Review impact of cross-border derivatives
BSP tells banks
The central bank is encouraging banks to assess their derivatives transactions with foreign counterparts after the issuance of the necessary “margin requirements” to avoid losses from cross-border deals resulting to defaults.
In a memo (Memorandum No. M-2017-004), Bangko Sentral ng Pilipinas (BSP) managing director Restituto Cruz of the Supervision and Examination Sector (SES) said banks and quasi-banks or QBs should carefully review their capability to address the Basel Committee on Banking Supervision’s (BCBS) requirements for non-centrally cleared derivatives. These are also requirements from the International Organization of Securities Commissions (IOSCO).
“Philippine banks and QBs are advised to assess the potential impact of the margin requirements and their readiness to comply with the same in relation to their crossborder derivatives transactions,” Cruz said.
Based on the memo, banks’ derivatives with foreign counterparties are “most likely” to be subject to variation margin requirements by March 1, 2017 and to initial margin requirements by September 1, 2020, except foreign bank branches which have their own timelines followed by their parent companies.
Cruz said banks “should evaluate the impact of the requirements on their strategic, liquidity, and operational risk profiles in line with sound risk management practices, and establish policies and procedures to ensure that they are able to meet the said requirements.”
The BSP wants banks and QBs to identify which of their crossborder derivative deals will be covered by margin requirements in other countries or jurisdictions to make sure they are complying with legal and operational arrangements. These assessments should include documentation and ability to “calculate margins” and to “deliver and receive collateral.”
“Banks are encouraged to communicate with their foreign counterparts on this matter,” said Cruz. He added that all banks and QBs “should pay attention to any liquidity risk concerns” when they acquire or “deploy” additional liquid assets to comply with the margin requirements.
The BSP said these margin requirements are intended to prevent contagion and spillover effects as margins can be used to offset arising from a counter-party default.