BSP to ease FCDU rules

Published August 23, 2021, 7:00 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) will relax and further streamline its rules on foreign currency denominated transactions for banks’ effective risk controls, but are limiting the foreign currency deposit unit (FCDU) functions for certain banks such as digital and smaller banks.

FCDUs are local units of banks that are permitted to engage in foreign currency transactions, including foreign currency deposits.

In a draft circular, the BSP said the big banks or the universal and commercial banks, as well as Islamic banks, will continue to be allowed to operate both the expanded FCDU (EFCDU) and FCDU operations.

However, the new digital bank category, which has a minimum capital requirement of P1 billion, will only be allowed to operate FCDU functions and not EFCDUs. It will be treated the same as thrift banks as far as FCDU rules are concerned.

The draft circular amending FCDU regulations is currently being circulated among banks. It also sets a feedback deadline of August 31.

Thrift banks and rural/cooperative banks are both allowed FCDU operations only, based on the BSP proposal. Previous rules permitted thrift banks and rural banks to operate EFCDUs in certain types of licenses but the draft circular has removed this privilege from the smaller banks.

It said that big banks and Islamic banks “may be authorized to operate an EFCDU while a thrift bank, digital bank, and rural bank/coop bank may be authorized to operate an FCDU (provided) that they meet the prudential criteria.”

The proposed circular said that thrift banks, digital banks, and rural/cooperative banks which are granted a certificate of authority to operate an FCDU are authorized to engage in the following transactions in any acceptable foreign currency: accept deposits and trust accounts; deposit, regardless of maturity, with foreign banks abroad, offshore banking units (OBUs) and other FCDUs/EFCDUs; invest in readily marketable foreign currency denominated debt instruments; and grant short-term foreign currency loans as may be allowed by BSP regulations.

These banks will also be allowed to do the following: borrow, subject to existing rules on foreign/foreign currency borrowings from EFCDUs, foreign banks abroad and OBUs, regardless of maturity, and from other FCDUs on short-term maturity; engage in foreign currency-foreign currency derivatives, as allowed under existing regulations swaps with the BSP, OBUs and other FCDUs/EFCDUs; to engage in securities lending activities as lender as per Securities and Exchange Commission rules; to engage in repurchase agreements involving foreign currency denominated government securities; purchase foreign currency denominated government securities under resale agreements; and to issue Hybrid Tier 1 capital instruments.

A new provision in the existing FCDU rules is BSP’s proposal for big banks and Islamic bank’s foreign currency funds to be lent to their regular banking unit (RBU), with no interest, but the loan will be for a period of one year or less, in the case of FCDU. “EFCDU, however, will be allowed to lend to RBU in tenors that are more than one year (and the) balance of loan shall be settled by way of actual transfer of foreign currency assets from the RBU books to the FCDU/EFCDU books,” said the BSP.

Big banks and Islamic banks, which are permitted to operate under the EFCDU system, are allowed to engage in more transactions in addition to normal FCDU functions such as investing in foreign currency-denominated debt instruments; to grant foreign currency loans as may be allowed by the BSP; and to borrow from other FCDUs/EFCDUs and from non-residents and OBUs, subject to existing rules on foreign borrowings.

Banks with both EFCDU and FCDU authority are also allowed to engage in foreign currency-foreign currency swap, and in foreign exchange trading. The can also – with prior BSP approval — engage in financial futures and options trading.

The draft circular also clarified other EFCDU functions such as engaging in direct purchase of export bills of resident exporters, as well as in securities lending activities as lender, and to repurchase agreements involving foreign currency denominated government securities.

There are currently 76 banks with FCDUs, of which 20 are universal and commercial banks. There are nine thrift banks and nine rural/cooperative banks with FCDUs, while there are 38 foreign banks with FCDUs.

About 43 big banks and only one thrift bank have EFCDU licenses, while three universal and commercial banks, 20 thrift banks and nine rural/cooperative banks have FCDUs.

FCDUs’ combined financial assets which are predominantly in US dollars, amount to almost $30 billion.