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The Monetary Board, in its Resolution No. 1692 dated 15 October 2015 and No.  1703.A.2  dated  22 October  2015,  approved  the  following  changes  to the relevant provisions of the Manual of Regulations for Banks (MORB) and the Q- Regulations of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) to incorporate guidelines governing treasury activities of BSFIs and amend the qualifications of directors and officers.

Section 1. The following  shall be included in MORB/MORNBFI  as Section X602/4602Q:

“Section   X602/4602Q   Treasury   Activities   of  BSP  Supervised   Financial Institutions (BSFls)

“Statement of Policy. The Bangko Sentral ng Pilipinas (BSP) is cognizant that treasury activities may expose BSFIs to significant risks along with profitable opportunities.  These  regulations  are  being  issued  to set  out  minimum expectations on BSFIs’ treasury activities pursuant to Section 4 of R.A. No. 8791 or the General Banking Law of 2000, which recognizes the authority of the BSP to issue rules of conduct and establish standards of operation for its supervised financial   institutions.   These   regulations,   which   cover   the   governance   and operation of the trading function, among others, are aligned with the thrust of the BSP to ensure that the activities of BSFIs are undertaken with prudence and integrity,  and  that  these  are  supported  by  commensurate   risk  management systems and internal controls.

“§X602.1/4602Q.1  Treasury operations.^[1]  A BSFl’s treasury activities may be a significant  source of operational  risk,^[2]  apart from giving rise to market, liquidity and  credit  risks.^[3]   Losses  to the  institution  may  arise  from  the  failure  to meet professional obligations to clients, faulty product design, unethical business practices, and the failure to execute transactional processes. The institution must likewise  be  cognizant  of  the  increased  exposure  to  reputational  risk  in  the presence of such factors.

In this regard, the operational risk management framework for treasury activities shall   include   the   following   elements:   a   strong   governance   structure   that safeguards the integrity of the Treasury unit, especially the trading function; comprehensive policies and procedures; effective internal controls; a reliable management  information  system  that  facilitates  the comprehensive  monitoring and timely reporting of exposures; and a robust process for dealing with clients.

The BSFI shall:

a)   Conduct its treasury activities with a high degree of integrity. Consistent with the principles embodied in §X141.3/§4141Q.3  of the Manual of Regulations for   Banks/Q-Regulations    of   the   Manual   of   Regulations   for   Non-Bank Financial Institutions, the board of directors shall be primarily responsible for establishing the tone of good governance from the top and setting standards of appropriate and ethical behavior for itself, senior management,  and other employees.  The board shall ensure compliance  with market conduct rules, professional body, clearing house or exchange, or government and any of its instrumentalities/agencies.

In  accordance  with  the  board's  duty  to  articulate  acceptable  and unacceptable  activities, transactions and behaviors, it must adopt a code of conduct and standards of practice that are binding on the Treasury unit, especially personnel involved in risk-taking. The code and standards should highlight and provide specific guidance on upholding market integrity and professionalism.  Practices  which  undermine  market  integrity  include engaging in trading transactions which have the effect, or are likely to have the effect, of creating a false or misleading  appearance  of active trading in any security, currency or commodity, or with respect to the market for, or the price  of,  any  security,  currency  or  commodity.  The  code  and  standards should  likewise  include  safeguards  to  prevent  conflict  of  interest  or  self- dealing in any form when allowing personnel to deal for their own account.

The code and standards  shall be complementary  to any codes adopted by the  entire  institution,  as  well  as  those  promulgated  by  the  industry.  It  is likewise the responsibility of the board to institute mechanisms to ensure compliance with the provisions of the code of conduct and the standards of practice, as well as to mete out appropriate sanctions for violations thereof.

b)   Conduct   Treasury   activities   within   a   board-approved   structure   that   is designed to meet the BSFI’s objectives while enabling the strict enforcement of controls. The structure shall clearly distinguish between different functions (e.g., between  asset-liability  management,  trading/dealership,  underwriting, and brokering) and recognize the need for effective separation between operational units. The scope of authority and responsibility of each personnel shall be adequately defined, documented, and clearly communicated.

c)     Appoint  personnel  who  possess  a  high  degree  of  integrity  and  sufficient expertise  to  understand  the  financial  instruments  dealt  and  transactions entered into by the Treasury unit. These qualifications shall not only apply to personnel who originate and process the transactions but also to those who are  responsible  for  reviewing  the  transactions'  conformity  to  the  BSFI’s accepted  trading  practices.  There  shall  likewise  be  manpower  adept  at operating and maintaining the management information system (MlS).

d)   Segregate the duties of the front, risk control and back office functions. The dealers  in  the  front  office  are  primarily  responsible  for  transacting  and managing positions. In this regard, the settlement and confirmation of transactions,   the  recording   of  contracts   in  the  accounting   system,  the revaluation of positions, the reconciliations and procedures required to avoid errors,  and  other  related  processes  in the back  office  shall  be performed outside the dealing room to ensure objectivity and to prevent manipulation or fraud. There should be comprehensive and well-documented policies and procedures that describe the activities performed by each function.

e)   Provide for the prompt evaluation and escalation of suspicious trading trends and patterns, and unusual gains or losses. While the primary responsibility for  ensuring  that  transactions  are  undertaken  with  integrity  lies  with  front

office personnel, there should be units tasked to perform reviews of treasury activities.  The unit responsible  for executing  such reviews  shall be independent  from the risk-taking function and accorded sufficient resources and stature in the institution. In this way, it shall be empowered to quickly escalate any activity that seems unusual or inconsistent with compliance, financial and operational controls to the appropriate authorities. “Appropriate authorities” shall refer to persons, units, or committees that are independent of  the  Treasury  function  and  its  management  but  possess  equivalent  or higher stature, such as the Chief Executive Officer, Chief Operating Officer, the  Chief  Risk  Officer,  the  Chief  Compliance   Officer,  or  a  Board-level committee. Personnel tasked to perform reviews shall have, among others, sufficient  understanding  of  the  strategies  engaged  in  by  trading  desks  to allow  them  to evaluate  whether  trading  activities  are aligned  with  the risk appetite of the financial institution.

f)     Regularly    and    actively    engage    the    control    functions    namely,    risk management, internal audit and compliance, in the oversight of treasury activities. Owing to their inherent responsibilities and stature within the BSFI, the  control   functions   are  well  placed   to  perform   reviews   and   render assessments of the Treasury unit and its activities. The operational risk management framework shall include tools and mechanisms to identify, measure, monitor and control risks in all aspects of treasury operations. As an  example,  risk  and  performance  indicators  may  consist  of  those  that identify errors in deal entry, track the cancellation of deals, analyze unusual trading activity, and flag limit exceptions, among others. Meanwhile, the compliance  function/system  referred to in §X180.2/§4180Q.1  is responsible for the regular conduct of reviews to ensure that the BSFI’s activities conform to applicable  laws, rules, and regulations,  including securities  laws, as well as  its  obligations  as  a  market  participant.  Lastly,  internal  audit  shall  be tasked with evaluating the Treasury unit’s compliance with the BSFI’s own policies and procedures, especially in the conduct of trading activities, in accordance with §X186.2/§4186Q.2,  as amended by Circular No. 871 dated
5 March 2015. The scope of internal audit shall likewise include the review of the performance of risk management and compliance duties in respect of treasury activities.

g)   Employ treasury systems that are able to support the volume and complexity of  the  treasury   transactions   in  the  areas   of  deal  entry,   confirmation, settlement and accounting. Institutions that engage in heavy trading should endeavor to move to the use of straight-through processing to minimize input errors. On the other hand, institutions whose processes involve manual intervention  should  ensure  that  the  integrity  of  data  is  preserved  through proper controls.

h)   Ensure that the MlS is able to serve the needs of its users. The Mls should enable the accumulation and production of accurate and timely financial, regulatory, and management reports. At a minimum, management reports should highlight trading positions, profits/losses, and limit utilization. If the institution uses more than one system for its information needs, it should establish controls and perform reconciliations to minimize the likelihood of producing corrupted consolidated data.

Subject new products to a rigorous approval process. The handling of new products shall be embodied in an internal policy that, among others, defines the circumstances  under  which  a product  shall  be considered  “new.”  The policy  shall  likewise   contain   guidelines   for  the  review   of  the  product, including the conduct of an analysis of its risks, costs and benefits to the institution; the identification of product features, uses, and target markets, as applicable; potential risks and mitigants to such risks; and the procedures involved in operationalizing the product. The policy shall identify the stages within the product development process at which approvals shall be obtained and from whom. All relevant units should sign off on the product program as part of the new product approval process.

j)     Act  with  honesty,   fairness,   and  professionalism,   and  pursue   the  best interests of its clients. Due to the increasingly sophisticated products being introduced  in the market, a BSFI acting as a dealer or broker shall have a clearly articulated  strategy for the sale and marketing  of financial products. The BSFI is expected to manage the risks arising from such activities and protect the interest of its clients. In this regard, a BSFI shall have appropriate policies, procedures and controls in place to ensure the suitability of products being offered to its clients. It shall ensure that (1) the client understands the nature of the transaction and the risks involved and (2) the transaction meets the client’s  financial  objectives  and is aligned  with his/its  risk tolerance.  It shall also provide sufficient, accurate and comprehensible  information about the products,  including  inherent  risks,  in a clear  and  balanced  manner  to enable  its  clients  to  make  informed  financial  decisions.  The  BSFI  shall likewise  use  reasonable  diligence  to  ascertain  the  best  market  for  the products offered to customers  and buy and sell in such market so that the result to the customer is as favorable as possible under prevailing market conditions.

Management  should  refer to the existing  Consumer  Protection  Framework and Sales and Marketing Guidelines under Appendix 26/Q-16.

The failure of an institution covered by these guidelines to consistently  observe the same may be considered by the BSP as conducting business in an unsafe or unsound manner, subject to applicable provisions of laws and regulations.

Supervisory Enforcement Actions. The BSP reserves the right to deploy its range of supervisory tools to promote adherence to the requirements set forth in these guidelines and bring about timely corrective actions and compliance with BSP directives. In this regard, the BSP may, among others, issue directives to refrain from engaging  in treasury  activities  with serious  supervisory  issues.  Sanctions may  likewise  be  imposed  on  the  BSFI  and  responsible  persons,  which  may include restrictions or prohibitions from certain authorities/activities;  and warning, reprimand,  suspension,   removal  and  disqualification   of  concerned  directors, officers and employees.

Section  2.  Subsections  X141.2(a)  and  X142.2  of  the  MORB  are  hereby amended to read as follows:

(a)  “§ X141.2 Qualifications of a director.

a.   A director shall have the following minimum qualifications:

“(1) Xxx
“(2) Xxx
“(3) Xxx
“(4) He must be fit and proper for the position of a director of the bank. In determining whether a person is fit and proper for the position of a director, the following matters must be considered: integrity/probity; physical/mental fitness; relevant education/financial  literacy/training;  possession of competencies relevant to the job, such as knowledge and experience, skills, diligence and independence of mind; and sufficiency of time to fully carry out responsibilities.

“In assessing a director’s integrity/probity, consideration shall be given to the director’s market reputation, observed conduct and behavior, as well as his ability to continuously comply with company policies and applicable laws and regulations,  including  market  conduct  rules, and the relevant  requirements and standards of any regulatory body, professional body, clearing house or exchange, or government and any of its instrumentalities/agencies.

“An elected director has the burden to prove that he/she possesses all the foregoing   minimum   qualifications   and   none   of  the  disqualifications   by submitting the documentary requirements listed in Appendix 98. X x x

“The members of the board of directors shall possess the foregoing qualifications in addition to those required or prescribed under R.A. No. 8791 and other applicable laws and regulations.”

(b)  “§ X142.2 Qualifications of an officer

“An officer shall have the following minimum qualifications:

“a.  Xxx
“b.  Xxx
“c.  He must be fit and proper for the position he is being proposed/appointed to. In determining whether a person is fit and proper for a particular position, the   following   matters   must   be   considered:   integrity/probity,   education/ training, and possession of competencies relevant to the function such as knowledge and experience, skills and diligence.

“In assessing an officer’s integrity/probity, consideration shall be given to the officer’s  market  reputation,  observed  conduct  and behavior,  as well as his

regulations,  including  market  conduct  rules, and the relevant  requirements and standards of any regulatory body, professional body, clearing house or exchange, or government and any of its instrumentalities/agencies.

“In  the  case  of  Coop  Bank,  the  manager   must  have  actual   banking experience (at least manager or assistant manager).

“An appointed officer has the burden to prove that he/she possesses all the foregoing   minimum   qualifications   and   none   of  the  disqualifications   by submitting the documentary requirements listed in Appendix 6. X x x

“The foregoing qualifications for officers shall be in addition to those required or   prescribed   under   R.A.   No.   8791   and   other   applicable   laws   and regulations.”

Section 3. Subsections 4141Q.2(a) and Section 4142Q of the MORNBFI are hereby amended to read as follows:

(a)  “§ 4141Q.2 Qualifications of a Director

“a.  A director shall have the following minimum qualifications: “(1) Xxx
“(2) Xxx
“(3) Xxx
“(4) He must be fit and proper for the position of a director of QB/trust entity. In  determining  whether  a  person  is  fit  and  proper  for  the  position  of  a director, the following matters must be considered: integrity/probity; physical/mental  fitness; relevant education/financial  literacy/training; possession of competencies relevant to the job, such as knowledge and experience,  skills,  diligence  and independence  of mind;  and sufficiency  of time to fully carry out responsibilities.

“In assessing a director’s integrity/probity, consideration shall be given to the director’s market reputation, observed conduct and behavior, as well as his ability to continuously comply with company policies and applicable laws and regulations,  including  market  conduct  rules, and the relevant  requirements and standards of any regulatory body, professional body, clearing house or exchange, or government and any of its instrumentalities/agencies.

“An elected director has the burden to prove that he/she possesses all the foregoing   minimum   qualifications   and   none   of  the  disqualifications   by submitting the documentary requirements listed in Appendix Q-57. Xxx

“The members of the board of directors shall possess the foregoing qualifications in addition to those required or prescribed under R.A. No. 8791 and other applicable laws and regulations.”

(b)  “Sec.  4142Q  Definition  and  Qualifications   of  Officers.  Officers  shall include the president, executive vice president (EVP), senior vice-president, vice president, general manager, treasurer, secretary, trust officer and others

mentioned as officers of the QB/trust entity, or those whose duties as such are defined in the by-laws, or are generally known to be the officers of the QB/trust entity (or any of its branches and offices other than the head office) either through announcement, representation, publication or any kind of communication made by the QB/trust entity: X x x
“An officer shall have the following minimum qualifications: “a.  Xxx
“b.  Xxx
“c.  He must be fit and proper for the position he is being proposed/appointed to. In determining whether a person is fit and proper for a particular position, the   following   matters   must   be   considered:   integrity/probity,   education/ training, and possession of competencies relevant to the function such as knowledge and experience, skills and diligence.

“In assessing an officer’s integrity/probity, consideration shall be given to the officer’s  market  reputation,  observed  conduct  and behavior,  as well as his ability to continuously comply with company policies and applicable laws and regulations,  including  market  conduct  rules, and the relevant  requirements and standards of any regulatory body, professional body, clearing house or exchange, or government and any of its instrumentalities/agencies.

“An appointed officer has the burden to prove that he/she possesses all the foregoing   minimum   qualifications   and   none   of  the  disqualifications   by submitting the documentary requirements listed in Appendix Q-57. xxx

“The foregoing qualifications for officers shall be in addition to those required or   prescribed   under   R.A.   No.   8791   and   other   applicable   laws   and regulations.”

This  Circular   shall  take  effect  fifteen   (15)  calendar   days  following   its publication either in the Official Gazette or in a newspaper of general circulation.

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^[1] This  subsection  should  be  read  in  conjunction  with  existing  regulations on  Operational Risk
Management.

^[2] Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems; or from external events. This definition includes legal and compliance risks.

^[3] BSFIs should refer to Sec. X175 of the MORB/Sec. 4175Q of the MORNBFI for the Guidelines on Market Risk Management, Sec. X176 of the MORB/Sec. 4176Q of the MORNBFI for the Guidelines on Liquidity Risk Management and Circular No. 855 dated 29 October 2014 for the Guidelines on Sound Credit Risk Management Practices.”