Trust entities, which are banks’ trust departments and stand-alone trust corporations, have been given access to the primary market of the Bangko Sentral ng Pilipinas (BSP)-issued securities to siphon off more excess liquidity in the financial system.
Based on BSP Circular No. 1183, signed by BSP Governor Eli M. Remolona Jr. on Nov. 24, the Monetary Board approved amendments to the previous circular released in October 2022 to open up the securities facility to trust entities.
Last year, BSP only allowed trust entities to trade BSP securities via the secondary market, and only unit investment trust funds (UITFs) at that.
The difference between a primary market and a secondary market is that the former is where the securities are first issued while the latter is where securities are traded by investors.
Remolona, in the circular, said the BSP securities in bills and bonds, are part of the BSP monetary operations to “manage short-term liquidity in the financial system and guide market interest rates.”
He said the BSP bills are now available to all BSP counterparties, namely the universal and commercial banks, digital banks, thrift banks, quasi-banks and trust entities through UITFs. They can all participate in the primary and secondary markets.
BSP bills are available for trading in the secondary market via the Philippine Dealing and Exchange Corp. (PDEx). Banks, quasi-banks and trust entities are eligible participants in the secondary market.
Remolona said the BSP is only allowing trust entities’ UITFs to invest in the BSP securities. The facility has a weekly auction or every Friday, and has two tenors, the 28-day and the 56-day.
In 2022, trust entities traded a total P1.8 trillion of BSP securities, based on BSP data.
About P1.9 trillion of 28-day BSP bills were traded in the secondary market, of which P1.8 trillion were by trust entities. Meanwhile, the outstanding holdings of trust entities amounted to P135.5 billion.
The BSP securities are monetary instruments that help the central bank to absorb liquidity in the financial system. It has added a 56-day tenor last June 30 as catch basin after the BSP cut banks’ reserve requirements ratio.
In October 2022, the BSP expanded the access of trust entities to the BSP securities by allowing UITFs of eligible trust departments of banks, regardless of whether the UITFs have funds from non-residents or not, to invest in BSP securities via the secondary market.
Trust entities may purchase securities in the secondary market for any UITF in which the share of net assets of non-residents does not exceed 10 percent of the net assets of the fund. This effectively improved the tradability and viability of BSP securities as a highly liquid instrument, thus allowing for better price discovery and monetary policy transmission.
Besides the BSP bills, the BSP’s open market operations also have transactions in the overnight reverse repurchase or RRP facility, the term deposit facility, the overnight deposit facility and the overnight lending facility.
Before October last year, trust entities can only invest in the BSP securities through their UITFs if there are no non-resident participants in said UITFs.
The BSP said expanding the coverage of participants in the secondary market trading of BSP securities enhances the BSP’s capability to absorb liquidity and helps transform the BSP securities as a primary tool for liquidity management.
The measure is also aimed at ensuring the tradability and viability of BSP securities as a highly liquid instrument, thus allowing for better price discovery and monetary policy transmission.
“The implementation of this policy supports the BSP's prevailing monetary policy stance to increase liquidity absorption amid an elevated inflation environment, consistent with the BSP's exit from monetary accommodation measures in response to the pandemic,” said the BSP.
The BSP is currently monitoring 30 trust entities with UITF operation. The UITF industry is a P1.3-trillion market as of end-2022.