TRUST ENTITIES’ (TE) unit investment trust funds (UITFs) with minimal foreign participants may now invest in central bank-issued securities traded in the secondary market as part of the Bangko Sentral ng Pilipinas’ (BSP) efforts to manage liquidity in the face of rising inflation.
BSP Circular No. 1157 signed by BSP Deputy Governor Chuchi G. Fonacier on Oct. 14 amends the Manuals of Regulations for Banks and for Non-Bank Financial Institutions to allow UITFs with non-resident participants to invest in BSP securities in the secondary market.
“Currently, TEs may invest in BSP securities through their UITFs provided that there are no non-resident participants in the invested UITFs,” Ms. Fonacier said in a statement on Tuesday.
“Under the approved amendments to the regulations, TEs may purchase BSP securities in the secondary market for any UITF in which the share of net assets of non-residents does not exceed ten percent (10%) of the net assets of the fund,” she added.
Ms. Fonacier said expanding the coverage of participants will improve the BSP’s capability to absorb cash in the financial system, allowing central bank-issued securities to become 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,” she said.
“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,” Ms. Fonacier added.
The official said the BSP will monitor the sources of funds placed by trust entities in the central bank’s facilities via reporting requirements.
She said the BSP may revisit trust firms’ access to the secondary market for central bank securities depending on its monitoring and the policy stance and liquidity management strategies of the regulator.
BSP securities are used by the central bank for its monetary policy implementation and liquidity management operations to help steer short-term market interest rates towards the policy rate.
During the height of the coronavirus pandemic, the BSP cut its key rate to an all-time low of 2% to help support the economy.
However, due to rising domestic inflation and the US central bank’s move to normalize its stance, the BSP kicked off its tightening cycle in May and has now raised benchmark rates by 225 basis points so far this year, bringing its policy rate to 4.25%. — KBT