The Bangko Sentral ng Pilipinas (BSP) has revised the regulations on the derivatives transactions of banks, quasi-banks and trust corporations relating to authorized activities and those that will require additional notification to the central bank. 

Financial derivatives, which are used for hedging, speculation or risk management, are financial instruments "linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right," according to the International Monetary Fund. 

Based on the approved amended circular or Circular No. 1194, signed by Deputy Governor Mamerto E. Tangonan on May 29, derivatives activities affected by the revised circular are credit default swaps, credit derivative, credit-linked note, forward rate agreement, foreign exchange (FX) option, FX swaps, non-deliverable swaps, structured products, ROP’s (registered options principals) paired warrant programs and total return swap.

The BSP said universal and commercial banks and their trust departments as well as digital banks, may engage in as a dealer, end-user or end-broker in deliverable and non-deliverable FX forwards and swaps; currency swaps; interest rate swaps and forward agreement swaps; interest rate and currency futures; and to trade in an organized market.

The circular also revised activities requiring notification for banks and its trust department, as well as a quasi-bank and its trust units.

The BSP drafted the circular last October 2023 and circulated it among affected BSP supervised financial institutions for comments and suggestions.  

One of the proposed amendments is the addition of financial derivatives that a bank may engage in without prior approval from the BSP.

The BSP said any financial derivative that is traded in an organized market where the universal bank or commercial bank is recognized as a dealing participant or member will not need prior BSP nod to transact. An organized market is an exchange or a BSP-recognized over-the-counter market that is “governed by transparent and binding market conventions on price transparency, trade reporting, market surveillance and orderly conduct/operations.”

As for activities that will need derivatives authority, the BSP said a bank, a quasi-bank or trust department of a bank will have to notify the central bank if it will transact a structured product.

A structured product is described as “where the embedded derivative/s differs from that of the product approved” under a universal and commercial bank’s existing authorities, either Type 2 or Type 3 additional derivatives authority or a trust department’s existing Type 3 additional derivatives authority, said the BSP.