(Article published in the Dec 3,2004 issue of TODAY, Business Section)
are the days when the officers in the trust department were envied by
their counterparts in the commercial bank proper for being able to do
their thing in a regulation-free environment. This year alone, the Bangko Sentral turned its regulatory
eyes on three major areas of trust operations, instituting structural
reforms, all for the protection of investors.
first area tackled was the lucrative business of securities custodianship
and securities registry. Circular No. 428, issued on 27 April 2004 and clarified
further by Circular No. 457, dated 14 October 2004, raised the qualifying
bar for securities custodians and registers and imposed strict prudential
standards on their operations. Seeking
to avert a repeat of the Bancap scandal that rocked the system more than
ten years ago, the BSP, over the howling and screaming of the big banks
that played the double role of keeper and vendor of securites to their
clients, required that custodians and registers to be third parties, i.e.
with no subsidiary or affiliate relationships to the issuers or sellers of
the securities they handle.
was followed by Circular No. 447 on 03 September 2004, sending trust
departments of banks into wailing and weeping as they
foresaw the impending death of the common trust fund (CTF).
Over the years, that laudable
mechanism for the collective investment of small funds permutated,
at great risk to the banking system as demonstrated by the Urban
Bank/Urban Corporation experience, into a substitute for
No. 447 required marking to market the investments of the funds thereby
forcing trust banks to disclose to their trust clients the true valuation
of their holdings.
Circular No. 447, the CTF was all but dead and Circular No. 452 left no
doubt that the Bangko Sentral was, pardon the pun, dead serious. Effective
01 April 2005, all CTFs then
still surviving will be subjected to the same legal and liquidity reserves
as deposit-substitutes. This
treats a spade exactly like a shovel and removes the CTF’s cost-saving
allure in the area of reserves. Moreover,
investments in securities of all currently existing CTFs were required to
be turned over since 31 October 2004 to a BSP-accredited third
party custodian, as prescribed by Circular No. 447.
last week, the Monetary Board trained its sights on banks and non-bank
financial institutions acting as trustee on any mortgage or bond issued by
any municipality, government-owned or controlled corporation or any body
trustees had to be accredited with the BSP and qualifications were made
more stringent; independence of the trustee better safeguarded; investment
and management of funds pending utilization and sinking funds severely
circumscribed; and operational transparency, at least to the BSP,
bars need be hurdled before an aspiring institution could be accredited.
It must be under BSP supervision and a holder of a trust license.
It’s capital accounts must comply with a schedule of minimums,
depending on the category of the applicant, and its risk-based capital
adequacy ratio must be not lower than 12%.
articles of incorporation and by-laws must have provisions specifically
authorizing the activity of acting as a trustee as well as mandating a
trust unit or department, with the concomitant responsibility and
are then followed by a list of efficiency and good behavior benchmarks.
Operations must have been profitable for the last three years; the
trustee must have no net weekly reserve deficiencies for the last eight
weeks. Serious compliance must be shown with good governance
standards, such as election of two independent directors, attendance by
directors of accredited seminars on their duties and responsibilities,
observance of DOSRI rules, keeping liquidity floor requirements,
respecting single-borrower’ loan limit, and hewing to the line on
investment in bank premises and other fixed assets.
the applicant must not have had outstanding float items exceeding 1% of
total resources in the “Due From/To Head Office/Branches/Other
Offices” for more than 60 calendar days.
It ought to have in place a sufficient risk management system.
Its CAMELS composite rating must be at least 3 in the last regular
examination and management must not have scored lower than 3, too.
And if the applicant is a bank, it must be a member of the PDIC,
although it is not required to be proud to be so.
the requirements must be met not only at the time of application; they
must be maintained up to the time of the grant of authority.
And even after the grant of authority, more rules fall into place.
prevent conflict of interest, a bank or non-bank financial institution is
prohibited from acting as a trustee or a mortgage or bond issuance of
entities where an elective or appointive official of the issuer or his
related interest own such number of shares enough to elect one board
member or is directly or indirectly the registered or beneficial owner of
more than 10% of any class of the trustee’s equity.
management of the funds received by must be in accordance with the Trust
Indenture or Agreement. However, funds pending utilization in accordance with the
agreement as well as sinking funds, from which the payment of the bond
issues are expected to come, may be invested only in deposits with duly
authorized banks, other than the trustee, or invested in peso-denominated
treasury bills acquired from third party dealers.
the interest of transparency, i.e. to ensure that the Bangko Sentral get
accurate reports and is enable to verify, the trustee is required to waive
the confidentiality provisions of the law on Secrecy of Bank Deposits (R.A.
No. 1405, as amended) and comply with future reportorial requirements from
the Bangko Sentral. In a
suppletory manner, the other rules relating to the conduct of trust
business, not inconsistent with the new rules, are also made applicable.
of punishment is severe enough to discourage flirting with short cuts.
Without prejudice to the institution of criminal and administrative
proceedings, a gradually increasing system of penalties is set up, with
sanctions ranging from a fine of Php 10,000 per day and reprimand to the
directors, for the first offense, to Php 30,000 per day, suspension of
directors and offices, without pay for 120 days, and suspension or
revocation of trust license, for the third and subsequent offenses.
And 2004 isn’t over yet. And there is no telling what more proposed regulations are in Nesting Espenilla’s briefcase. No wonder trust officers have been wearing long faces recently. But then, no wonder too investors have been wide smiles lately.