(Article published in the Mar 28, 2007
issue of Manila Standard Today)
The more responsible members of the Money Market Association of the Philippines (MART) would probably do a lot of soul searching this Holy Week to determine how best, moving forward, their association could continue to pursue, in the light recent events, the organization’s vision, as stated in its website, mart.com.ph, “to be acknowledged as the prime mover in the development of the interest rate markets and be responsive to the needs of its members and publics.”
The dominant figure on the trading of government and private debt instruments since the early ‘70s, when the term “money market” was almost proprietary to Bancom Development Corporation, and the active trading of commercial paper was, for Philippine banks, traditional as they have always been, a “new frontier”, the MART was in effect recently made to take a few steps away center stage, for the time being at least. For the moment, it will not be “the prime mover” that it used and aimed to be.
On the basis of the results of its
almost-year long probe into the allegations that some money market traders
sought to massage the price of government securities during the Unit
Investment Trust Funds’ blood bath last May, the Bangko Sentral ng
Pilipinas (BSP) lodged on MART’s elders, the Bankers Association of the
Philippines (BAP), the power and responsibility, which had heretofore been
the MART’s, of calculating the true market value of a government
security issue. In addition,
at about the same time, the BSP sent out what was termed in news reports
as a “warning” (but which, according to objective banking leaders who
have seen it, was no more, in intent and substance, a cautionary letter)
to 24 banks. The addressees were advised against the repetition in the
future of behavior like that last May.
Circumstances before and during the issuance by a MART officer of a
“smoking gun”, in the form of an e-mail message, during the height of
the UITF sell-off last year, conceivably could weave at least a prima
facie tale of price-fixing.
However, since, as BSP Governor Say Tetangco correctly says, “what’s important is that it won’t happen again”, the regulator’s focus was to review and revise the existing guidelines on the mark-to-market valuation of securities, both equity and debt, required under BSP Circular No. 476 and 538, dated respectively 16 February 2005 and 04 August 2006, as amended, by issuing Memorandum No. M-2007-006 on 28 February 2007.
Prior to Memorandum No. M-2007-006, the applicable rules were contained in Circular Letter issued by then Deputy Governor Alberto V. Reyes on 29 December 2000. The December 2000 circular letter essentially reposed on the banks themselves the choice of how to mark to market the securities they are holding. Where there was a credible market pricing mechanism, like the stock exchange for traded shares of stock, the market price is to be the basis. However, in the absence of a market price, the banks were permitted to use their own, individual, system of marking to market, provided the system is approved by the BSP as sufficiently transparent, objective, reliable and consistent. The leaders of the banking industry, for the sake of uniformity and orderly trading amongst themselves, decided to assign to the MART the duty to build and operate the system compliant with the December 2000 circular. For a few uneventful years, the MART system held.
But just as hidden and unnoticed cardiac defects are often (though not always) discovered in a stress test, the unseen geological faults in the MART system were exposed by (if I may mix metaphors) the financial electrocardiogram brought about by the UITF melt down in May 2006. The key fissure was that the players were themselves the referees.
Accordingly, Memorandum No. M-2007-006, in addition to tweaking the methodology of marking to market, ever so gently told the BAP henceforth to appoint a Calculation Agent that was to do the computation and publication of the benchmark or reference rates as prescribed by the memorandum. This Calculation Agent has the duty of ensuring the integrity of the benchmark or reference prices needed by the traders for an orderly market. For this purpose, it is tasked to monitor the quality of the contributed source rates for the benchmark and the data contributors (i.e. the participating banks) and replace participants, upon consultation with the BAP, that fail to meet commitments to the benchmark. This makes sure that something like the principle, “garbage in, garbage out”, does not enter into its computations.
In addition, the Calculation Agent will monitor the activities of the participants to ensure compliance with their commitments and for possible market manipulation and enforce sanctions on errant participants and immediately inform the BAP and the BSP thereon as well as review and upgrade the benchmark setting methodology upon consultation with the BAP on a continuing basis, including documentation and publication thereof.
The responsibilities of the Calculation Agent are a perfect fit to the powers of the Philippine Dealing and Exchange Corporation (PDEx) which was previously granted by the SEC the status of a self-regulatory organization (SRO), a new genre of trade associations recognized for the first time in the law by the Securities Regulation Code. As a SRO, the PDEx has the power both to make rules binding on its members as well as the power to compel compliance, conduct surveillance, examine members, investigate suspected violations, and discipline members and participants in the market.
A protégé of the BAP, the PDEx was the logical entity to which the former would entrust the task of a Calculation Agent. And the PDEx rose to the occasion.
PDEx created a Market Governance Board, conceived to be an independent and separate body, primarily to formulate the rules and regulations of the PDEx in the discharge of its task of overseeing the market. It is different, both in composition and function, from the corporate governance structure that is meant to address the entity’s requirements as a business enterprise. The Market Governance Board has four (4) governors representing the different market sectors, i.e. issuers, investors, dealers, and salesmen; another four (4) independent governors, and a lone representative of the market operator who is classified also as an independent director.
To see to it that rules of the market and the applicable laws are observed, PDEx also organized a Market Compliance and Discipline Committee. This, in turn, is composed of the four (4) independent governments of the Market Governance Board and the representative of the market operator. Surveillance of the activities of the trading participants, to monitor their individual compliance with the relevant laws, rules and regulations, is the function of the Market Regulatory Services Group.
At the moment, the amendments to the PDEx inter-dealer Rules for the Government Securities Market, primarily incorporating sanctions on future violators, are pending approval by the SEC.
The greatest direct beneficiary of these developments will naturally be the investors as well as the entities in the trust and mutual fund industries. But the widest smile, in approval, must be presently worn somewhere up there by Rafael B. Buenaventura who was obsessed with the idea of developing the capital market when once he walked amongst us.