJAMIN E. DIOKNO Governor I December 2O2O

Annex A Amendments to the Report on Compliance with the Expanded/Foreign Currency Deposit Unit (E/FCDU) Cover Requirement and the CapitalAdequacy Ratio (CARI Reports for Designated Clearing and Settlement Banks Report on Compliance with the E/FCDU Cover Requirement 1. In computing for the "Net Due To Head Office (HO)/Branch (Br) Abroad - E/FCDU" under item A.2, the Due From HO/Br/Agencies Abroad - FCDU representing deposits placed in the HO up to the extent the deposits maintained by other resident banks in the designated clearing and settlement bank relative to its function shall be excluded. Footnote 1 will be amended to read as follows: "Applicable to Philippine branches of foreign banks only. lf the resulting balance is a Net Due from HO/Br Abroad, the amount to be shown as Net Due to HO/Br shall be zero. Net Due from HO/Br Abroad shall not be eligible for the LOO% asset cover. In the case of designated clearing and settlement bank, the deposits placed in the HO up to the extent the deposits maintained by other resident banks therein relative to its function shall be excluded first from the Due from HO, Branch Abroad before computing for the net amount." 2. Pending the issuance of the revised Financial Reporting Package containing the specific information on (a) the deposits placed in the HO and (b) the deposits maintained by other resident banks in the designated clearing and settlement bank relative to its function, the designated clearing and settlement bank shall submit the via email to: [email protected] within (15) banking days after the end of each reference period the following information: Account Description FCDU/EFCDU InUSS Peso Equiv. Due from Head Office/Branches/Agencies Abroad- Philippine Branch of Foreign Banks - Deposit in the Head Office relative to clearing and settlement functions of designated clearing and settlement banks Deposit Liabilities - Deposits by other resident banks relative to clearing and settlement functions of designated clearing and settlement banks CAR Report 3. In computing for qualifying capital under Part ll, the "Net Due from account" under item 24 of A.2shall exclude the Due From HO/Branches/Agencies Abroad representing deposits placed in the HO up to the extent of the deposits maintained by other

resident banks in the designated clearing and settlement bank relative to its function. Footnote 14 will also be amended to read as follows: "The balance of Net Due from head office, branches and subsidiaries account shall exclude accumulated earnings/losses that were included as part of CETl capital. In the case of designated clearing and settlement banks, such Net Due from account shall also exclude deposits placed in the HO booked in the Due from HO/Branches/Agencies Abroad account up to the extent of the deposits maintained by other resident banks therein relative to its function." 4. In computing for the risk weighted on-balance sheet assets under Part lll.L, such deposits booked in HO/Branches/Agencies Abroad account will be risk weighted using the percentage appropriate to the external credit rating of the HO. The same will be temporarily mapped under "Due from Other Banks - E/FCDUs/OBUs/Non-Resident" under ltem D, which will contain the following footnote: "ln the case of designated clearing and settlement bank, this shall also include the Due from HO/Branches/Agencies Abroad representing deposits placed in the HO up to the extent of the deposits maintained by other resident banks therein relative to its function." 5. The foregoing adjustments shall be reflected in the aforementioned reports starting with the reference cut-off date as of end-December 2020.