MORNBFI Vol. 1 - Planters Development Bank

FOREWORDThe 2011 Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) isan updated compilation of regulations and policies issued by the Bangko Sentral ng Pilipinas(BSP) for financial institutions under its supervision. Available in hard and soft copies, it is aconvenient reference and guide for said financial institutions in the conduct of their operations.The updated MORNBFI incorporates regulatory policies issued to align bankingpractices on risk management, good corporate governance, capital adequacy, accounting andreporting with international standards. It also includes rules implementing legislative reformmeasures, the more significant of which are the General Banking Law of 2000, the Anti-Money Laundering Act of 2001 and the Special Purpose Vehicle Act of 2002.In providing easy access to this information, the updated MORNBFI seeks to facilitatecompliance with the supervisory and regulatory requirements of BSP that will contribute tothe enhancement of its partnership with financial institutions under its supervision, andultimately to the strengthening of the Philippine Banking System and the economy.AMANDO M. TETANGCO, JR.Governor

INSTRUCTIONS TO USERS(2011 Edition)The Manual of Regulations for Non-Bank Financial Institutions (the “Manual”) containsthe rules and regulations which govern non-bank financial institutions (NBFIs) subject tothe supervision of the Bangko Sentral ng Pilipinas (BSP) under existing laws, i.e. : Quasibanks(Q Regulations), NSSLAs (S Regulations), Pawnshops (P Regulations), and other NBFIs,trust entities, subsidiaries and affiliates of banks and quasi-banks (N Regulations).The Manual is divided into four (4) books Q, S, P or N. Each book is divided intoparts. Each part is divided into sections containing four (4) digits and the letter Q, S, P or N,as applicable, i.e., 4143Q. The first digit “4” means that the regulation is applicable toNBFIs; the second digit “1” refers to the Part number, and the third and fourth digits “4”and “3” refer to the section number.Sections may contain subsections represented by number/s after the decimal point,i.e., 4143Q.1.To illustrate, Subsection 4143Q.1 indicates:Main Section on “Disqualification of Directors/Trustees and Officers”Subsection on “Persons disqualified to become officers”4 1 4 3 Q . 1Regulation addressed to quasi-banksPart One on “Organization, Management and Administration"Regulations addressed to NBFIsThe runners in the upper-right or left hand corners of each page show the sections/subsections of the regulations and the cut-off date of the regulatory issuances included inthe page of the Manual where the runner is shown.

LIST OF APPENDICESList of Appendices11.12.31No.Q - 1Q - 2Q - 3Q - 4Q - 5Q - 6Q - 7Q - 8Q - 9Q - 10Q - 11SUBJECT MATTERGuidelines to Evaluate Investment HousesDetermination of Amount of Additional Capital the Entity Must Put UpList of Reports Required from Quasi-BanksAnnex Q-3-a - Information on One-Year Borrowing-InvestmentProgram to be Submitted by Quasi-BanksAnnex Q-3-b - Guidelines Governing the Consolidation of FinancialStatement of Financial Intermediaries and their AlliedUndertakings/Subsidiaries/AffiliatesAnnex Q-3-c - Reporting Guidelines on Crimes/LossesAnnex Q-3-d - Documentary Requirements on Directors/OfficersMajor Individual StockholdersAnnex Q-3-e - Documents/Information on Organizational Structureand Operational PoliciesAnnex Q-3-f - Guidelines on Calculating Additional InformationRequired in Published Statement of ConditionGuidelines on Prescribed Reports Signatories and SignatoryAuthorizationAnnex Q-4-a - Format of Resolution for Signatories of Category A-1ReportsAnnex Q-4-b - Format of Resolution for Signatories of Category A-2ReportsAnnex Q-4-c - Format of Resolution for Signatories of CategoriesA-3 and B ReportsMinimum Internal Control Standards for Quasi-BanksStandardized Deposit Substitute InstrumentsNew Rules on Registration of Short-Term Commercial PapersNew Rules on the Registration of Long-Term Commercial PapersList of Reserve - Eligible and Non-Eligible SecuritiesGuidelines in Identifying and Monitoring Problem Loans and Other RiskFormat-Disclosure Statement of Loan/Credit Transactionxxxiii

List of Appendices11.12.31No.SUBJECT MATTERQ - 12 Abstract of "Truth in Lending Act" (Republic Act No. 3765)Q - 13Q - 13aQ - 13bQ - 14Q - 15Q - 16Q - 16aQ - 17Q - 18Q - 19Q - 20Q - 20aQ - 21Q - 22Agreement for the Enhanced Interbank Call Loan Funds Transfer SystemSettlement Procedures for Interbank Loan Transactions and Purchaseand Sale of Government Securities under Repurchase Agreements withthe Bangko SentralEnhanced Intraday Liquidity FacilitySample Investment Management AgreementRisk Management Guidelines for DerivativesSales and Marketing Guidelines for DerivativesSample Risk Disclosure Statement for Derivatives Activities(Reserved)Securities and Exchange Commision Basic Rules and Regulations toImplement the Provisions of Presidential Decree No. 129, OtherwiseKnown as "The Investment Houses Law"New Rules and Regulations to Implement the Provisions of R. A. No.5980 (The Financing Company Act), as amendedClassification, Accounting Procedures, Valuation and Sales andTransfers of Investments in Debt Securities and Marketable EquitySecuritiesAnnex A - Reclassification of Financial Assets betweenCategoriesEstablishing the Market Benchmarks/Reference Prices and ComputationMethod Used to Mark-to-Market Debt and Marketable Equity SecuritiesGuidelines on the Use of Scripless (RoSS) Securities as Security Depositfor the Faithful Performance of Trust DutiesDefinition of Terms and AcronymsProcedures on Collection of Fines/Penalties from Quasi-banks and/orDirectors/Officers of Quasi-banksxxxiv

List of Appendices11.12.31No.SUBJECT MATTERQ - 22aQ - 23Q - 23aQ - 23bQ - 23cQ - 23dQ - 23ePro-forma Payment Form(Reserved)Certification of Compliance with Anti-Money Laundering RegulationsRules on Submission of Covered Transaction Reports and SuspiciousTransaction Reports by Covered InstitutionsCustomer Due Diligence for Banks and Quasi-BanksGeneral Identification RequirementsGeneral Guide to Account Opening and Customer IdentificationQ - 23f Anti-Money Laundering Council Resolution No. 02 Series of 2005Q - 24Q - 25Q - 26Q - 27Q - 28Q - 28aActivities Which May Be Considered Unsafe and Unsound PracticesRevised Implementing Rules and Regulations - R.A. No. 9160, asamended by R.A. No. 9194Investment Houses and Financing Companies with Quasi-BankingFunctions - Reverse Repurchase Agreements with Bangko SentralPro-forma Accounting EntriesDetails on the Computation of Quarterly Interest Payments Credited tothe Demand Deposit Accounts of Quasi-Banks' Legal Reserve Depositswith the Bangko SentralTransfer/Sale of Non-Performing Assets to a Special Purpose Vehicle orto an IndividualAccounting Guidelines on the Sale of Non-Performing Assets to SpecialPurpose Vehicles and to Qualified Individuals for Housing Under "TheSpecial Purpose Vehicle Act of 2002"Annex Q-28-a-1 Illustrative Accounting Entries to Record Sale of Non-Performing Assets to Special Purpose Vehicles underthe Special Purpose Vehicle Law of 2002 underDeferred Recognition of Loss/Impairment of FinancialInstrumentsxxxv

List of Appendices11.12.31No. SUBJECT MATTERAnnex Q-28-a-2Pro-Forma Disclosure RequirementA. Statement of ConditionB. Statement of Income and ExpensesQ - 28b Significant Timelines Relative to the Implementation of R.A. No. 9182,also known as the "Special Purpose Vehicle Act", as amended byR.A. No. 9343Q - 29Guidelines and Minimum Documentary Requirements for ForeignExchange Forward and Swap TransactionsQ - 30Q - 31Q - 32Q - 33Q - 34Guidelines to Govern the Selection, Appointment, ReportingRequirements and Delisting of External Auditors and/or Auditing Firmof Covered EntitiesQualification Requirements for a Bank/Non Bank Financial InstitutionApplying for Accreditation to Act as Trustee on any Mortgage or BondIssued by any Municipality, Government-Owned or ControlledCorporation, or any Body PoliticRules and Regulations on Common Trust FundsChecklist of BSP Requirements in the Submission of Financial Audit Report,Annual Audit Report and Reports Required Under Appendix Q-30Annex Q-33-aQuarterly Investment Disclosure StatementQ - 34a ( Name of Trust Entity )-( Trust Banking Group/Trust Department )Unit Investment Trust Funds Risk Disclosure StatementQ - 35Q - 36Q - 37Bangko Sentral Rules of Procedure on Administrative Cases InvolvingDirectors and Officers of Quasi-banks and Trust EntitiesFormat CertificationAnnex Q-36aDuties and Responsibilities of Banks and their Directors/Officers in AllCases of Outsourcing of Banking Functionsxxxvi

List of Appendices11.12.31No. SUBJECT MATTERQ - 38Implementation of the Delivery by the Seller of Securities to the Buyeror to his Designated Third Party CustodianAnnex A - Template of Letter to InvestorQ - 38a Disposition of Compliance Issues on Appendix Q-38Q - 38bQ - 39Q - 40Q - 41Q - 42Q - 43Q - 44Q - 45Q - 46Q - 46aQ - 46bDelivery of Government Securities to the Investor's Principal SecuritiesAccount with the Registry of Scripless SecuritiesAnnex A - Memorandum of AgreementAnnex B - Investor's UndertakingThe Guidelines for the Imposition of Monetary Penalty for Violations/Offenses with Sanctions Falling Under Section 37 of R.A. No. 7653on Quasi-Banks, Directors and/or OfficersAnnex A - Aggravating and Mitigating Factors to be Consideredin the Imposition of PenaltyPrompt Corrective Action FrameworkGuidelines for the Change in the Mode of Compliance with theLiquidity Reserve RequirementAnnex A - Debit/Credit Authority FormatGuidelines on Supervision by RiskGuidelines on Market Risk ManagementGuidelines on Liquidity Risk ManagementAuthorization Form for Querying the Bangko Sentral Watchlist Files forScreening Applicants and Confirming Appointments of Directors andOfficialsRisk-Based Capital Adequacy Framework for the Philippine BankingSystemGuidelines on the Capital Treatment of Banks' Holdings of Republic ofthe Philippines Global Bonds Paired with WarrantsGuidelines on the Use of the Standardized Approach in Computing theCapital Charge for Operational Risksxxxvii

List of Appendices11.12.31No. SUBJECT MATTERQ - 47Q - 47aQ - 48Q - 49Q - 50Q - 51Q - 52Q - 53Q - 54Q - 55Q - 56Q - 57Guidelines for Trust Departments' Placements in the Special DepositAccount Facility of the Bangko SentralAnnex 1 - Letter of RequestAnnex 2 - Sample ConfirmationSpecial Deposit Account Placements of Trust Departments/Entities asAgent for Tax-Exempt Institutions and AccountsAnnex 1 - CertificationBasic Standards in the Administration of Trust, Other Fiduciary andInvestment Management AccountsGuidelines for Days Declared as Public Sector HolidaysGuidelines on the Submission of Application for Merger andConsolidationGuidelines on the Collection of the Annual Supervisory Fees for theYear 2010Guidelines on Banks' Internal Capital Adequacy Assessment ProcessAnnex A - Internal Capital Adequacy Assessment ProcessAnnex B - Alternative Internal Capital Adequacy AssessmentProcess MethodologiesGuidelines on the Bangko Sentral's Supervisory Review ProcessProcessing Guidelines for Microfinance OtherBanking Offices orMicrobanking OfficesGuidelines on Outsourcing of Services by Electronic Money Issuers(EMIs) to Electronic Money Network Service Providers (EMNSP)Guidelines Governing the Implementation/Early Adoption of PhilippineFinancial Reporting Standards (PFRS 9) Financial InstrumentsList of Documentary Requirements Confirmantion of the Election/Appointment of the Members of the Board of Directors/Senior VicePresidents (SVP) and Above or Equivalent Ranks of Non-Banks withQuasi-Banking Functions (NBQBs)xxxviii

POWER OF THE BANGKO SENTRAL TO EXAMINE QUASI-BANKS(2008 - 4654Q) Examination by the BangkoSentral. The BSP shall have supervision over,and conduct periodic or specialexaminations of QBs, including theirsubsidiaries and affiliates in allied activities.The head and examiners of theappropriate department of the Supervisionand Examination Sector (SES) are authorizedto administer oaths to any director, officer,or employee of QBs, including theirsubsidiaries and affiliates engaged in alliedactivities, and to compel the presentation ofall books, documents, papers or recordsnecessary in their judgment to ascertain thefacts relative to the true condition of theinstitution as well as the books and records ofpersons and entities relative to or inconnection with the operations, activities ortransactions of the institution underexamination, subject to the provision ofexisting laws protecting or safeguarding thesecrecy or confidentiality of investments ofprivate persons, natural or juridical, in debtinstruments issued by the Government.(2008 - 4654Q.1) Definitionsa. Subsidiary is a corporation morethan fifty percent (50%) of the outstandingvoting stock of which is directly orindirectly owned, controlled, or held withpower to vote by a QB.b. Affiliate is an entity linked directlyor indirectly to a QB by means of:(1) Ownership, control or power to vote,of ten percent (10%) or more of the outstandingvoting stock of the entity, or vice-versa;(2) Interlocking directorship orofficership;(3) Common stockholders owning tenpercent (10%) or more of the outstandingvoting stock of each of the financialintermediary and the entity;(4) Management contract or anyarrangement granting power to the financialintermediary to direct or cause the directionof management and policies of the entity,or vice-versa; or(5) Permanent proxy or voting trust infavor of the financial intermediaryconstituting ten percent (10%) or more ofthe outstanding voting stock of the entity,or vice-versa.c. Financial allied undertakings referto enterprises or firms with homogeneousor similar activities/business/functions withthe financial intermediary and may include,but not limited to, leasing companies,banks, IHs, financing companies, creditcard operations, FIs addressed/catering tosmall and medium scale industries, andsuch other similar activities as the MonetaryBoard may declare as appropriate from timeto time.d. Non-financial allied undertakingsmay include, but not limited to,warehousing companies, storagecompanies, safe deposit box companies,companies engaged in the management ofmutual funds but not in the mutual fundsthemselves, management corporationsengaged or to be engaged in activitiessimilar to the management of mutualfunds, insurance agencies, companiesengaged in home building and homedevelopment and companies providingdrying and/or including facilities foragricultural crops such as rice and corn andsuch other similar activities as the MonetaryBoard may declare as appropriate from timeto time.e. (2008 - 4661Q) Effective 14 August2004 the term “examination” shall,henceforth, refer to an investigation of aninstitution under the supervisory authorityi

of the BSP to determine compliance withlaws and regulations. It shall includedetermination that the institution isconducting its business on a safe and soundbasis. Examination requires full andcomprehensive looking into the operationsand books of institutions, and shall include,but need not be limited to, the following:(1) Determination of the QB’s solvencyand liquidity position;(2) Evaluation of asset quality as wellas determination of sufficiency of valuationreserves on loans and other risk assets;(3) Review of all aspects of QBoperations;(4) Assessment of risk managementsystem, including the evaluation of theeffectiveness of the QB management’soversight functions, policies, procedures,internal control and audit;(5) Appraisal of overall management ofthe QB;(6) Review of compliance withapplicable laws, rules and regulations;and(7) Any other activities relevant to theabove.Regular or periodic examination shallbe done once a year, with an interval oftwelve (12) months from the last datethereof. Special examination may beconducted earlier, or at a shorter interval,when authorized by the Monetary Board byan affirmative vote of five (5) members.In the full exercise of the supervisorypowers of the BSP, examination by the BSPof institutions shall be complemented byoverseeing thereof. In this regard, the termoverseeing shall refer to a limitedinvestigation of an institution, or anyinvestigation/s that is limited in scope,conducted to inquire into a particular area/aspect of an institution’s operations, for thepurpose of overseeing that laws andregulations are complied with, inquiringinto the solvency and liquidity of theinstitution, enforcing prompt correctiveaction, or such other matters requiringimmediate investigation: Provided, That(i) specific authorizations be issued by theDeputy Governor, SES, and (ii) periodicsummary reports on overseeings made besubmitted to the Monetary Board.(Circular No. 442 dated 20 July 2004)ii

§§ 4101Q - 4101Q.108.12.31PART ONEORGANIZATION, MANAGEMENT AND ADMINISTRATIONA. SCOPE OF AUTHORITYSection 4101Q Quasi-Banking FunctionsQuasi-banking functions consist of thefollowing:a. Borrowing funds for the borrower’sown account;b. Twenty (20) or more lenders at anyone time;c. Methods of borrowing: issuance,endorsement, or acceptance of debtinstruments of any kind, other thandeposits, such as:(1) acceptances;(2) promissory notes;(3) participations;(4) certificates of assignment or similarinstruments with recourse;(5) trust certificates;(6) repurchase (repo) agreements; and(7) such other instruments as theMonetary Board may determine; andd. Purpose:(1) relending; or(2) purchasing receivables or otherobligations.As used in the definition of quasi-bankingfunctions, the following terms and phrasesshall be understood, as follows:Borrowing shall refer to all forms ofobtaining or raising funds through any ofthe methods and for any of the purposesprovided in Items "c" and "d" above,whether the borrower’s liability therebyis treated as real or contingent.For the borrower’s own account shallrefer to the assumption of liability in one’sown capacity and not in representation, oras an agent or trustee, of another.Purchasing of receivables or otherobligations shall refer to the acquisition ofclaims collectible in money, includinginterbank borrowings or borrowingsbetween financial institutions (FIs), or ofsecurities, of any amount and maturity,from domestic or foreign sources.Relending shall refer to the extensionof loans by an institution with antecedentborrowing transactions. Relending shall bepresumed in the absence of expressstipulation, when the institution is regularlyengaged in lending.Regularly engaged in lending shallrefer to the practice of extending loans,advances, discounts or rediscounts as amatter of business, i.e., continuous orconsistent lending as distinguished fromisolated lending transactions.§ 4101Q.1 Financial intermediariesFinancial intermediaries shall mean personsor entities whose principal functions includethe lending, investing or placement of fundsor evidences of indebtedness or equitydeposited with them, acquired by them, orotherwise coursed through them either fortheir own account or for the account of others.Principal shall mean chief, main, mostconsiderable or important, of firstimportance, leading, primary, foremost,dominant or preponderant, as distinguishedfrom secondary or incidental.Functions shall mean actions, activitiesor operations of a person or entity by whichhis/its business or purpose is fulfilled orcarried out. The business or purpose of aperson or entity may be determined fromthe purpose clause in its articles ofincorporation/partnership, and from thenature of the business indicated in his/itsapplication for registration of business filedwith the appropriate government agency.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 1

§§ 4101Q.1 - 4101Q.208.12.31To be considered a financialintermediary, a person or entity mustperform any of the following functions ona regular and recurring, not on an isolatedbasis:a. Receive funds from one (1) groupof persons, irrespective of number, throughtraditional deposits, or issuance of debt orequity securities; and make available/lendthese funds to another person or entity, andin the process acquire debt or equitysecurities;b. Use principally the funds receivedfor acquiring various types of debt or equitysecurities;c. Borrow against, or lend on, or buyor sell debt or equity securities;d. Hold assets consisting principally ofdebt or equity securities such as promissorynotes, bills of exchange, mortgages, stocks,bonds, and commercial papers;e. Realize regular income in thenature of, but need not be limited to,interest, discounts, capital gains,underwriting fees, guarantees, fees,commissions, and service fees, principallyfrom transactions in debt or equitysecurities or by being an intermediarybetween suppliers and users of funds.Non-banking financial intermediariesshall include the following:(1) A person or entity licensed and/orregistered with any government regulatorybody as a non-bank financial intermediary,such as investment house (IH), investmentcompany, financing company, securitiesdealer/broker, lending investor (IH),pawnshop, money broker, fund manager,cooperative, insurance company, nonstocksavings and loan association (NSSLA)and building and loan association.(2) A person or entity which holds itselfout as a non-banking financial intermediary,such as by the use of a business name,which includes the term financing, finance,investment, lending and/or any word/phrase of similar import which connotesfinancial intermediation, or an entity whichadvertises itself as a financial intermediaryand is engaged in the function(s) wherefinancial intermediation is implied.(3) A person or entity performing anyof the functions enumerated in Items "a"to "e" of this Subsection.§ 4101Q.2 Guidelines on lendercount. The following guidelines shallgovern lender count on borrowings orfunds mobilized by non-bank financialintermediaries:a. For purposes of ascertaining thenumber of lenders/placers to determinewhether or not a non-bank financialintermediary is engaged in quasi-bankingfunctions, the names of payees on the faceof each debt instrument shall serve as theprimary basis for counting the lenders/placers except when proof to the contraryis adduced such as the official receipts ordocuments other than the debt instrumentitself. In such case the actual/real lenders/placers as appearing in such proof, shallbe the basis for counting the number oflenders/placers.In a debt instrument issued to two (2)or more named payees under an and/orand or arrangement, the number of payeesappearing on the instrument shall be the basisfor counting the number of lenders/ placers:Provided, however, That a debt instrumentissued in the name of a husband and wifefollowed by the word spouses, whetherunder an and, and/or or or arrangement orin the name of a designated payee underan in trust for (ITF) arrangement, shall becounted as one (1) borrowing/placement.b. Each debt instrument payable tobearer shall be counted as one (1) lender/placer except when the non-bank financialintermediary can prove that there is onlyone (1) owner for several debt instrumentsso payable.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 2

§§ 4101Q.2 - 4101Q.308.12.31c. Two (2) or more debt instrumentsissued to the same payee, irrespective of thedate and amount shall be counted as one(1) borrowing or placement.d. Debt instruments underwritten byIHs or traded by securities dealers/brokerswhether on a firm, standby or best effortsbasis shall be counted on the basis of thenumber of purchasers thereof and shall notbe treated as having been issued solely tothe underwriter or trader: Provided,however, That in case of unsold debtinstruments in a firm commitmentunderwriting, the underwriter shall becounted as a lender.e. Each buyer, assignee, and/orindorsee shall be counted in determiningthe number of lenders/placers of fundsmobilized through sale, assignment,and/or indorsement of securities, orreceivables on a without recourse basis,whenever the terms and/or attendantdocumentation, practice, or circumstancesindicate that the sale, assignment, and/orindorsement thereof legally obligates thenon-bank financial intermediary torepurchase or reacquire the securities/receivables sold, assigned, indorsed or topay the buyer, assignee, or indorsee at somesubsequent time.f. Funds obtained by way of advancesfrom stockholders, directors, officers,regardless of nature, shall be consideredborrowed funds or funds mobilized andsuch stockholders, directors or officers shallbe counted in determining the number oflenders/placers.§ 4101Q.3 Transactions notconsidered quasi-banking. The followingshall not constitute quasi-banking:a. Borrowing by commercial, industrialand other non-financial companies, throughthe means listed in Sec. 4101Q for the limitedpurpose of financing their own needs or theneeds of their agents or dealers; andb. The mere buying and selling withoutrecourse of instruments mentioned in Sec.4101Q: Provided, That:(1) The institution selling withoutrecourse shall indicate or stamp inconspicuous print on the instrument/s, aswell as on the confirmation of sale (COS),the phrase without recourse or sansrecourse and the following statement:(Name of financial intermediary)assumes no liability for the payment,directly or indirectly, ofthis instrument.(2) In the absence of the phrase withoutrecourse or sans recourse and theabove- required accompanying statement,the instrument so issued, endorsed oraccepted shall automatically be consideredas falling within the purview of the rules onquasi-banking.Provided, further, That any of the followingpractices or practices similar and/ortantamount thereto in connection with awithout recourse transaction renders suchtransaction as with recourse and within thepurview of the rules on quasi-banking.(i) Issuance of postdated checks by afinancial intermediary, whether for its ownaccount or as an agent of the debt instrumentissuer, in payment of the debt instrument sold,assigned or transferred without recourse;(ii) Issuance by a financial intermediaryof any form of guaranty on sale transactionsor on negotiations or assignment of debtinstruments without recourse; or(iii) Payment with the funds of thefinancial intermediary which assigned, soldor transferred the debt instrument withoutrecourse, unless the financial intermediarycan show that the issuer has with the saidfinancial intermediary funds correspondingto the amount of the obligation.Any IH violating the provisions of thisSubsection shall be subject to the sanctionsprovided in Sections 12 and 16 of P.D. No.129, as amended.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 3

§ 4101Q.411.12.31§ 4101Q.4 Delivery of securitiesa. Securities sold on a withoutrecourse basis allowed under Subsec.4101Q.3(b) shall be delivered physically tothe purchaser, or to his designated custodianduly accredited by the BSP, if certificated,or by means of book-entry transfer to theappropriate securities account of thepurchaser or his designated BSP accreditedcustodian in a registry for said securities, ifimmobilized or dematerialized, while the COSor document of conveyance by the seller shallbe physically delivered to the purchaser. Thecustodian shall hold the securities in the nameof the buyer: Provided, That a QB/other entityauthorized by the BSP to performcustodianship function may not be allowedto be custodian of securities issued or sold ona without recourse basis by said non-bankfinancial institution (NBFI), its subsidiaries oraffiliates, or of securities in bearer form.The delivery shall be effected uponpayment and shall be evidenced by asecurities delivery receipt duly signed by theauthorized officer of the custodian anddelivered to the purchaser.Sanctions. Violation of any provision ofthis Subsection shall be subject to thefollowing sanctions/penalties:(1) Monetary penaltiesFirst offense - Fine of P10,000 a day foreach violation reckoned from the date theviolation was committed up to the date itwas corrected.Subsequent offenses - Fine of P20,000a day for each violation reckoned from thedate the violation was committed up to thedate it was corrected.(2) Other sanctionsFirst offense - Reprimand for the directors/officers responsible for the violation.Subsequent offense -(a) Suspension for ninety (90) dayswithout pay of directors/officers responsiblefor the violation;(b) Suspension or revocation of theaccreditation to perform custodianship function;(c) Suspension or revocation of theauthority to engage in quasi-bankingfunction; and/or(d) Suspension or revocation of theauthority to engage in trust and otherfiduciary business.b. The guidelines to implement thedelivery by the seller of securities to thebuyer or to his designated third partycustodian are shown in Appendix Q-38.Sanctions. Without prejudice to thepenal and administrative sanctions providedfor under Sections 36 and 37, respectivelyof R.A. No. 7653 (The New Central BankAct), violation of any provision of theguidelines in Appendix Q-38 shall be subjectto the following sanctions/penaltiesdepending on the gravity of the offense:(a) First offense -(1) Fine of up to P10,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected; and(2) Reprimand for the directors/officersresponsible for the violation.(b) Second offense -(1) Fine of up to P20,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected; and(2) Suspension for ninety (90) dayswithout pay of directors/officers responsiblefor the violation.(c) Subsequent offenses -(1) Fine of up to P30,000 a day for theinstitution for each violation from the datethe violation was committed up to the dateit was corrected;(2) Suspension or revocation of theauthority to act as securities custodian and/or registry; and(3) Suspension for 120 days without payof the directors/officers responsible for theviolation.(As amended by Circular No. 714 dated 10 March 2011, M-2007-002dated 23 January 2007, M-2006-009 dated 18 July 2006, M-2006 -002dated 05 June 2006 and Circular No. 524 dated 31 March 2006)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 4

§§ 4101Q.5 - 4101Q.608.12.31§ 4101Q.5 Securities custodianshipoperationsa. Securities sold on a withoutrecourse basis shall be delivered to thepurchaser, or to his designated custodianduly accredited by the BSP: Provided , Thata bank/other entity authorized by the BSP toperform custodianship function may not beallowed to be custodian of securities issuedor sold on a without recourse basis by saidQB/entity, its subsidiaries or affiliates, or ofsecurities in bearer form. Existing securitiesbeing held under custodianship by QB/otherentities under BSP supervision, which arenot in accordance with said regulation, musttherefore, be delivered to a BSP accreditedthird party custodian. However, banks andother FIs under BSP supervision maymaintain custody of existing securities oftheir clients who are unable or unwilling totake delivery pursuant to the provisions ofthis Subsection but who declined to delivertheir existing securities to a BSP accreditedthird party custodian subject to thefollowing conditions:(1) the custody arrangements withclients have been in existence prior to 05November 2004 (effectivity date of CircularNo. 457 dated 14 October 2004);(2) the dealing bank/NBFI under BSPsupervision had been informed in writingby the client that he is not willing to havehis existing securities delivered to a thirdparty custodian;(3) any BSP regulated institution shallnot enter into securities transactions with aclient who has outstanding securities notdelivered to a BSP accredited third partycustodian; and(4) it shall be the responsibility of anyBSP regulated institution to satisfy itself thatthe person purchasing securities from it hasno outstanding securities holdings whichwere not delivered to a BSP accredited thirdparty custodian.b. Sanctions. Without prejudice to thepenal and administrative sanctions providedfor under Sections 36 and 37, respectively,of R.A. No. 7653, violation of any provisionof this Subsection shall be subject to thefollowing sanctions/penalties:(1) First offense -(a) Fine of up to P10,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected; and(b) Reprimand for the directors/officersresponsible for the violation.(2) Second offense -(a) Fine of up to P20,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected; and(b) Suspension for ninety (90) dayswithout pay of directors/officers responsiblefor the violation.(3) Subsequent offenses -(a) Fine of up to P30,000 a day for theinstitution for each violation from the datethe violation was committed up to the dateit was corrected;(b) Suspension or revocation of theauthority to act as securities custodian and/or registry; and(c) Suspension for 120 days without payof the directors/officers responsible for theviolation.§ 4101Q.6 Sale, discounting, assignmentor negotiation by quasi-banks of their creditrights arising from claims against the BangkoSentral to clients. Pursuant to the policy ofthe BSP to promote investor protection andtransparency in securities transactions asimportant components of capital marketsdevelopment, credit rights in SpecialDeposit Account (SDA) placements andreverse repo agreements with the BSP, shallnot be the subject of sale, discounting,assignment or negotiation on a with orwithout recourse basis.Any violation of the provisions of thisSubsection shall be considered a lessserious offense and shall subject the QB andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 5

§§ 4101Q.6 - 4102Q.108.12.31the director/s and/or officer/s concerned tothe sanctions provided under Sec. 4199Q.(Circular No. 636 dated 17 December 2008)§ 4101Q.7 (2008 - 4655Q) Applicabilityof rules governing universal banks to quasibanks.In case of conflict between rulesapplicable to banks with universal bankingauthority and those applicable to QBs inactivities where they perform the samefunctions, the rules governing banks withuniversal banking authority shall prevail.B. ESTABLISHMENT ANDORGANIZATIONSec. 4102Q Statement of Policy. It is thepolicy of the BSP to promote thedevelopment of the domestic financialmarket so as to foster a sound, efficient andinclusive financial system fully supportiveof sustainable economic growth. Towardsthis end, the grant of authority to engage inquasi-banking functions to IHs and financecompanies shall be allowed subject to thefollowing conditions:a. That quasi-banking activities shall beundertaken by the institution concerned topursue its core business, i.e., underwritingof securities of other corporations and of thegovernment or its instrumentalities,participating as soliciting dealer or sellinggroup member in tender offers, block sales,or exchange offering of securities, anddealing in options, rights or warrants relatingto securities and such other powers whicha dealer may exercise under the SecuritiesRegulation Code (SRC), in the case of IHs,and discounting or factoring commercialpapers or accounts receivable, or by buyingand selling contracts, leases, chattelmortgages (CHMs), or other evidences ofindebtedness, or by leasing of motorvehicles, heavy equipment and industrialmachinery, business and office machinesand equipment, appliances and othermovable property, or granting business andconsumer loans, in the case of financecompanies;b. That the institution concerned shallfully inform investors of the nature of a depositsubstitute instrument, e.g., that it is not coveredby the Philippine Deposit InsuranceCorporation (PDIC), that pre-terminationthereof is subject to penalty, where applicable,and such other material risks involved ininvesting in such instrument; andc. That the institution concerned shallconduct effective investor suitability testingprocedures.(Circular No. 557 dated 12 January 2007)§ 4102Q.1 Preconditions for theexercise of quasi-banking functions. Noperson or entity shall engage in quasibankingfunctions without authority fromthe BSP. Only a duly incorporated IH andfinance company may undertake or performquasi-banking functions as defined inSection 4101Q. An institution securing BSPauthority to engage in quasi-bankingfunctions must meet the followingrequirements:a. It must have complied with theminimum adjusted capital accounts of atleast P300.0 million or such amounts asmay be required by the Monetary Board inthe future;b. It has generally complied withapplicable laws, rules and regulations,orders or instructions of appropriateauthority, including the Monetary Board and/or BSP Management where applicable;c. Its accounting records, systems andprocedures as well as internal controlsystems are satisfactorily maintained;d. It does not have float itemsoutstanding for more than sixty (60) calendardays in the “Due From/To Head Office/Branches/Offices” accounts exceeding onepercent (1%) of the total resources as of endof preceding month;e. It has no past due obligation withany FI as of date of application;Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 6

§§ 4102Q.1 - 4103Q08.12.31f. The officers who will be in-chargeof the quasi-banking operations have actualexperience of at least two (2) years in a bankor QB as in-charge (or at least as assistantin-charge).The directors of the institution,officer-in-charge of the quasi-bankingoperations and the managerial staff mustcomply with the fit and proper rule prescribedunder existing law/rules and regulations;g. The institution has elected at leasttwo (2) independent directors and all itsdirectors have attended the required seminarfor directors of QBs conducted or accreditedby the BSP;h. It has not engaged in unsafe andunsound practices during the past six (6)months immediately preceding the date ofapplication where applicable;i. It must have in place a comprehensiverisk management system approved by its boardof directors appropriate to its operationscharacterized by a clear delineation ofresponsibility for risk management, adequaterisk measurement systems, appropriatelystructured risk limits, effective internal controland complete, timely and efficient riskreporting systems. In this connection, a manualof operations and other related documentsembodying the risk management system mustbe submitted to the appropriate departmentof the Supervision and Examination Sector(SES) at the time of application for authorityand within thirty (30) days from updates.(As amended by Circular No. 557 dated 12 January 2007)Sec. 4103Q Application for a Certificateof Authority from the Bangko Sentral 1 . Aninstitution securing BSP’s Certificate ofAuthority to engage in quasi-banking functionsshall file an application with the appropriatedepartment of the SES. The application shallbe signed by the president or officer ofequivalent rank of the institution and shall beaccompanied by the following documents:a. Certified true copy of the resolutionof the board of directors of the institutionauthorizing the application;b. A certification signed by thepresident or officer of equivalent rank that:(1) the institution has complied with allconditions/prerequisites for the grant ofauthority to engage in quasi-bankingfunctions;(2) quasi-banking functions shall bepursued/undertaken by the institution in thefurtherance of its core business, e.g.,underwriting of and dealing in securities ofother corporations and of the governmentor its instrumentalities, in the case of IHs,and leasing and/or discounting/factoringcommercial papers or accounts receivable,or granting business and consumer loans,in the case of finance companies;(3) investors shall be informed thattheir investments/placements are notinsured by the PDIC and that any preterminationthereof shall be subject topenalty, if applicable, as well as all othermaterial risks; and(4) investors shall be subjected toeffective investor suitability testingprocedures;c. An information sheet;d. Bio-data signed under oath, of themembers of the managerial staff who willundertake quasi-banking operations; ande. Borrowing-investment program forone (1) year, and annually thereafter on orbefore November 30, which should includeat the minimum:(1) planned distribution of portfolios asto:(a) underwriting;(b) commercial papers;(c) stocks and bonds;(d) government securities(GS);(e) receivables financing, discountingand factoring;(f) leasing; and(g) direct loans;(2) expected sources of funds to supportinvestment program classified as to:(a) maturity: short, medium andlong-term;1See SEC Circular Nos. 5 dated 17 July 2008, 3 dated 16 February 2006 and 14 dated 24 October 2000.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 7

§§ 4103Q - 4107Q08.12.31(b) interest rates; and(c) domestic or foreign sources whetherinstitutional or personal.The foregoing requirement shall alsoapply to QBs existing as of 03 February2007.Transitory provisions. IHs and financecompanies authorized to engage and areactually performing quasi-banking functionsbut do not meet the new capital requirementare hereby given a period of two (2) yearsreckoned from 03 February 2007 withinwhich to comply with the minimum capitalrequirement in Subsec. 4102Q.1(a):Provided, That this may be substituted by acapital build-up program for a period of notmore than three (3) years which must beapproved by the Monetary Board. Suchcapital build-up program shall be in equalannual or diminishing amounts; and shallbe submitted to the appropriate departmentof the SES within three (3) months from03 February 2007. QBs which fail tocomply with the required capitalizationupon expiration of said two (2) year periodgiven them or those which fail to complywith the approved capital build-up programshall liquidate their quasi-bankingoperations within one (1) year from saiddeadlines and their licenses shall beconsidered revoked/cancelled.The licenses of existing QBs not actuallyperforming quasi-banking functions whichdo not meet the required minimumcapitalization provided in Subsec.4102Q.1(a) on 03 February 2007 shall beautomatically revoked.(As amended by CL-2008-078 dated 15 December 2008,CL-2008-053 dated 21 August 2008, CL-2008-007 dated05 February 2008 and Circular No. 557 dated 12 January 2007)Sec. 4104Q Issuance of Bangko SentralCertificate of Authority. The BSP shall issuea Certificate of Authority upon proof thatthe applicant has complied with therequirements of Secs. 4102Q and 4103Qand of pertinent laws and regulations.In the case of a merger or consolidationof two (2) or more QBs, the authority shallcontinue to have full force and effect. Fordocumentation purposes, in the case of amerger, the Certificate of Authority of theabsorbing corporation shall be maintained;and with respect to consolidation, a newcertificate shall be issued to the newcorporation. The Certificate of Authority of theabsorbed corporation in a merger and thecertificates of the consolidated corporationsin a consolidation shall be surrendered to theappropriate department of the BSP.Sec. 4105Q Licensing of an InvestmentHouse. Applications for license as an IHreferred to the BSP by the Securities andExchange Commission (SEC) pursuant to P.D.No. 129 shall be evaluated in accordance withthe Guidelines to Evaluate Investment Housesprescribed in Appendix Q-1.Sec. 4106Q (2008 - 4656Q) Basic LawsGoverning Investment Houses andFinancing Companies. The following are thebasic laws governing investment houses(IHs) and financing companies:a. IHs. P.D. No. 129, as amended,known as The Investment Houses Law,governs the establishment, operation andregulation of IHs. To effectively carry outthe provisions of this Decree, the SEC,pursuant to the powers vested in it by saidDecree, promulgated basic rules andregulations (Appendix Q-18) to implementthe provisions of the Decree.b. Financing companies. R.A. No.8556, known as The Financing CompanyAct of 1998, regulates the organization andoperation of financing companies. Toeffectively carry out the provisions of thisAct, the SEC, pursuant to the powers vestedin it under said Act, promulgated basic rulesand regulations to implement the provisionsof the Act (Appendix Q-19).Sec. 4107Q (Reserved)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 8

§§ 4108Q - 4108Q.309.12.31C. MERGER/CONSOLIDATIONSec. 4108Q (2008 - 4111Q) Merger/Consolidation Involving Quasi-Banks. Themerger/ consolidation of QBs is encouragedto meet minimum capital requirements andto develop larger and stronger FIs. QBswhich are IHs are likewise encouraged tomerge with banks to obtain authority toperform expanded commercial bankingfunctions.Mergers/consolidations involving QBsshall comply with the provisions ofapplicable law and shall be subject toapproval by the BSP.For purposes of merger andconsolidation of QBs, the followingdefinitions shall apply:a. Merger is the absorption of one (1)or more corporations by another existingcorporation, which retains its identity andtakes over the rights, privileges, franchises,and properties, and assumes all theliabilities and obligations of the absorbedcorporation(s) in the same manner as if ithad itself incurred such liabilities orobligations. The absorbing corporationcontinues its existence while the life or livesof the other corporation(s) is/are terminated.b. Consolidation is the union of two(2)or more corporations into a single newcorporation, called the consolidatedcorporation, all the constituent corporationsthereby ceasing to exist as separate entities.The consolidated corporation shallthereupon and thereafter possess all therights, privileges, immunities, franchisesand properties, and assume all the liabilitiesand obligations of each of the constituentcorporations in the same manner as if it haditself incurred such liabilities or obligations.§ 4108Q.1 Requirement of BangkoSentral approval. Mergers and consolidationsinvolving QBs shall comply with theprovisions of applicable law and shall besubject to approval by the BSP.The guidelines and procedures in theapplication for merger/consolidation asshown in Appendix Q -51 shall be observedby QBs.(M-2009-028 dated 12 August 2009)§ 4108Q.2 (Reserved)§ 4108Q.3 (2008 - 4112Q) Merger/consolidation incentives. In pursuance ofthe policy to promote mergers andconsolidations among banks and otherfinancial intermediaries as a means todevelop larger and stronger FIs, constituententities may, subject to BSP approval, availthemselves of any or all of the followingincentives:a. Revaluation of premises,improvements and equipment of theinstitutions: Provided, That such revaluationshall be based on fair valuation of theproperty conducted by a reputable appraisalcompany which shall be subject to reviewand approval by the BSPThe following rules shall govern therevaluation of assets:(1) The revaluation of the QB’spremises, improvements and equipmentshall be allowed only to all institutionsparticipating in a merger/consolidation ifall of them belong to the same category,or at least two (2) of them belong to thehighest category among the merging/consolidating institutions.(2) In case the merging/consolidatinginstitutions do not belong to the samecategory or only one (1) of them falls underthe highest category, all of them may beallowed to revalue their premises,improvements and equipment: Provided,That the amount of appraisal incrementresulting from such revaluation shall belimited to the amount of the total resourcesof the institution belonging to the lowercategory or categories.(3) The appraisal increment resultingfrom the revaluation shall form part of capitalManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page - 9

§ 4108Q.308.12.31for purposes of determining the singleborrower’s limit and capital-to-risk assetsratio. The use of appraisal increment for cashdividend shall be governed by the provisionsof the Corporation Code.(4) The revaluation of premises,improvements, and equipment of theinstitution as well as the recognition ofgoodwill as an incentive to mergers/consolidations shall only be allowed if thefollowing conditions are met:(i) The surviving or consolidated entitywill meet the existing capital requirementsafter all adjustments are taken up in thebooks of accounts of the merging/consolidating entities but before consideringappraisal increments and goodwill, or therewill be infusion of fresh capital to meet saidexisting capital requirements; and(ii) The merger/consolidation will resultin a more viable FI as a result of cost savingsand improve competitive position.In case of purchase or acquisition of themajority or all of the outstanding shares ofstock of a QB, the same conditions must besatisfied.b. Unbooked valuation reserves basedupon BSP examination and other capitaladjustments resulting from the merger/consolidation may be booked on staggeredbasis over a maximum period of five (5)years.The following guidelines shall governthe staggered booking of valuation reserves:(1) The booking on staggered basis overa maximum period of five (5) years ofunbooked valuation reserves based uponexamination by the BSP may be allowed toall institutions participating in a merger/consolidation if all of them belong to thesame category, or at least two (2) of thembelong to the highest category among themerging/consolidating institutions.(2) In case the merging/consolidatinginstitutions do not belong to the samecategory or only one (1) of them falls underthe highest category, all of them may beallowed to book the required valuationreserves based upon examination by the BSPon a staggered basis over a maximumperiod of five (5) years: Provided, That theaggregate amount of the required valuationreserves shall be limited to the amount ofthe total resources of the institutionbelonging to the lower category orcategories.c. If by reason of merger/consolidation, the resulting QB is unableto comply fully with the prescribed networth-to-risk assets ratio, the MonetaryBoard may, at its discretion, temporarilyrelieve the QB from full compliance withthis requirement under such conditions asit may prescribe;In the case of purchase or acquisitionof majority or all of the outstanding sharesof a QB by a bank/another QB, therevaluation of assets and the booking of therequired valuation reserves based uponexamination by the BSP over a period offive (5) years shall be allowed only if suchpurchase or acquisition is for the purposeof rehabilitating the former QB: Provided,That the revaluation of assets and staggeredbooking of reserves shall be allowed in fullonly if the purchaser is another QB and boththe QBs belong to the same category.Otherwise, only the QB being acquired/rehabilitated shall be allowed to recognizein full the appraisal increment resulting fromrevaluation of assets and to book valuationreserves on a staggered basis, while in thecase of the acquiring bank/QB, the appraisalincrement resulting from revaluation ofassets and the privilege of staggered bookingof valuation reserves shall each be limitedto the amount of the total resources of theQB being acquired/rehabilitated.d. Conversion or upgrading of theexisting head offices, branches and/or otheroffices of the merged/absorbed institutionsinto branches of the new or surviving FI;e. (Deleted by Cir. No. 494 dated20 September 2005)Q RegulationsPart I - Page - 10Manual of Regulations for Non-Bank Financial Institutions

§ 4108Q.308.12.31f. Relocation of branches/offices maybe allowed within one (1) year from date ofmerger/consolidation in cases where themerger/consolidation resulted in duplicationof branches/offices in a service area, or insuch other cases/circumstances as theMonetary Board may prescribe;g. Outstanding penalties in legalreserve deficiencies and interest onoverdrafts with the BSP as of the date ofmerger/consolidation may be paid ininstallments over a period of one (1) year;h. Restructuring/plan of payment of pastdue obligations of the proponents with the(Next page is Part I - Page 11)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page - 10a

§§ 4108Q.3 - 4113Q08.12.31BSP as of the date of merger/consolidationover a period not exceeding ten (10) years;i. Subject to approval of the MonetaryBoard, concurrent officerships between amerged/consolidated bank/FI and anotherbank/FI may be allowed; andj. Any right or privilege granted amerging bank under a rehabilitationprogram previously approved by theMonetary Board or under any specialauthority previously granted by theMonetary Board shall continue to be ineffect.The revaluation of assets and staggeredbooking of valuation reserves shall beavailable for a period of two (2) years from19 February 1999 while the rest of theincentives enumerated under Subsec.4108Q.3 shall be available for a period ofthree (3) years from 31 August 1998.The foregoing incentives may also begranted in cases of purchases or acquisitionsof majority or all of the outstanding sharesof stock of a QB.Secs. 4109Q - 4110Q (Reserved)D. CAPITALIZATIONSec. 4111Q (2008 - 4106Q) MinimumRequired Capitalization. A QB shall havea minimum combined capital accounts ofP300.0 million.Combined capital accounts shall meanthe total of capital stock, retained earningsand profit and loss summary, net of (a) suchunbooked valuation reserves and othercapital adjustments as may be required bythe BSP, (b) total outstanding unsecuredcredit accommodations, both direct andindirect, to directors, officers, allstockholders and their related interests(DOSRI) and, (c) unsecured loans, othercredit accommodations and guaranteesgranted to subsidiaries and affiliates. Withrespect to Item “b” hereof, the provisionsof Sec. 4326Q shall apply except that in thedefinition of stockholders in Subsec.4326Q.1, the qualification that hisstockholdings, individually and/or togetherwith his related interests in the lending QB,amount to ten percent (10%) or more of thetotal subscribed capital stock of the QB,shall not apply for purposes of this Item.Any appraisal surplus or appreciation creditas a result of appreciation or an increase inbook value of the assets of the QB shall beexcluded, except in the case of merger andconsolidation, where the appraisalincrement resulting from the revaluationshall form part of capital for purposes ofdetermining single borrower’s limit andcapital-to-risk assets ratio.Any foreign equity shall be registeredwith and approved by the Board ofInvestments and the appropriate departmentof the BSP.(As amended by Circular No. 560 dated 31 January 2007)Sec. 4112Q (2008 - 4107Q) MinimumCapital of Investment House. The minimumpaid-in capital requirement for an IH shallbe P300 million pursuant to R.A. No. 129,as amended by R.A. No. 8366.Secs. 4113Q (2008 - 4108Q) SanctionsAny or all of the following sanctions maybe imposed on any QB which fails tomaintain at least the applicable minimumcapital under Secs. 4111Q and 4112Q:(1) Suspension of authority to engage inquasi-banking functions;(2) Suspension of authority to engage intrust/investment management activities (inthe case of an IH);(3) Cease-and-desist order (in the caseof an IH);(4) No new/renewal/extension of creditaccommodations to DOSRI;(5) Prohibition against declaration ofcash dividends;(6) Suspension of the privilege toestablish and/or open approved branches,agencies, offices, etc.; and(7) Other sanctions as may be imposedby the Monetary Board.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 11

§§ 4114Q - 4116Q.211.12.31Sec. 4114Q (Reserved)E. RISK-BASED CAPITALSec. 4115Q (2008 - 4116Q) Basel II Risk-BasedCapital. The guidelines implementing therevised risk-based capital adequacy frameworkfor the Philippine banking system to conform toBasel II recommendations is provided inAppendix Q-46b. These guidelines apply to allUniveral Banks (UBs) and commercial Banks(KBs), as well as their subsidiary banks and QBs.The risk-based capital ratio of a QB,expressed as a percentage of qualifying capitalto risk-weighted assets, shall not be less thanten percent (10%) for both solo basis (head officeplus branches) and consolidated basis (parentQB plus subsidiary financial allied undertakings,but excluding insurance companies).The ratio shall be maintained daily. This shallbe effective 01 January 2004.(As amended by Circular Nos. 716 dated 25 March 2011, 709 dated10 January 2011, 588 dated 11 December 2007, M-2007-019 dated21 June 2007, Circular Nos. 560 dated 31 January 2007 and 538dated 04 August 2006)§ 4115Q.1 (2008 - 4116Q) Scope. The BaselII guidelines apply to all UBs and KBs as well astheir subsidiary banks and QBs.§ 4115Q.2 (Reserved)Sec. 4116Q Basel I Risk-Based Capital. Therisk-based capital ratio of a QB, expressed as apercentage of qualifying capital to risk-weightedassets, shall not be less than ten percent (10%)for both solo basis (head office plus branches)and consolidated basis (parent QB plussubsidiary financial allied undertakings, butexcluding insurance companies).(As amended by Circular No. 588 dated 11 December 2007,M-2007-019 dated 21 June 2007, Circular Nos. 560 dated 31 January2007 and 538 dated 04 August 2006)§ 4116Q.1 Scope. QBs that are notsubsidiaries of UBs or KBs shall continue to besubject to the risk-based capital adequacyframework, as provided below as well asSubsecs. 4116Q.1 to 4116Q.6.§ 4116Q.2 (2008 - 4116Q.1) Qualifyingcapital. The qualifying capital shall be the sumof -a. Tier 1 (core) capital -(1) Paid-up common stock;(2) Paid-up perpetual and non-cumulativepreferred stock;(3) Common stock dividendsdistributable;(4) Perpetual and non-cumulative preferredstock dividends distributable;(5) Surplus;(6) Surplus reserves;(7) Undivided profits; and(8) Minority interest in the equity ofsubsidiary financial allied undertakings whichare less than wholly-owned: Provided, That aQB shall not use minority interests in theequity accounts of consolidated subsidiariesas avenue for introducing into its capitalstructure elements that might not otherwisequalify as Tier 1 capital or that would, in effect,result in an excessive reliance on preferredstock within Tier 1:Provided, further, That the following items shallbe deducted from the total of Tier 1 capital:(a) Common stock treasury shares;(b) Perpetual and non-cumulative preferredstock treasury shares;(c) Net unrealized losses on underwrittenlisted equity securities purchased (for IH);(d) Unbooked valuation reserves andother capital adjustments based on the latestreport of examination as approved by theMonetary Board;(e) Total outstanding unsecured creditaccommodations, both direct and indirect, toDOSRI;Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 12

§ 4116Q.211.12.31(f) Unsecured loans, other creditaccommodations and guarantees granted tosubsidiaries and affiliates;(g) Deferred income tax; and(h) Goodwill.b. Tier 2 (supplementary) capital whichshall be the sum of -(1) Upper Tier 2 (UT2) capital -(a) Paid-up perpetual and cumulativepreferred stock;(b) Perpetual and cumulative preferredstock dividends distributable;(c) Appraisal increment reserve - QBpremises, as authorized by the Monetary Board;(d) Net unrealized gains on underwrittenlisted equity securities purchased: Provided, Thatthe amount thereof that may be included in UT2capital shall be subject to a fifty-five percent (55%)discount (for IH);(e) General loan loss provision: Provided,That the amount thereof that may be includedin UT2 capital shall be limited to a maximum ofone and twenty-five hundredths percent (1.25%)of gross risk-weighted assets, and any amount inexcess thereof shall be deducted from the totalrisk-weighted assets in computing thedenominator of the risk-based capital ratio;(f) With prior BSP approval, unsecuredsubordinated debt (UnSD) with a minimumoriginal maturity of at least ten (10) years, subjectto the following conditions:(i) It must not be secured nor covered by aguarantee of the issuer or related party;(ii) It must be subordinated in the right ofpayment of principal and interest to all creditorsof the QB, except those creditors expressed torank equally with, or behind holders of the debt.Subordinated creditors must waive their right toset off any amounts they owe the QB againstsubordinated amounts owed to them by the QB.The issue documentation must clearly state thatthe debt is subordinated;(iii) It must be fully paid-up. Only thenet proceeds actually received from debtissues can be included as capital. If the debt isissued at a premium, the premium cannot becounted as part of capital;(iv) It must not be redeemable at the initiativeof the holder;(v) It must not contain any clause whichrequires acceleration of payment of principal,except in the event of insolvency;(vi) It must not be repayable prior to maturitywithout the prior consent of the BSP: Provided,That repayment may be allowed in connectionwith call option only after a minimum of five (5)years from issue date and only if – (1) the QB’scapital ratio is at least equal to the requiredminimum capital ratio; and (2) the debt issimultaneously replaced with issues of newcapital which is neither smaller in size nor oflower quality than the original issue;(vii) It may allow a moderate step-up in theinterest rate in conjunction with a call option,only if the step-up occurs at a minimum of ten (10)years after the issue date and if it results in anincrease over the initial rate that is not more than100 basis points: Provided, That only one (1) ratestep up shall be allowed over the life of theinstrument;(viii) It must provide for possible conversioninto common shares or preferred shares orpossible deferral of payment of principal andinterest if the QB’s capital ratio becomes lessthan the required minimum capital ratio;(ix) It must provide for the principal andinterest on the debt to absorb losses where theQB would not otherwise be solvent;(x) It must allow deferment of interestpayment on the debt in the event of, and at thesame time as, the elimination of dividends onall outstanding common or preferred stock ofthe issuer. It is acceptable for the deferred interestto bear interest, but the interest rate payable ondeferred interest should not exceed market rates;(xi) It must be underwritten by a third partynot related to the issuer QB nor acting inreciprocity for and in behalf of the issuer QB;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 13

§ 4116Q.211.12.31(xii) It must be issued in minimumdenominations of at least P500,000 or itsequivalent; and(xiii) It must clearly state on its face thatit is not a deposit and is not insured by thePDIC:Provided, That it shall be subject to acumulative discount factor of twenty percent(20%) per year during the last five (5) years tomaturity [i.e., twenty percent (20%) if theremaining life is four (4) years to less than five(5) years, forty percent (40%) if the remaininglife is three (3) years to less than four (4) years,etc.]: Provided, further, That where it isdenominated in a foreign currency, it shall berevalued periodically (at least monthly) inPhilippine peso at prevailing exchange rate usingthe same exchange rate used for revaluation offoreign currency-denominated assets, liabilitiesand forward contracts under existing regulations:Provided furthermore, That, for purposes ofreserve requirement regulation, it shall not betreated as a deposit substitute liability or otherforms of borrowings;(g) Deposit for common stock subscription;and(h) Deposit for perpetual and noncumulativepreferred stock subscription: Provided,That the following items shall be deducted fromthe total of UT2 capital:(i) Perpetual and cumulative preferredstock treasury shares;(2) Lower Tier 2 (LT2) capital -(a) Paid-up limited life redeemablepreferred stock: Provided, That these shall besubject to a cumulative discount factor of twentypercent (20%) per year during the last five (5)years to maturity [i.e., twenty percent (20%) ifthe remaining life is four (4) years to less thanfive (5) years, forty percent (40%) if theremaining life is three (3) years to less than four(4) years, etc.];(b) Limited life redeemable preferred stockdividends distributable;(c) With prior BSP approval, UnSD with aminimum original maturity of at leastfive (5) years, subject to the followingconditions:(i) It must not be secured nor coveredby a guarantee of the issuer or related party;(ii) It must be subordinated in the rightof payment of principal and interest to allcreditors of the QB, except those creditorsexpressed to rank equally with, or behindholders of the debt. Subordinated creditorsmust waive their right to set off any amountsthey owe the QB against subordinatedamounts owed to them by the QB. The issuedocumentation must clearly state that thedebt is subordinated;(iii) It must be fully paid-up. Only the netproceeds actually received from debt issues canbe included as capital. If the debt is issued at apremium, the premium cannot be counted aspart of capital;(iv) It must not be redeemable at theinitiative of the holder;(v) It must not contain any clause whichrequires acceleration of payment of principal,except in the event of insolvency;(vi) It must not be repayable prior to maturitywithout the prior consent of the BSP: Provided,That repayment may be allowed in connectionwith call option only after a minimum of five (5)years from issue date and only if – (1) the QB’scapital ratio is at least equal to the requiredminimum capital ratio; and (2) the debt issimultaneously replaced with issues of newcapital which is neither smaller in size nor oflower quality than the original issue;(vii) It may allow a moderate step-up inthe interest rate in conjunction with a calloption, only if the step-up occurs at aminimum of five (5) years after the issue dateand if it results in an increase over the initialrate that is not more than 100 basis pointsor fifty percent (50%) of the initial creditspread, at the option of the bank: Provided,That only one (1) rate step up shall beallowed over the life of the instrument;(viii) It must be underwritten by a thirdparty not related to the issuer QB nor actingQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 14

§§ 4116Q.2 - 4116Q.311.12.31in reciprocity for and in behalf of the issuerQB;(ix) It must be issued in minimumdenominations of at least P500,000 or itsequivalent; and(x) It must clearly state on its face that it isnot a deposit and is not insured by the PDIC:Provided, That it shall be subject to acumulative discount factor of twenty percent(20%) per year during the last five (5) years tomaturity [i.e., twenty percent (20%) if theremaining life is four (4) years to less than five(5) years, forty percent (40%) if the remaininglife is three (3) years to less than four (4) years,etc.]: Provided, further, That where it isdenominated in a foreign currency, it shall berevalued periodically (at least monthly) inPhilippine peso using the same exchange rateused for revaluation of foreign currencydenominated assets, liabilities and forwardcontracts under existing regulations: Provided,finally, That, for purposes of reserve requirementregulation, it shall not be treated as equivalentto a deposit substitute liability or other forms ofborrowings; and(d) Deposit for perpetual and cumulativepreferred stock subscription;Provided, That the following items shall bededucted from the total of Lower Tier 2 capital:(1) Limited life redeemable preferred stocktreasury shares; and(2) Sinking fund for redemption of limitedlife redeemable preferred stock: Provided, Thatthe amount to be deducted shall be limited tothe balance of redeemable preferred stock afterapplying the cumulative discount factor:Provided, further, That the total amount ofLT2 capital that may be included in the Tier 2capital shall be a maximum of fifty percent (50%)of total Tier 1 capital (net of deductionstherefrom): Provided furthermore, That the totalamount of upper and lower Tier 2 capital thatmay be included in the qualifying capital shallbe a maximum of 100% of total Tier 1 capital(net of deductions therefrom);c. Less deductions from the total of Tier 1and Tier 2 capital, as follows:(1) Investments in equity of unconsolidatedsubsidiary banks and other subsidiary financialallied undertakings, but excluding insurancecompanies (for solo basis);(2) Investments in debt capital instrumentsof unconsolidated subsidiary banks (for solobasis);(3) Investments in equity of subsidiaryinsurance companies and subsidiary nonfinancialallied undertakings;(4) Reciprocal investments in equity of otherbanks/enterprises; and(5) Reciprocal investments in unsecuredsubordinated term debt instruments of otherbanks/QBs in excess of the lower of (i) anaggregate ceiling of five percent (5%) of totalTier 1 capital of the QB; or (ii) ten percent(10%) of the total outstanding unsecuredsubordinated term debt issuance of the otherbank/QB:Provided, That any asset deducted from thequalifying capital in computing the numeratorof the risk-based capital ratio shall not beincluded in the risk-weighted assets incomputing the denominator of the ratio.Capital instruments issued by QBs starting01 January 2011 should comply with theminimum conditions specified in AppendixQ-46c in order to be eligible as Hybrid Tier 1 orLower Tier 2 capital.(As amended by Circular Nos.716 dated 25 March 2011, 709 dated10 January 2011 and 560 dated 31 January 2007)§ 4116Q.3 (2008 - 4116Q.2) Risk-weightedassets. The risk-weighted assets shall bedetermined by assigning risk weights to amountsof on-balance sheet assets and to creditequivalent amounts of off-balance sheet items(inclusive of derivative contracts): Provided, Thatthe following shall be deducted from the totalrisk-weighted assets:(1) general loan loss provision (in excess ofthe amount permitted to be included in UT2capital); and(2) unbooked valuation reserves andother capital adjustments affecting assetaccounts based on the latest report ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 15

§ 4116Q.308.12.31examination as approved by the MonetaryBoard.a. On-balance sheet assets. Therisk-weighted amount shall be the productof the book value of the asset multipliedby the risk weight associated with thatasset, as follows:(1) Zero percent (0%) risk weight(a) Cash on hand;(b) Claims on or portions of claimsguaranteed by or collateralized bysecurities issued by -(i) Philippine national government andBSP; and(ii) Central governments and centralbanks of foreign countries with the highestcredit quality as defined in Subsec. 4116Q.4;(c) Loans to the extent covered byhold-out on, or assignment of depositsubstitutes maintained with the lending QB;(d) Portions of loans covered byIndustrial Guarantee and Loan Fund (IGLF)guarantee;(e) Real estate mortgage (REM) loansto the extent guaranteed by the HomeGuaranty Corporation (HGC);(f) Loans to the extent guaranteed bythe Trade and Investment DevelopmentCorporation of the Philippines (TIDCORP);(g) Residual value of leased equipmentto the extent covered by deposits on leasecontracts (for FCs);(h) Lease contract receivables to theextent covered by the excess of depositson lease contracts over residual value ofleased equipment (for FCs); and(i) Foreign currency notes and coins onhand acceptable as international reserves;(2) Twenty percent (20%) risk weight(a) Checks and other cash items (COCIs);(b) Claims on or portions of claimsguaranteed by or collateralized bysecurities issued by non-centralgovernment public sector entities offoreign countries with the highest creditquality as defined in Subsec. 4116Q.4;(c) Claims on or portions of claimsguaranteed by Philippine incorporatedbanks/QBs with the highest credit qualityas defined in Subsec. 4116Q.4;(d) Claims on or portions of claimsguaranteed by foreign incorporated bankswith the highest credit quality as definedin Subsec. 4116Q.4;(e) Claims on or portions of claimsguaranteed by or collateralized bysecurities issued by multilateraldevelopment banks (MDBs);(f) Loans to exporters to the extentguaranteed by Small Business Guaranteeand Finance Corporation (SBGFC); and(g) Foreign currency COCIsdenominated in currencies acceptable asinternational reserves;(3) Fifty percent (50%) risk weight -(a) Loans for housing purpose, fullysecured by first mortgage on residentialproperty that is or will be occupied orleased out by the borrower; and(b) Local government unit (LGU)bonds which are covered by deed ofassignment of Internal Revenue Allotment(IRA) of the LGU and guaranteed by theLGU Guarantee Corporation;(4) One hundred percent (100%) riskweight -All other assets including, among others, thefollowing:(a) Claims on central governments andcentral banks of foreign countries other thanthose with the highest credit quality;(b) Claims on Philippine (LGUs);(c) Claims on non-central governmentpublic sector entities of foreign countries otherthan those with the highest credit quality;(d) Claims on government-owned orcontrolled commercial corporations;(e) Claims on Philippine incorporatedbanks/QBs other than those with the highestcredit quality;(f) Claims on foreign incorporated banksother than those with the highest credit quality;Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 16

§ 4116Q.308.12.31(g) Loans to companies engaged inspeculative residential building or propertydevelopment;(h) Claims on the private sector(except those deducted from capital);(i) Equity investments (except thosededucted from capital);(j) Equipment and other real estatefor lease (for FCs);(k) Real estate for sale/lease;(l) QB premises, furniture, fixturesand equipment (net);(m) Appraisal increment - QBpremises, furniture, fixtures and equipment(net);(n) Real and other properties ownedor acquired (net);(o) Foreign currency notes and coinson hand not acceptable as internationalreserves; and(p) Foreign COCIs not denominatedin foreign currencies acceptable asinternational reserves, except those whichare deducted from capital, as follows:(i) Unsecured credit accommodations,both direct and indirect, to DOSRI;(ii) Deferred income tax;(iii) Goodwill;(iv) Sinking fund for redemption oflimited life redeemable preferred stock;(v) Equity investments in unconsolidatedsubsidiary banks and other subsidiaryfinancial allied undertakings, but excludinginsurance companies;(vi) Investments in debt capitalinstruments of unconsolidated subsidiarybanks;(vii) Equity investments in subsidiaryinsurance companies and subsidiarynon-financial allied undertakings;(viii) Reciprocal investments in equityof other banks/enterprises; and(ix) Reciprocal investments inunsecured subordinated term debtinstruments of other banks/QBs, in excessof the lower of (i) an aggregate ceiling offive percent (5%) of total Tier 1 capital ofthe QB; or (ii) ten percent (10%) of the totaloutstanding unsecured subordinated termdebt issuance of the other bank/QB;b. Off-balance sheet items. Therisk-weighted amount shall be calculatedusing a two (2)-step process.First, the credit equivalent amount ofan off-balance sheet item shall bedetermined by multiplying its notionalprincipal amount by the appropriate creditconversion factor, as follows:(1) One hundred percent (100%)credit conversion factor -This shall apply to direct creditsubstitutes, e.g. general guarantees ofindebtedness and acceptances (includingendorsements with the character ofacceptances), and shall include -(a) Outstanding guarantees issuedThis shall also apply to sale and repoagreements and asset sales with recoursewhere the credit risk remains with the QB[to the extent not included in the (BS)], aswell as to forward asset purchases, andpartly-paid shares and securities, whichrepresent commitments with certaindrawdown: Provided, That these itemsshall be weighted according to the type ofasset and not according to the type ofcounterparty with whom the transactionhas been entered into.(2) Fifty percent (50%) creditconversion factor - This shall apply to -(a) Note issuance facilities andrevolving underwriting facilities (for IHs); and(b) Other commitments, e.g., formalstandby facilities and credit lines with anoriginal maturity of more than one (1) year.This shall include -(i) Underwritten accounts unsold(for IHs).(3) Zero percent (0%) creditconversion factor -This shall apply to commitments withan original maturity of up to one (1) year.This shall also apply to those notinvolving credit risk, and shall include -Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 17

§§ 4116Q.3 - 4116Q.408.12.31(a) Items held for safekeeping/custodianship;(b) Trust department accounts;(c) Items held as collaterals; etc.Second, the credit equivalent amountshall be treated like any on-balance sheetasset and shall be assigned the appropriaterisk weight, i.e., according to the obligor,or if relevant, the qualified guarantor or thenature of collateral.c. Derivative contracts. The creditequivalent amount shall be the sum of thecurrent credit exposure (or replacementcost) and an estimate of the potential futurecredit exposure (or add-on): Provided, Thatthe following shall not be included in thecomputation:(1) Instruments which are traded onexchange where they are subject to dailyreceipt and payment of cash variationmargin; and(2) Exchange rate contracts with originalmaturity of fourteen (14) calendar days or less.The current credit exposure shall be thepositive mark-to-market value of thecontract (or zero if the mark-to-marketvalue is zero or negative). The potentialfuture credit exposure shall be the productof the notional principal amount of thecontract multiplied by the appropriatepotential future credit conversion factor, asindicated below:Interest ExchangeResidual Rate RateMaturity Contract ContractOne (1) 0.0% 1.0%year or lessOver one 0.5% 5.0%(1) year to five(5) yearsOver five 1.5% 7.5%(5) yearsProvided, That for contracts with multipleexchanges of principal, the factors are to bemultiplied by the number of remainingpayments in the contract: Provided, further,That for contracts that are structured to settleoutstanding exposure following specifiedpayment dates and where the terms arereset such that the market value of thecontract is zero on these specified dates,the residual maturity would be set equalto the time until the next reset date, and inthe case of interest rate contracts withremaining maturities of more than one (1)year that meet these criteria, the potentialfuture credit conversion factor is subjectto a floor of five tenths percent (0.5%):Provided, furthermore, That no potentialfuture credit exposure shall be calculatedfor single currency floating/ floating interestrate swaps, i.e., the credit exposure onthese contracts would be evaluated solelyon the basis of their mark-to-market value.The credit equivalent amount shall betreated like any on-balance sheet asset,and shall be assigned the appropriate riskweight, i.e., according to the obligor, or ifrelevant, the qualified guarantor or thenature of collateral: Provided, That a fiftypercent (50%) risk weight shall be appliedin respect of obligors which wouldotherwise attract a 100% risk weight.The extent to which a claim isguaranteed/collateralized shall bedetermined by the amount of guaranteecoverage/current market value of securitiespledged, in comparison with the bookvalue of the on-balance sheet asset or thenotional principal amount of the off-balancesheet exposure, except for derivativecontracts for which determination isgenerally made in relation to creditequivalent amount.§ 4116Q.4 (2008 - 4116Q.3) Definitionsa. Amount due from the BSP. Thisrefers to all deposits of the reporting QBwith the BSP.b. Appraisal increment reserve. Thisshall form part of capital only if authorizedby the Monetary Board.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 18

§ 4116Q.408.12.31c. QB premises, furniture, fixturesand equipment net of depreciation. Thisrefers to the cost of land and improvementsused as the QB premises, and furniture,fixtures and equipment owned by the QB.d. Cash on hand. This refers to totalcash held by the QB consisting of bothnotes and coins in Philippine currency.e. Central government of a foreigncountry. This refers to the centralgovernment which is regarded as such bya recognized banking supervisoryauthority in that country.f. Claims. This refer to loans or debtobligations of the entity on whom the claimis held, and shall include, but shall not belimited to, the following accounts,inclusive of accumulated market gains/(losses) and accumulated bond discount/(premium amortization), and net of specificallowance for probable losses:(1) Due from BSP;(2) Due from other banks;(3) Interbank loans receivable;(4) Loans and discounts, includinglease contract receivables, net of advanceleasing income received and receivablesfinanced for Financing Companies (FCs);(5) Restructured loans;(6) Trading account securities - loans;(7) Underwriting accounts - debtsecurities (for IHs);(8) Underwriting accounts - equitysecurities (for IHs);(9) Trading account securities - debtsecurities;(10) Trading account securities - equitysecurities (for IHs);(11) Available for sale securities;(12) Investments in bonds and otherdebt instruments (IBODI); and(13) Others, e.g., accounts receivableand accrued interest receivable.Accruals on a claim shall be classified andrisk weighted in the same way as the claim.g. Consolidated basis. This refers tocombined statement of condition (SOC) ofparent QB and subsidiary financial alliedundertakings, but excluding insurancecompanies.h. Debt capital instruments. Thisrefers to unsecured subordinated term debtinstruments qualifying as capital of banks.i. Equity investments. This refers toinvestments in capital stock of companies,firms or enterprises, made for purposes ofcontrol, affiliation or other continuingbusiness advantage.j. Exchange rate contracts. Thisincludes cross-currency interest rate swaps,forward foreign exchange (FX) contracts,currency futures, currency optionspurchased and similar instruments.k. Financial allied undertakings. Thisrefers to enterprises or firms withhomogenous or similar activities/business/functions with the financial intermediaryand may include but not limited to leasingcompanies, banks, IHs, FCs, credit cardcompanies, FIs catering to small andmedium scale industries (including venturecapital corporations), companies engagedin stock brokerage/securities dealership,companies engaged in FX dealership/brokerage, holding companies, and suchother similar activities as the MonetaryBoard may declare as appropriate fromtime to time, but excluding insurancecompanies.l. Foreign country/foreign incorporatedbank and Philippine incorporated bank/QBwith the highest credit quality. This refersto a foreign country/foreign incorporatedbank and Philippine incorporated bank/QBgiven the highest credit rating of any two(2) of the following internationally acceptedrating agencies:Rating AgencyHighest Rating(1) Moody’s “Aa3” and above(2) Standard and “AA-” and abovePoor's(3) Fitch IBCA “AA-” and above(4) Others as maybe approved bythe Monetary BoardManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 19

§ 4116Q.408.12.31m. Forward asset purchases. Thisrefers to a commitment to purchase a loan,security or other asset at a specified futuredate, usually on pre-arranged terms.n. Goodwill. This refers to an intangibleasset that represents the excess of thepurchase price over the fair market value ofidentifiable assets acquired less liabilitiesassumed in acquisitions accounted for underthe purchase method of accounting.o. Interest rate contracts. This includessingle-currency interest rate swaps, basisswaps, forward rate agreements, interestrate futures, interest rate options purchasedand similar instruments.p. Loans for housing purpose, fullysecured by first mortgage on residentialproperty that is or will be occupied orleased out by the borrower. This shall notinclude loans to companies engaged inspeculative residential building or propertydevelopment.q. Loans to the extent covered byhold-out on, or assignment of depositsubstitutes maintained in the lending QB.A loan shall be considered as secured by ahold-out on, or assignment of depositsubstitute only if such deposit substituteaccount is covered by a hold-out agreementor deed of assignment signed by the investor/placer in favor of the QB. This shall notinclude loans transferred to/carried by theQB’s trust department secured by depositsubstitute hold-out/assignment.r. MDBs. This refers to InternationalBank for Reconstruction and Development(IBRD), Inter-American DevelopmentBank, Asian Development Bank (ADB),African Development Bank (AfDB),European Investment Bank (EIB) andEuropean Bank for Reconstruction andDevelopment.s. Non-central government publicsector entity of a foreign country. This refersto entities which are regarded as such by arecognized banking supervisory authority inthe country in which they are incorporated.t. Note issuance facilities andrevolving underwriting facilities. Thisrefers to an arrangement whereby aborrower may draw down funds up to aprescribed limit over an extended periodby repeated issues to the market ofpromissory notes which the QB committedto underwrite.u. Other commitments. This includesundrawn portion of any bindingarrangements which obligate the QB toprovide funds at some future date.v. Other commitments with anoriginal maturity of up to one (1) year. Thisincludes any revolving or undated openendedcommitments, e.g., unused creditlines: Provided, That these can beunconditionally cancelled at any time andare subject to credit revision at least annually.w. Partly-paid shares and securities.This arises where only a part of the issueprice or nominal face value of a securitypurchased has been subscribed and theissuer may call for the outstanding balance(or a further installment), either on a datepredetermined at the time of issue, or atan unspecified future date.x. Perpetual preferred stock. This refersto preferred stock that does not have amaturity date, that cannot be redeemed atthe option of the holder of the instrument,and that has no provision that will requirefuture redemption of the issue. Consistentwith these provisions, any perpetualpreferred stock with a feature permittingredemption at the option of the issuer mayqualify as capital only if the redemption issubject to prior approval of the BSP.y. Philippine LGUs. This refers to thePhilippine government units below thelevel of national government, such as city,provincial, and municipal governments.z. Philippine national government.This shall refer to the Philippine nationalgovernment and its agencies such asdepartments, bureaus, offices, andinstrumentalities, but excludingQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 20

§§ 4116Q.4 - 4117Q08.12.31government owned and-controlledcommercial corporations.(1) Private sector. This refers to entitiesother than banks, QBs and governments.This shall also include commercialcompanies owned by the public sector,such as government-owned or-controlledcommercial corporations.(2) Redeemable preferred stock. Thisrefers to preferred stock which may beredeemed at the specific dates or periodsfixed for redemption.(3) Sale and repo agreements andasset sales with recourse. This refers toarrangements whereby a QB sells a loan,security or fixed asset to a third party witha commitment to repurchase the asset aftera certain time, or in the event of a certaincontingency.(4) Solo basis. This refers to combinedSOC of head office and branches.(5) Subsidiary. This refers to acorporation or firm more than fifty percent(50%) of the outstanding voting stock ofwhich is directly or indirectly owned,controlled or held with the power to voteby a QB.(6) Treasury shares. This refers to theQB’s own shares of stock that have beenissued and fully paid for, subsequentlyreacquired through purchase or donationsand have not been cancelled or re-issued.This also refers to shares of a parent QBheld by a subsidiary financial alliedundertaking in a consolidated statement ofcondition (CSOC).§ 4116Q.5 (2008 - 4116Q.4) Requiredreports. QBs shall submit a report of theirrisk-based CAR on a solo basis (head officeplus branches) and on a consolidated basis(parent QB plus subsidiary financial alliedundertakings, but excluding insurancecompanies) quarterly to the appropriatedepartment of the SES in the prescribedforms within the deadlines, i.e., fifteen (15)business days and thirty (30) business daysafter the end of reference quarter,respectively. Only QBs with subsidiaryfinancial allied undertakings (excludinginsurance companies) which under existingregulations are required to prepareconsolidated statements of condition on aline-by-line basis shall be required to submitreport on consolidated basis. The abovementionedreports shall be classified asCategory A-2 reports.§ 4116Q.6 (2008 - 4116Q.5) SanctionsWhenever the capital accounts of a QB aredeficient with respect to the prescribedCAR, the Monetary Board after consideringa report of the appropriate department ofthe SES on the state of solvency of theinstitution concerned, shall limit or prohibitthe distribution of the net profits and shallrequire that part or all of net profits be usedto increase the capital accounts of the QBuntil the minimum requirement has beenmet. The Monetary Board may restrict orprohibit the making of new investments ofany sort by the QB, with the exception ofpurchases of readily marketable evidencesof indebtedness issued by the Philippinenational government and BSP included inItem “a(1)(b)i” of Subsec. 4116Q.3, until theminimum required capital ratio has beenrestored.§ 4116Q.7 (2008 - 4116Q.6) Temporaryrelief. In case of QB merger orconsolidation, or when a QB is underrehabilitation under a program approved bythe BSP, the Monetary Board maytemporarily relieve the surviving QB,consolidated QB, or constituent QB orcorporations under rehabilitation from fullcompliance with the required capital ratiofor a maximum period of one (1) year.Sec. 4117Q Treatment of Equity Investmentwith Reciprocal Stockholdings. Forpurposes of computing the prescribed ratioof net worth (or combined capital accounts)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 21

§§ 4117Q - 4119Q09.12.31to risk assets, equity investments of a QBin another QB shall be deducted from itsnet worth if the investee QB has areciprocal equity investment in theinvesting QB, in which case theinvestment of the QB or the reciprocalinvestment of the other QB, whichever islower, shall be deducted from the networth of the QBs.Sec. 4118Q Sanctions on Net WorthDeficiencya. Any QB which is deficient in thecapital requirement under Sec. 4115Q shallbe liable to the following sanctions:(1) In case of capital deficiency for five(5) or more times within a reporting period:(a) For the first offense - a fine ofP3,000.(b) For the second consecutive offense- prohibition from extending new loans ormaking new investments for a period ofthirty (30) calendar days.New loans and new investments shallrefer to any loan or investment involvingdisbursement of funds, except GS.(c) For the third consecutive offense -extension of the penalty under thepreceding paragraph for another thirty (30)calendar days.(d) For the fourth consecutive offense -suspension of the Certificate of Authority toengage in quasi-banking functions for aperiod of thirty (30) calendar days. Thesuspension shall be automatically lifted ifin the final reporting period of the period ofsuspension, the entity maintains theminimum capital required under Sec.4115Q and 4116Q as may be applicablefor every day of such reporting period.(2) In case of continuous capitaldeficiency:(a) For two (2) consecutive reportingperiods - suspension of the Certificate ofAuthority to engage in quasi-bankingfunctions for a period of thirty (30) calendardays.(b) For every consecutive reportingperiod, the suspension shall extend foranother thirty (30) calendar days.(c) The suspension shall beautomatically lifted if on the final reportingperiod of the period of suspension, the entitymaintains the minimum capital requiredunder Secs. 4115Q and 4116Q as may beapllicable for every day of such reportingperiod.(3) In all of the cases abovementioned,establishment of branches, agencies,extension offices, etc., shall be suspended.b. For improperly accomplished report,QBs shall pay P600 per day for every day thereport is not corrected, counted as of the datethe error is brought to its attention until thecorrected report is submitted.c. For willfully making false statementsin the report or submitting a false report,the Certificate of Authority for quasi-bankingfunctions shall be suspended/revoked.d. The Monetary Board may imposeadditional sanctions on the entity engagedin quasi-banking functions by:(1) Revoking the Certificate of Authorityto engage in quasi-banking functions; and(2) Such other sanctions as the BSP maydeem necessary.(As amended by Circular No. 585 dated 15 October 2007)Sec. 4119Q Internal Capital AdequacyAssessment Process and SupervisoryReview Process. The guidelines on internalcapital adequacy assessment process(ICAAP) and BSP’s supervisory reviewprocess (SRP) are shown in AppendicesQ-52 and Q-53 respectively.The ICAAP guidelines shall apply to allUBs and KBs on a group-wide basis.All covered UBs and KBs are requiredto submit the interim ICAAP document onor before 30 April 2010 and the final ICAAPdocument together with the CorporateSecretary’s Certificate attesting to theapproval by the bank’s board of directorson or before 31 January 2011.Q RegulationsPart I - Page 22Manual of Regulations for Non-Bank Financial Institutions

§§ 4119Q - 4136Q.109.12.31The guidelines shall take effect on01 January 2011.(Circular No. 639 dated 15 January 2009, as amended by CircularNo. 29 December 2009)Sec. 4120Q (Reserved)F. (RESERVED)Secs. 4121Q - 4135Q (Reserved)G. STOCK, STOCKHOLDERS ANDDIVIDENDSSec. 4136Q (2008 - 4126Q) DividendsPursuant to Section 57 of R.A. No. 8791,no QB shall declare dividends greaterthan its accumulated net profits then onhand, deducting therefrom its losses andbad debts. Neither shall the QB declaredividends if, at the time of declaration, ithas not complied with the provisions ofSubsec. 4136Q.2.§ 4136Q.1 (2008 - 4126Q.1) Definitionof terms. For purposes of this Section, thefollowing definitions shall apply:a. Bad debts shall include any debton which interest is past due for a periodof six (6) months, unless it is well securedand in process of collection.A loan payable in installment with anautomatic acceleration clause shall beconsidered a bad debt within thecontemplation of this Section whereinstallments or amortizations havebecome past due for a period of six (6)months, unless the loan is well securedand in process of collection. For a loanpayable in installments without anacceleration clause, only the installmentsor amortizations that have become pastdue for a period of six (6) months andwhich are not well secured and in theprocess of collection shall be consideredbad debts within the contemplation of thisSection.b. Well secured - A debt shall beconsidered well secured (or fullysecured) if it is covered by collateral inthe form of a duly constituted mortgage,pledge, or lien on real or personalproperties, including securities. Theoutstanding debt, accrued interest andother pertinent fees and expensesthereon shall not be in excess of seventypercent (70%) of the appraised value(AV) of real estate, or fifty percent (50%)of the other personal properties offeredas lien.c. In process of collection - A debtdue to a QB shall be considered in processof collection when it is the subject ofcontinuing extrajudicial or judicialproceedings aimed towards its fullsettlement or liquidation, or otherwise toplace it in current status.The extrajudicial proceedings, such asthe writing of collection or demand letters,must have been initiated by the QB and/orits lawyers before the interest or installmentsor amortizations on the debt become pastdue and unpaid for a period of six (6)months.The debt shall continue to beconsidered in process of collection for aperiod of six (6) months counted from dateof the first collection or demand letter andif, within this period, the debtor fails tomake a payment of at least twenty percent(20%) of the outstanding balance of theprincipal on his account, plus all interestswhich may have accrued thereon, thesame shall automatically be classified asbad debt unless judicial proceedings areinstituted.The debt shall continue to beconsidered in process of collection duringthe pendency of the judicial proceedings.When judgment against the debtor hasbeen obtained, the QB must be active inenforcing the judgment for the debt tocontinue to be considered in process ofcollection.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 23

§§ 4136Q.2 - 4136Q.408.12.31§ 4136Q.2 (2008 - 4126Q.2) Requirementson the declaration of dividends/net amountavailable for dividendsa. Requirements on the declaration ofdividends. At the time of declaration, QBsshall have complied with the following:(1) Clearing account with the BSP is notoverdrawn;(2) Minimum capitalization requirementand risk-based capital ratio;(3) Statutory and liquidity reservesrequirement;(4) No past due loans with anyinstitution;(5) No net losses from operations inany one of the two (2) fiscal yearsimmediately preceding the date ofdividend declaration; and(6) Has not committed any of thefollowing major violations:(a) Loans and other creditaccommodations and guarantees grantedin excess of the single borrower’s limit;(b) Loans and other creditaccommodations granted/extended inexcess of the ceilings on accommodationsto DOSRI;(c) Unsafe and unsound bankingpractice as defined under existing BSPregulations;(d) Equity investments in excess of theprescribed ceilings;(e) Investments in real estate, QBpremises and equipment in excess ofprescribed ceilings;(f) Major violations/exceptions citedin the previous examination not duly actedupon or not yet corrected;(g) Transactions or activities withoutprior approval or necessary license fromthe BSP such as, but not limited toderivatives, trust and e-banking;(h) Refusal to permit examination intothe affairs of the institution or any willfulmaking of a false or misleading statementto the Monetary Board or to theappropriate department of the SES; and(i) Failure to comply with the capitalbuild-up program approved by theMonetary Board.QBs which have committed any of themajor violations under Item “a(6)” abovemay only be allowed to declare dividendsby the Monetary Board uponrecommendation of the appropriatedepartment of the SES that the QB hascorrected the major violation/s that it hascommitted.b. Amount available. The net amountavailable for dividends shall be the amountof unrestricted or free retained earningsand profit and loss summary less:(1) Bad debts against which valuationreserves are not required by the BSP to beset up;(2) Unbooked valuation reserves, andother unbooked capital adjustmentsrequired by the BSP, whether or notallowed to be set up on a staggered basis;(3) Deferred income tax;(4) Accumulated profits not yetreceived but already recorded by the QBrepresenting its share in profits of itssubsidiaries under the equity method ofaccounting;(5) Accrued interest as required to beexcluded pursuant to Item “c” of Subsec.4305Q.4, net of booked valuation reserveson accrued interest receivable or allowancefor uncollectible interest on loans; and(6) FX profit arising from revaluation ofFX denominated accounts.(As amended by Circular No. 571 dated 21 June 2007)§ 4136Q.3 (Reserved)§ 4136Q.4 (2008 - 4126Q.3) Reportingand verification. Declaration of cashdividend shall be reported by the QBconcerned to the appropriate department ofthe SES within ten (10) business days fromdate of approval of the declaration by theQB’s board of directors, in the prescribedform.Q RegulationsPart I - Page 24Manual of Regulations for Non-Bank Financial Institutions

§ 4136Q.408.12.31Pending verification of abovementionedreport by the appropriate department of theSES, the QB concerned shall not make anyannouncement or communication on thedeclaration of cash dividends nor shall anypayment be made thereon.In any case, the declaration may beannounced and the dividends paid, if,after thirty (30) business days from thedate the report required herein shall havebeen received by the BSP, no adviceagainst such declaration has beenreceived by the QB concerned, subject tothe condition that the record date for suchdividends cannot be set earlier than thirty(30) business days after declaration.QBs whose shares are listed with anydomestic stock exchange may give noticeof cash dividend declaration in accordancewith pertinent rules of the SEC: Provided,That no record date is fixed for such cashdividend, pending verification of the report(Next page is Part I - Page 25)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 24a

§§ 4136Q.4 - 4141Q.108.12.31on such declaration by the appropriatedepartment of the SES.§ 4136Q.5 (2008 - 4126Q.4) Recordingof dividends. The liability for cash dividendsdeclared shall be taken up in the books uponreceipt of BSP approval thereof, or if no suchapproval is received, after thirty (30) businessdays from the date required report on cashdividend declaration was received by theappropriate department of the SES,whichever comes earlier. A memorandumentry may be made to record the dividenddeclaration on the date of approval by theboard of directors and for full disclosurepurposes. The cash dividends may bedisclosed in the financial statements bymeans of a footnote which should includea statement to the effect that the dividenddeclaration is subject to review by the BSP.Dividends of all kinds, whether oncommon or on preferred shares of stock,shall not be treated as interest expense,considering that as a general policy onlyirredeemable stock may be issued by QBs.§ 4136Q.6 (Reserved)§ 4136Q.7 (2008 - 4126Q.5) Rules ondeclaration of stock dividends. Thedeclaration of stock dividends shall besubject to the preceding regulations ondeclaration of cash dividends. Additionalpaid-in capital may be included in theamount available for stock dividends.Secs. 4137Q - 4140Q (Reserved)H. DIRECTORS, OFFICERS ANDEMPLOYEESSec. 4141Q Definition; Qualifications;Powers; Responsibilities and Duties ofBoard of Directors and Directors. Thefollowing shall be the definition,qualifications, powers, responsibilities andduties of the board of directors and directors.§ 4141Q.1 Limits on the number ofthe members of the board of directorsPursuant to Sections 15 and 17 of R.A. No.8791, there shall be at least five (5), and amaximum of fifteen (15) members of theboard of directors of a QB/trust entity two(2) of whom shall be independentdirectors: Provided, That in case of aQB/trust entity merger or consolidation,the number of directors may be increasedup to twenty-one (21).An independent director shall mean aperson who -(1) Is not or has not been an officer oremployee of the QB/trust entity, itssubsidiaries or affiliates or related interestsduring the past three (3) years counted fromthe date of his election;(2) Is not a director or officer of therelated companies of the institution’smajority stockholder;(3) Is not a majority stockholder of theinstitution, any of its related companies, orof its majority shareholders;(4) Is not a relative within the fourthdegree of consanguinity or affinity, legitimateor common-law of any director, officer ormajority shareholder of the QB/trust entity orany of its related companies;(5) Is not acting as a nominee orrepresentative of any director or substantialshareholder of the QB/trust entity, any of itsrelated companies or any of its substantialshareholders; and(6) Is not retained as professionaladviser, consultant, agent or counsel of theinstitution, any of its related companies orany of its substantial shareholders, eitherin his personal capacity or through his firm;is independent of management and freefrom any business or other relationship, hasnot engaged and does not engage in anytransaction with the institution or with anyof its related companies or with any of itssubstantial shareholders, whether byhimself or with other persons or through afirm of which he is a partner or a companyManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 25

§ 4141Q.108.12.31of which he is a director or substantialshareholder, other than transactions whichare conducted at arms length and could notmaterially interfere with or influence theexercise of his judgment.An independent director of a QB/trustentity can be elected as an independentdirector of its: (a) parent or holdingcompany; (b) subsidiary or affiliate;(c) substantial shareholder; or (d) otherrelated companies, or vice-versa: Provided,That he is not a substantial shareholder ofthe QB/trust entity or any of the saidconcerned entities.The terms and phrases used in Items“(1)” to “(6)” shall have the followingmeaning:(a) Parent is a corporation which hascontrol over another corporation directlyor indirectly through one (1) or moreintermediaries.(b) Subsidiary means a corporationmore than fifty percent (50%) of the votingstock of which is owned or controlled directlyor indirectly through one (1) or moreintermediaries by a QB/trust entity.(c) Affiliate is a juridical person thatdirectly or indirectly, through one (1) ormore intermediaries, is controlled by, or isunder common control with the QB/trustentity or its affiliates.(d) Related interests as defined underSections 12 and 13 of R.A. No. 8791 shallmean individuals related to each otherwithin the fourth degree of consanguinityor affinity, legitimate or common law, andtwo (2) or more corporations owned orcontrolled by a single individual or by thesame family group or the same group ofpersons.(e) Control exists when the parentowns directly or indirectly throughsubsidiaries more than one-half of thevoting power of an enterprise unless, inexceptional circumstance, it can be clearlydemonstrated that such ownership doesnot constitute control. Control may alsoexist even when ownership is one-half orless of the voting power of an enterprisewhen there is:(i) power over more than one-half ofthe voting rights by virtue of an agreementwith other stockholders; or(ii) power to govern the financial andoperating policies of the enterprise undera statute or an agreement; or(iii) power to appoint or remove themajority of the members of the board ofdirectors or equivalent governing body; or(iv) power to cast the majority votes atmeetings of the board of directors orequivalent governing body; or(v) any other arrangement similar toany of the above.(f) Related company means anothercompany which is: (a) its parent or holdingcompany; (b) its subsidiary or affiliate; or(c) a corporation where a QB/trust entityor its majority stockholder own suchnumber of shares that will allow/enablehim to elect at least one (1) member of theboard of directors or a partnership wheresuch majority stockholder is a partner.(g) Substantial or major shareholdershall mean a person, whether natural orjuridical, owning such number of sharesthat will allow him to elect at least one (1)member of the board of directors of a QB/trust entity or who is directly or indirectlythe registered or beneficial owner of morethan ten percent (10%) of any class of itsequity security.(h) Majority stockholder or majorityshareholder means a person, whethernatural or juridical, owning more than fiftypercent (50%) of the voting stock of a QB/trust entity.Non-Filipino citizens may becomemembers of the board of directors of a QB/trust entity to the extent of the foreignparticipation in the equity of said QB/trustentity: Provided, That pursuant to Section23 of the Corporation Code of thePhilippines (BP Blg. 68), a majority of theQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 26

§§ 4141Q.1 - 4141Q.308.12.31directors must be residents of thePhilippines.The meetings of the board of directorsmay be conducted through moderntechnologies such as, but not limited to,teleconferencing and videoconferencing aslong as the director who is taking part insaid meetings can actively participate inthe deliberations on matters taken uptherein: Provided, That every member ofthe board shall participate in at least fiftypercent (50%) and shall physically attendat least twenty-five percent (25%) of allboard meetings every year: Provided,further, That in the case of a director whois unable to physically attend or participatein board meetings via teleconferencing orvideoconferencing, the corporatesecretary shall execute a notarizedcertification attesting that said director wasgiven the agenda materials prior to themeeting and that his/her comments/decisions thereon were submitted fordeliberation/discussion and were taken upin the actual board meeting, and that thesubmission of said certification shall beconsidered compliance with the requiredfifty percent (50%) minimum attendancein board meetings.§ 4141Q.2 Qualifications of a directorA director shall have the followingminimum qualifications:a. He shall be at least twenty-five (25)years of age at the time of his election orappointment;b. He shall be at least a collegegraduate or have at least five (5) yearsexperience in business;c. He must have attended a specialseminar for board of directors conductedor accredited by the BSP: Provided, Thatincumbent directors as well as thoseelected after 17 September 2001 mustattend said seminar on or before31 December 2002 or within a period ofsix (6) months from date of election forthose elected after 31 December 2002, asthe case may be; andd. He must be fit and proper for theposition of a director of the QB/trust entity.In determining whether a person is fit andproper for the position of a director, thefollowing matters must be considered:integrity/probity, competence, education,diligence and experience/training.The foregoing qualifications fordirectors shall be in addition to thoserequired or prescribed under R.A. No. 8791and other existing applicable laws andregulations.§ 4141Q.3 Powers/responsibilities andduties of board of directors and directorsa. Powers of the board of directors.The corporate powers of a QB/trust entityshall be exercised, its business conductedand all its property shall be controlled andheld by its board of directors. The powersof the board of directors as conferred bylaw are original and cannot be revoked bythe stockholders. The directors hold theiroffice charged with the duty to act for theQB/trust entity in accordance with theirbest judgment.b. General responsibility of the boardof directors. The position of a QB/trustentity director is a position of trust. Adirector assumes certain responsibilities todifferent constituencies or stakeholders,i.e., the QB/trust entity itself, itsstockholders, its clients and other creditors,its management and employees, and thepublic at large. These constituencies orstakeholders have the right to expect thatthe institution is being run in a prudent andsound manner.The board of directors is primarilyresponsible for the corporate governanceof the QB/trust entity. To ensure goodgovernance of the QB/trust entity, theboard of directors should establish strategicobjectives, policies and procedures thatwill guide and direct the activities of theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 27

§ 4141Q.308.12.31QB/trust entity and the means to attain thesame as well as the mechanism formonitoring management’s performance.While the management of the day-to-dayaffairs of the institution is the responsibilityof the management team, the board ofdirectors is, however, responsible formonitoring and overseeing managementaction.c. Specific duties and responsibilitiesof the board of directors(1) To select and appoint officers whoare qualified to administer the QB’s/trustentity’s affairs effectively and soundly andto establish adequate selection process forall personnel. It is the primary responsibilityof the board of directors to appointcompetent management team at all times.The board of directors should apply fit andproper standards on key personnel.Integrity, technical expertise andexperience in the institution’s business,either current or planned, should be the keyconsiderations in the selection process. Andbecause mutual trust and a close workingrelationship are important, the board’schoice should share its general operatingphilosophy and vision for the institution.The board of directors shall establish anappropriate compensation package for allpersonnel which shall be consistent withthe interest of all stakeholders.(2) To establish objectives and drawup a business strategy for achieving them.Consistent with the institution’s objectives,business plans should be established todirect its on-going activities. The boardshould ensure that performance against planis regularly reviewed, with correctiveaction taken as needed.(3) To conduct the affairs of theinstitution with high degree of integrity.Since reputation is a very valuable asset, itis in the institution’s best interest that indealings with the public, it observes a highstandard of integrity. The board of directorsshould prescribe corporate values, codesof conduct and other standards ofappropriate behaviour for itself, the seniormanagement and other employees.Among others, activities and transactionsthat could result or potentially result inconflict of interest, personal gain at theexpense of the institution, or unethicalconduct shall be strictly prohibited. Itshould provide policies that will preventthe use of the facilities of the QB/trust entityin furtherance of criminal and other illegalactivities.(4) To establish and ensure compliancewith sound written policies. The boardshould adopt written policies on all majorbusiness activities, i.e., investments, loans,asset and liability management, businessplanning and budgeting. A mechanism toensure compliance with said policies shallalso be provided.(5) To prescribe a clear assignment ofresponsibilities and decision-makingauthorities, incorporating a hierarchy ofrequired approvals from individuals to theboard of directors. The board shouldestablish in writing the limits of thediscretionary powers of each officer,committee, sub-committee and such othergroup for the purpose of lending, investingor committing the QB/trust entity to anyfinancial undertaking or exposure to riskat any time. The board should have aschedule of matters and authoritiesreserved to it for decision, such as: majorcapital expenditures, equity investmentsand divestments.(6) To effectively supervise the QB’s/trust entity’s affairs. As QBs/trust entitiesare entrusted with the handling andinvestment of public funds, the supervisionrequired from the board involves a higherdegree of wisdom, prudence, goodbusiness judgment and competence thanthat of directors of ordinary companies.Although directors may delegate certainauthority to senior officers, it is theirresponsibility to supervise and beQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 28

§ 4141Q.308.12.31responsible for the institution’s soundmanagement, as well as its problems. Theboard of directors should establish asystem of checks and balances whichapplies in the first instance to the boarditself. Among the members of the board,an effective system of checks andbalances must exist. The system shouldalso provide a mechanism for effectivecheck and control by the board over thechief executive officer (CEO) and keymanagers and by the latter over the lineofficers of the QB/trust entity.(7) To monitor, assess and control theperformance of management. The boardshall put in place an appropriate reportingsystem so that it is provided with relevantand timely information to be able toeffectively assess the performance ofmanagement. For this purpose, it mayconstitute a governance committee.(8) To adopt and maintain adequaterisk management policy. The board ofdirectors shall be responsible for theformulation and maintenance of writtenpolicies and procedures relating to themanagement of risks throughout theinstitution. The risk management policyshall include:(a) a comprehensive risk managementapproach;(b) a detailed structure of limits,guidelines and other parameters used togovern risk-taking;(c) a clear delineation of lines ofresponsibilities for managing risk;(d) an adequate system for measuringrisk; and(e) effective internal controls and acomprehensive risk-reporting process.The board may constitute a committeefor this purpose.(9) To constitute the followingcommittees: 1(a) Audit committee. The auditcommittee shall be composed of membersof the board of directors, at least two (2) ofwhom shall be independent directors,including the chairman, preferably withaccounting, auditing, or related financialmanagement expertise or experience. Theaudit committee provides oversight of theinstitution’s financial reporting and controland internal and external audit functions.It shall be responsible for the setting up ofthe internal audit department and for theappointment of the internal auditor as wellas the independent external auditor whoshall both report directly to the auditcommittee. It shall monitor and evaluatethe adequacy and effectiveness of theinternal control system.Upon setting up the audit committee,the board of directors shall draw up awritten charter or terms of reference whichclearly sets out the audit committee’sauthority and duties, as well as thereporting relationship with the board ofdirectors. This charter shall be approvedby the board of directors and reviewed andupdated periodically.The audit committee shall have explicitauthority to investigate any matter withinits terms of reference, full access to andcooperation by management and fulldiscretion to invite any director orexecutive officer to attend its meetings,and adequate resources to enable it toeffectively discharge its functions.The audit committee shall ensure thata review of the effectiveness of theinstitution’s internal controls, includingfinancial, operational and compliancecontrols, and risk management, isconducted at least annually.The Audit Committee shall establishand maintain mechanisms by whichofficers and staff may, in confidence, raiseconcerns about possible improprieties ormalpractices in matters of financialreporting, internal control, auditing or otherissues to persons or entities that have thepower to take corrective action. It shallensure that arrangements are in place for1Effective 01 January 2005 under Circular 456 dated 04 October 2004.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 29

§ 4141Q.308.12.31the independent investigation, appropriatefollow-up action, and subsequentresolution of complaints.(b) Corporate governance committee.The corporate governance committee shallassist the board of directors in fulfilling itscorporate governance responsibilities. Itshall review and evaluate the qualificationsof all persons nominated to the board aswell as those nominated to other positionsrequiring appointment by the board ofdirectors. The committee shall becomposed of at least three (3) members ofthe board of directors, two (2) of whomshall be independent directors.The corporate governance committeeshall have a written charter that describesthe duties and responsibilities of itsmembers. This charter shall be approved bythe board of directors and reviewed andupdated at least annually.The committee shall be responsible forensuring the board’s effectiveness and dueobservance of corporate governanceprinciples and guidelines. It shall oversee theperiodic performance evaluation of the boardand its committees and executivemanagement; and shall also conduct anannual self-evaluation of its performance. Thecommittee shall also decide whether or nota director is able to and has been adequatelycarrying out his/her duties as director bearingin mind the director’s contribution andperformance (e.g., competence, candor,attendance, preparedness and participation).Internal guidelines shall be adopted thataddress the competing time commitmentsthat are faced when directors serve onmultiple boards.The committee shall makerecommendations to the board regardingthe continuing education of directors,assignment to board committees,succession plan for the board members andsenior officers, and their remunerationcommensurate with corporate andindividual performance.The corporate governance committeeshall decide the manner by which theboard’s performance may be evaluatedand propose an objective performancecriteria approved by the board. Suchperformance indicators shall address howthe board has enhanced long termshareholders’ value.(c) Risk management committee. Therisk management committee shall beresponsible for the development andoversight of the institution’s riskmanagement program. The committeeshall be composed of at least three (3)members of the board of directors whoshall possess a range of expertise as wellas adequate knowledge of the institution’srisk exposures to be able to developappropriate strategies for preventing lossesand minimizing the impact of losses whenthey occur. It shall oversee the system oflimits to discretionary authority that theboard delegates to management, ensurethat the system remains effective, that thelimits are observed and that immediatecorrective actions are taken wheneverlimits are breached.The risk management committee shallhave a written charter that defines theduties and responsibilities of its members.The charter shall be approved by the boardof directors and reviewed and refinedperiodically.The core responsibility of the riskmanagement committee are:(i) Identify and evaluate exposures.The committee shall assess the probabilityof each risk becoming reality and shallestimate its possible effect and cost. Priorityareas of concern are those risks that are themost likely to occur and are costly whenthey happen.(ii) Develop risk managementstrategies. The risk managementcommittee shall develop a written plandefining the strategies for managing andcontrolling the major risks. It shall identifyQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 30

§ 4141Q.308.12.31practical strategies to reduce the chance ofharm and failure or minimize losses if therisk becomes real.(iii) Implement the risk managementplan. The risk management committee shallcommunicate the risk management plan andloss control procedures to affected parties.The committee shall conduct regulardiscussions on the institution’s current riskexposure based on regular managementreports and direct concerned units or officeson how to reduce these risks.(iv) Review and revise the plan asneeded. The committee shall evaluate the riskmanagement plan to ensure its continuedrelevancy, comprehensiveness, andeffectiveness. It shall revisit strategies, look foremerging or changing exposures, and stayabreast of developments that affect thelikelihood of harm or loss. The committee shallreport regularly to the board of directors theentity’s over-all risk exposure, actions takento reduce the risks, and recommend furtheraction or plans as necessary.(10) To meet regularly. To properlydischarge its function, the board of directorsshall meet regularly. Independent views inboard meetings shall be given fullconsideration and all such meetings shallbe duly minuted.The meetings of the board of directorsmay be conducted through moderntechnologies such as, but not limited to,teleconferencing and video-conferencing aslong as the director who is taking part insaid meetings can actively participate in thedeliberations on matters taken up therein:Provided, That every member of the boardshall be physically present in at least fiftypercent (50%) of all board meetings in everyyear.(11) To keep the individual members ofthe board and the shareholders informed. It isthe duty of the board to present to all itsmembers and to the shareholders a balancedand understandable assessment of the QB’s/trust entity’s performance and financialcondition. It should also provide appropriateinformation that flows internally and to thepublic. All members of the board shall havereasonable access to any information aboutthe institution.(12) To ensure that the QB/trust entityhas beneficial influence on the economy.The board has a continuing responsibilityto provide those services and facilitieswhich will be supportive of the nationaleconomy.(13) To assess at least annually itsperformance and effectiveness as a body,as well as its various committees, the CEOand the QB/trust entity itself. Thecomposition of the board shall also bereviewed regularly with the end in view ofhaving a balanced membership. Towardsthis end, a system and procedure forevaluation shall be adopted which mayinclude, but not limited to, the setting ofbenchmark and peer group analysis.(14) To keep their authority within thepowers of the institution as prescribed inthe articles of incorporation, charter, bylawsand in existing laws, rules andregulations. To conduct and maintain theaffairs of the institution within the scope ofits authority as prescribed in its charter andin existing laws, rules and regulations, theboard shall appoint a compliance officerwho shall be responsible for coordinating,monitoring and facilitating compliance withexisting laws, rules and regulations. Thecompliance officer shall be vested withappropriate authority and provided withappropriate support and resources. It mayalso constitute a compliance committee.If the directors carry the institution intoa transaction outside the scope of thebusiness agreed upon in the articles, withresulting loss to the institution, they may becalled upon to reimburse the institution forthat loss. If directors willfully do an act,which they know or ought to know to beunauthorized, they are clearly liable to theinstitution for resulting damages.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 31

§§ 4141Q.3 - 4141Q.411.12.31d. Specific duties and responsibilitiesof a director(1) To conduct fair businesstransactions with the QB/trust entity and toensure that personal interest does not biasboard decisions. A director should,whenever possible, avoid situations thatwould give rise to a conflict of interest. Iftransactions with the institution cannot beavoided, it should be done in the regularcourse of business and upon terms not lessfavorable to the institution than those offeredto others. The basic principle to be observedis that a director should not use his positionto make profit or to acquire benefit oradvantage for himself and/or his relatedinterests. He should avoid situations thatwould compromise his impartiality.(2) To act honestly and in good faith,with loyalty and in the best interest of theinstitution, its stockholders, regardless of theamount of their stockholdings, and otherstakeholders such as its investors,borrowers, other clients and the generalpublic. A director must always act in goodfaith, with the care which an ordinarilyprudent man would exercise under similarcircumstances. While a director shouldalways strive to promote the interest of allstockholders, he should also give due regardto the rights and interests of otherstakeholders.(3) To devote time and attentionnecessary to properly discharge his dutiesand responsibilities. A director shoulddevote sufficient time to familiarize himselfwith the institution’s business. He must beconstantly aware of the institution’scondition and be knowledgeable enough tocontribute meaningfully to the board’s work.He must attend and actively participate inboard and committee meetings, request andreview meeting materials, ask questions, andrequest explanations and be familiar withaudits and supervisory communications. Ifa person cannot give sufficient time andattention to the affairs of the institution, heshould neither accept his nomination norrun for election as member of the board.(4) To act judiciously. Before decidingon any matter brought before the board ofdirectors, every director should thoroughlyevaluate the issues, ask questions and seekclarifications when necessary.(5) To exercise independent judgment.A director should view each problem/situation objectively. When a disagreementwith others occurs, he should carefullyevaluate the situation and state his position.He should not be afraid to take a positioneven though it might be unpopular.Corollarily, he should support plans andideas that he thinks will be beneficial to theinstitution.(6) To be generally informed of boththe QB’s/trust entity’s business environmentand legal and regulatory frameworkcontrolling its activities. A director shouldhave a working knowledge of the statutoryand regulatory requirements affecting theinstitution, including the content of itsarticles of incorporation and by-laws, therequirements of the BSP and whereapplicable, the requirements of otherregulatory agencies and must exercise careto see that these are not violated. He shouldalso keep himself informed of the industrydevelopments and business trends in orderto safeguard the institution’scompetitiveness.(7) To observe confidentiality. Adirector must observe the confidentiality ofnon-public information acquired by reasonof his position as director. He may notdisclose said information to any other personwithout the authority of the board.§ 4141Q.4 Confirmation of theelection/appointment of directors andofficers. The election/appointment ofdirectors and officers of QBs/trust entitiesshall be subject to confirmation by the:Q RegulationsPart I - Page 32Manual of Regulations for Non-Bank Financial Institutions

§§ 4141Q.4 - 4142Q11.12.31Confirming Position LevelAuthoritya. Monetary Board director, president,chief executive officer,chief operating officer,senior vice president orequivalent rank of QBs/trust entities with totalassets of at leastP1 billion.b. A Committee director/trustee, senior viceto be composed president and above orof:equivalent rank of• The DeputyQBs/trust entitiesGovernor - SES whose election/• Managing Directors appointment is notof SE I and IIsubject to confirmation• Directors of theconcerned appropriatedepartment of the SESby the Monetary BoardThe election/appointment of allincumbent directors/trustees and officers ofQBs/trust entities as of 17 September 2001not previously approved/confirmed by theMonetary Board shall be submitted to theBSP through the appropriate department ofthe SES for confirmation.The documentary requirements on theconfirmation of the election/appointment ofthe members of the board of directors/seniorvice presidents and above or equivalentranks of banks are listed in Appendix Q-57.(As amended by CL-2011-045 dated 01 July 2011)§§ 4141Q.5 - 4141Q.8 (Reserved)§ 4141Q.9 Reports required. QBs/ trustentities shall furnish all of their directors/trustees with a copy of the specific dutiesand responsibilities of the board of directors/trustees prescribed under Items “b” and “c”of Subsec. 4141Q.3 within thirty (30)business days from 17 May 2001 in cases ofincumbent directors/trustees and at the timeof election in cases of directors/trusteeselected after such date.The directors/trustees concerned shalleach be required to acknowledge receipt ofthe copies of such specific duties andresponsibilities and shall certify that theyfully understand the same.Copies of the acknowledgment andcertification herein required shall besubmitted in accordance with Appendix Q-3.§ 4141Q.10 Sanctions. Without prejudiceto the other sanctions prescribed under Section37 of R.A. No. 7653 and to the provisions ofSection 16 of R.A. No. 8791, any director/trustee of a QB/trust entity who violates or failsto observe and/or perform any of the aboveresponsibilities and duties shall for eachviolation or offense, be penalized for P15,000.Sec. 4142Q Definition and Qualifications ofOfficers. Officers shall include the president,executive vice president (EVP), senior vicepresident,vice president, general manager,treasurer, secretary, trust officer and othersmentioned as officers of the QB/trust entity,or those whose duties as such are defined inthe by-laws, or are generally known to be theofficers of the QB/trust entity (or any of itsbranches and offices other than the head office)either through announcement, representation,publication or any kind of communicationmade by the QB/trust entity: Provided, That aperson holding the position of chairman orvice-chairman of the board or another positionin the board shall not be considered as anofficer unless the duties of his position in theboard include functions of management suchas those ordinarily performed by regularofficers: Provided, further, That members of agroup or committee, including sub-groups orsub-committees, whose duties includefunctions of management such as thoseordinarily performed by regular officers, andare not purely recommendatory or advisory,shall likewise be considered as officers.An officer shall have the followingminimum qualifications:a. He shall be at least twenty-one (21)years of age;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 33

§§ 4142Q - 4143Q.109.12.31b. He shall be at least a collegegraduate, or have at least five (5) yearscreditable experience or training in financialmanagement or related activities, or in a fieldrelated to his position and responsibilities:Provided, however, That trust officers shallhave at least five (5) years of actualexperience in trust operations, or at leastthree (3) years of actual experience in trustoperations and completed at least one (1)year training program in trust operationsacceptable to the BSP, or at least five (5)years of actual experience as officer of abank, NBFI or related activities andcompleted at least one (1) year trainingprogram in trust operations acceptable tothe BSP; andc. He must be fit and proper for theposition he is being proposed/appointedto. In determining whether a person is fitand proper for a particular position, thefollowing matters must be considered:integrity probity, competence, education,diligence and experience/training.The foregoing qualifications forofficers shall be in addition to thoserequired or prescribed under R.A. No.8791 and other existing applicable lawsand regulations.(As amended by Circular Nos. 665 dated 04 September 2009and 562 dated 13 March 2007)Sec. 4143Q Disqualification of Directors/Trustees and Officers. The followingregulations shall govern the disqualificationof QB/trust entity directors/trustees andofficers.§ 4143Q.1 Persons disqualified tobecome directors/trustees. Withoutprejudice to specific provisions of lawprescribing disqualifications for directors/trustees, the following are disqualified frombecoming directors/trustees:a. Permanently disqualifiedDirectors/trustees/officers/employees permanently disqualified bythe Monetary Board from holding adirector/trustee position:(1) Persons who have been convictedby final judgment of a court for offensesinvolving dishonesty or breach of trustsuch as but not limited to, estafa,embezzlement, extortion, forgery,malversation, swindling, theft, robbery,falsification, bribery, violation of B.P. Blg.22, violation of Anti-Graft and CorruptPractices Act and prohibited acts andtransactions under Section 7 of R.A. No.6713 (Code of Conduct and EthicalStandards for Public Officials andEmployees);(2) Persons who have been convictedby final judgment of a court sentencingthem to serve a maximum term ofimprisonment of more than six (6) years;(3) Persons who have been convictedby final judgment of the court for violationof banking laws, rules and regulations;(4) Persons who have been judiciallydeclared insolvent, spendthrift orincapacitated to contract;(5) Directors/trustees, officers oremployees of closed QBs who werefound to be culpable for such institution’sclosure as determined by the MonetaryBoard;(6) Directors/trustees and officers ofQBs found by the Monetary Board asadministratively liable for violation ofbanking laws, rules and regulations wherea penalty of removal from office isimposed, and which finding of theMonetary Board has become final andexecutory; or(7) Directors/trustees and officers ofQBs or any person found by the MonetaryBoard to be unfit for the position of directorstrustees or officers because they werefound administratively liable by anothergovernment agency for violation ofbanking laws, rules and regulations or anyoffense/violation involving dishonesty orbreach of trust, and which finding of saidQ RegulationsPart I - Page 34Manual of Regulations for Non-Bank Financial Institutions

§ 4143Q.108.12.31government agency has become final andexecutory.b. Temporarily disqualifiedDirectors/trustees/officers/employees disqualified by the MonetaryBoard from holding a director/trusteeposition for a specific/indefinite periodof time. Included are:(1) Persons who refuse to fully disclosethe extent of their business interest or anymaterial information to the appropriatedepartment of the SES when requiredpursuant to a provision of law or of acircular, memorandum, rule or regulationof the BSP. This disqualification shall be ineffect as long as the refusal persists;(Next page is Part I - Page 35)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 34a

§ 4143Q.108.12.31(2) Directors/trustees who have beenabsent or who have not participated forwhatever reasons in more than fiftypercent (50%) of all meetings, bothregular and special, of the board ofdirectors/trustees during theirincumbency, and directors/ trustees whofailed to physically attend for whateverreasons in at least twenty-five percent(25%) of all board meetings in any year,except that when a notarized certificationexecuted by the corporate secretary hasbeen submitted attesting that saiddirectors/trustees were given the agendamaterials prior to the meeting and thattheir comments/decisions thereon weresubmitted for deliberation/discussion andwere taken up in the actual board meeting,said directors/trustees shall be consideredpresent in the board meeting. Thisdisqualification applies only for purposesof the immediately succeeding election;(3) Persons who are delinquent in thepayment of their obligations as definedhereunder:(a) Delinquency in the payment ofobligations means that an obligation of aperson with a QB/trust entity where heis a director/trustee or officer, or at leasttwo (2) obligations with other QBs/trustentities/FIs, under different credit linesor loan contracts, are past due pursuantto Secs. X306, 4306Q, 4306S and 4303P;(b) Obligations shall include allborrowings from a QB/trust entity/FIobtained by:(i) A director/trustees or officer for hisown account or as the representative oragent of others or where he acts as aguarantor, indorser or surety for loans fromsuch FIs;(ii) The spouse or child under parentalauthority of the director/trustee or officer;(iii) Any person whose borrowings orloan proceeds were credited to the accountof, or used for the benefit of, a director/trustee or officer;(iv) A partnership of which a director/trustee or officer, or his spouse is themanaging partner or a general partnerowning a controlling interest in thepartnership; and(v) A corporation, association or firmwholly-owned or majority of the capital ofwhich is owned by any or a group ofpersons mentioned in the foregoing Items“(i)”, “(ii)” and “(iv)”;This disqualification shall be in effectas long as the delinquency persists.(4) Persons who have been convictedby a court for offenses involvingdishonesty or breach of trust such as, butnot limited to, estafa, embezzlement,extortion, forgery, malversation,swindling, theft, robbery, falsification,bribery, violation of B.P. Blg. 22, violationof Anti-Graft and Corrupt Practices Actand prohibited acts and transactions underSection 7 of R.A. No. 6713 (Code ofConduct and Ethical Standards for PublicOfficials and Employees), violation ofbanking laws, rules and regulations orthose sentenced to serve a maximum termof imprisonment of more than six (6) yearsbut whose conviction has not yet becomefinal and executory;(5) Directors/trustees and officers ofclosed QBs/trust entities pending theirclearance by the Monetary Board;(6) Directors/trustees disqualified forfailure to observe/discharge their duties andresponsibilities prescribed under existingregulations. This disqualification appliesuntil the lapse of the specific period ofdisqualification or upon approval by theMonetary Board on recommendation by theappropriate department of the SES of suchdirectors’/trustees’ election/re-election;(7) Directors/trustees who failed toattend the special seminar for board ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 35

§§ 4143Q.1 - 4143Q.210.12.31directors/trustees required under Item “c” ofSubsec. 4141Q.2. This disqualificationapplies until the director/trustee concernedhad attended such seminar;(8) Persons dismissed from employmentfor cause. This disqualification shall be ineffect until they have cleared themselves ofinvolvement in the alleged irregularity orupon clearance, on their request, from theMonetary Board after showing good andjustifiable reasons, or after the lapse of five(5) years from the time they were officiallyadvised by the appropriate department ofthe SES of their disqualification;(9) Those under preventive suspension;(10) Persons with derogatory records ascertified by, or on the official files of, thejudiciary, National Bureau of Investigation(NBI), Philippine National Police (PNP),quasi-judicial bodies, other governmentagencies, international police, monetaryauthorities and similar agencies orauthorities of foreign countries forirregularities or violations of any law, rulesand regulations that would adversely affectthe integrity of the director/trustee/officeror the ability to effectively discharge hisduties. This disqualification applies untilthey have cleared themselves of thealleged irregularities/violations or after alapse of five (5) years from the time thecomplaint, which was the basis of thederogatory record, was initiated;(11) Directors/trustees and officers ofQBs found by the Monetary Board asadministratively liable for violation ofbanking laws, rules and regulations wherea penalty of removal from office is imposed,and which finding of the Monetary Board ispending appeal before the appellate court,unless execution or enforcement thereof isrestrained by the court;(12) Directors/trustees and officers ofQBs or any person found by the MonetaryBoard to be unfit for the position of director/trustee or officer because they were foundadministratively liable by anothergovernment agency for violation of bankinglaws, rules and regulations or any offense/violation involving dishonesty or breach oftrust, and which finding of said governmentagency is pending appeal before theappellate court, unless execution orenforcement thereof is restrained by thecourt; and(13) Directors/trustees and officers ofQBs found by the Monetary Board asadministratively liable for violation ofbanking laws, rules and regulations wherea penalty of suspension from office or fineis imposed, regardless whether the findingof the Monetary Board is final and executoryor pending appeal before the appellatecourt, unless execution or enforcementthereof is restrained by the court. Thedisqualification shall be in effect during theperiod of suspension or so long as the fineis not fully paid.(As amended by Circular Nos. 584 dated 28 September 2007and 513 dated 10 February 2006)§ 4143Q.2 Persons disqualified tobecome officersa. The disqualifications for directors/trustees mentioned in Subsec. 4143Q.1 shalllikewise apply to officers, except thosestated in Items “b(2)” and “b(7)”.b. The spouses or relatives within thesecond degree of consanguinity or affinityare prohibited from holding officershippositions across the following functionalcategories within a QB:1. Decision making and seniormanagement function, e.g., chairman,president, chief executive officer (CEO),chief operating officer (COO), generalmanager, and chief financial officer (CFO)other than the treasurer or controller;2. Treasury function, e.g., Treasurer andVice President – Treasury;Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 36

§ 4143Q.210.12.313. Recordkeeping and financialreporting functions, e.g., controller andchief accountant;4. Safekeeping of assets, e.g., chiefcashier;5. Risk management function, e.g., chiefrisk officer;6. Compliance function, e.g.,compliance officer; and7. Internal audit function, e.g., internalauditor.The spouse or a relative within thesecond degree of consanguinity oraffinity of any person holding theposition of manager, cashier, oraccountant of a branch or extensionoffice of a QB or their respectiveequivalent positions is disqualified fromholding or being appointed to any ofsaid positions in the same branch orextension office.(As amended by Circular No. 699 dated 17 November 2010)(Next Page is Part I - Page 37)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 36a

§§ 4143Q.3 - 4143Q.408.12.31§ 4143Q.3 Effect of non-possession ofqualifications or possession ofdisqualifications. Director/trustee/officerelected or appointed who does not possessall the qualifications mentioned underSubsec. 4141Q.2 and the last paragraphof Sec. 4142Q and/or has any of thedisqualifications mentioned underSubsecs. 4143Q.1 and 4143Q.2 shall notbe confirmed by the confirming authorityunder Subsec. 4141Q.4 and shall beremoved from office even if he/sheassumed the position to which he/she waselected or appointed. Confirmed director/trustee/officer or officer not requiringconfirmation possessing any of thedisqualifications, as enumerated in theabovementioned subsections shall besubject to the disqualification proceduresprovided under Subsec. 4143Q.4.Director/trustee/officer, prior to assumingthe position to which he/she was elected/appointed, must submit to theappropriate department of the SES averified statement that he/she has all theaforesaid qualifications and none of thedisqualifications. The submission ofverified statement will apply to directors/trustees/officers elected/appointed after14 March 2006.(As amended by Circular No. 513 dated 10 February 2006)§ 4143Q.4 Disqualification proceduresa. The board of directors/trustees andmanagement of every institution shall beresponsible for determining the existenceof the ground for disqualification of theinstitution’s director/trustee/officer oremployee and for reporting the same tothe BSP. While the concerned institutionmay conduct its own investigation andimpose appropriate sanction/s as areallowable, this shall be without prejudiceto the authority of the Monetary Board todisqualify a director/trustee/officer/employee from being elected/appointedas director/trustee/officer in any FI underthe supervision of the BSP. Grounds fordisqualification made known to theinstitution, shall be reported to theappropriate department of the SES withinseventy-two (72) hours from knowledgethereof.b. On the basis of knowledge andevidence on the existence of any of thegrounds for disqualification mentioned inSubsecs. 4143Q.1 and 4143Q.2, thedirector/trustee or officer concerned shallbe notified in writing either by personalservice or through registered mail withregistry return receipt card at his/her lastknown address by the appropriatedepartment of the SES of the existence ofthe ground for his/her disqualification andshall be allowed to submit within fifteen(15) calendar days from receipt of suchnotice an explanation on why he/sheshould not be disqualified and included inthe watchlisted file, together with theevidence in support of his/her position. Thehead of said department may allow anextension on meritorious ground.c. Upon receipt of the reply/explanation of the director/trustee/officerconcerned, the appropriate department ofthe SES shall proceed to evaluate the case.The director/trustee/officer concerned shallbe afforded the opportunity to defend/clearhimself/herself.d. If no reply has been received fromthe director/trustee/officer concerned uponthe expiration of the period prescribedunder Item “b” above, said failure to replyshall be deemed a waiver and theappropriate department of the SES shallproceed to evaluate the case based onavailable records/evidence.e. If the ground for disqualification isdelinquency in the payment of obligation,the concerned director/trustee or officershall be given a period of thirty (30) calendardays within which to settle said obligationor, restore it to its current status or, toexplain why he/she should not beManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 37

§ 4143Q.408.12.31disqualified and included in the watchlistedfile, before the evaluation on hisdisqualification and watchlisting is elevatedto the Monetary Board.f. For directors/trustees/officers ofclosed banks, the concerned departmentof the SES shall make appropriaterecommendation to the Monetary Boardclearing said directors/trustees/officerswhen there is no pending case/complaintor evidence against them. When there isevidence that a director/trustee/officer hascommitted irregularity, the appropriatedepartment of the SES shall makerecommendation to the Monetary Boardthat his/her case be referred to the Officeof Special Investigation (OSI) for furtherinvestigation and that he/she be includedin the masterlist of temporarily disqualifiedpersons until the final resolution of his/hercase. Directors/trustees/officers withpending cases/complaints shall also beincluded in said masterlist of temporarilydisqualified persons upon approval by theMonetary Board until the final resolutionof their cases. If the director/trustee/officeris cleared from involvement in anyirregularity, the appropriate department ofthe SES shall recommend to the MonetaryBoard his/her delisting. On the other hand,if the director/trustee/officer concerned isfound to be responsible for the closure ofthe institution, the concerned departmentof the SES shall recommend to theMonetary Board his/her delisting from themasterlist of temporarily disqualifiedpersons and his/her inclusion in themasterlist of permanently disqualifiedpersons.g. If the disqualification is based ondismissal from employment for cause, theappropriate department of the SES shall, asmuch as practicable, endeavor to establishthe specific acts or omissions constitutingthe offense or the ultimate facts whichresulted in the dismissal to be able todetermine if the disqualification of thedirector/trustee/officer concerned iswarranted or not. The evaluation of thecase shall be made for the purpose ofdetermining if disqualification would beappropriate and not for the purpose ofpassing judgment on the findings anddecision of the entity concerned. Theappropriate department of the SES maydecide to recommend to the MonetaryBoard a penalty lower than disqualification(e.g., reprimand, suspension, etc.) if, in itsjudgment the act committed or omitted bythe director/trustee/officer concerned doesnot warrant disqualification.h. All other cases of disqualification,whether permanent or temporary shall beelevated to the Monetary Board forapproval and shall be subject to theprocedures provided in Items “a”,”b”,”c”and “d” above.i. Upon approval by the MonetaryBoard, the concerned director/trustee/officer shall be informed by the appropriatedepartment of the SES in writing either bypersonal service or through registeredmail with registry return receipt card, athis/her last known address of his/herdisqualification from being elected/appointed as director/trustee/officer in anyFI under the supervision of BSP and/or ofhis/her inclusion in the masterlist ofwatchlisted persons so disqualified.j. The board of directors/trustees ofthe concerned institution shall beimmediately informed of cases ofdisqualification approved by the MonetaryBoard and shall be directed to act thereonnot later than the following board meeting.Within seventy-two (72) hours thereafter,the corporate secretary shall report to theGovernor of the BSP through theappropriate department of the SES theaction taken by the board on the director/trustee/officer involved.k. Persons who are elected orappointed as director/trustee or officer inany of the BSP-supervised institutions forQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 38

§§ 4143Q.4 - 4143Q.508.12.31the first time but are subject to any of thegrounds for disqualification provided forunder Subsecs. 4143Q.1 and 4143Q.2,shall be afforded the procedural due processprescribed above.l. Whenever a director/trustee/officeris cleared in the process mentioned underItem “c” above or, when the ground fordisqualification ceases to exist, he/shewould be eligible to become director/trusteeor officer of any bank, QB, trust entity orany institution under the supervision of theBSP only upon prior approval by theMonetary Board. It shall be the responsibilityof the appropriate department of the SES toelevate to the Monetary Board the lifting ofthe disqualification of the concerneddirector/trustee/officer and his/her delistingfrom the masterlist of watchlisted persons.(As amended by Circular No. 584 dated 28 September 2007)§ 4143Q.5 Watchlisting. To provide theBSP with a central information file to be usedas reference in passing upon and reviewingthe qualifications of persons elected orappointed as director/trustee or officer of abank, QB or trust entity, the SES shallmaintain a watchlist of persons disqualifiedto be a director/trustee or officer of suchentities under its supervision under thefollowing procedures:a. Watchlist categories. Watchlistingshall be categorized as follows:(1) Disqualification File “A”(Permanent)- Directors/trustees/officers/employees permanently disqualified by theMonetary Board from holding a director/trustee/officer position.(2) Disqualification File “B”(Temporary)- Directors/trustees/officers/employees temporarily disqualified by theMonetary Board from holding a director/trustee/officer position.b. Inclusion of directors/trustees/officers/employees in the watchlist.Directors/trustees/officers/employeesdisqualified under Subsec. 4143Q.4included in the watchlist disqualificationfiles “A” or “B”.c. Confidentiality. Watchlist files shallbe for internal use only of the BSP and maynot be accessed or queried upon by outsideparties including banks, QBs and trustentities except with the authority of theperson concerned and with the approval ofthe Deputy Governor, SES or the Governoror the Monetary Board.BSP will disclose information on itswatchlist files only upon submission of aduly accomplished and notarizedauthorization from the concerned personand approval of such request by theDeputy Governor, SES or the Governor orthe Monetary Board. The prescribedauthorization form to be submitted to theconcerned department of SES is AppendixQ-45.QBs can gain access to information inthe said watchlist for the sole purpose ofscreening their applicants for hiring and/orconfirming their elected directors/trusteesand appointed officers. QBs must obtain thesaid authorization on an individual basis.d. Delisting. All delistings shall beapproved by the Monetary Board uponrecommendation of the operatingdepartments of SES except in cases ofpersons known to be dead where delistingshall be automatic upon proof of death andneed not be elevated to the Monetary Board.Delisting may be approved by the MonetaryBoard in the following cases:(1) Watchlist - Disqualification File “B”(Temporary)(a) After the lapse of the specific periodof disqualification;(b) When the conviction by the courtfor crimes involving dishonesty, breach ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 39

§§ 4143Q.5 - 4145Q09.12.31trust and/or violation of banking lawbecomes final and executory, in which casethe director/trustee/officer/employee isrelisted to Watchlist - Disqualification File“A” (Permanent); and(c) Upon favorable decision orclearance by the appropriate body, i.e.,court, NBI, BSP, bank, QB, trust entity orsuch other agency/body where theconcerned individual had derogatory record.Directors/trustees/officers/employeesdelisted from the Watchlist- Disqualification File “B” other thanthose upgraded to Watchlist- Disqualification File “A” shall beeligible for re-employment with any bank,QB or trust entity.(As amended by CL-2007-001 dated 04 January 2007 andCL-2006-046 dated 21 December 2006)§ 4143Q.6 Prohibition against foreignofficers/employees of financingcompanies. Except in the case of technicalpersonnel whose employment may bespecifically authorized by the Secretary ofJustice, foreigners cannot be officers oremployees of financing companies.Sec. 4144Q (2008 - 4146Q) MonetaryBoard Confirmation of Directors/Trusteesand Senior Officers. The election/appointment of directors/trustees andofficers with the rank of senior vice-presidentand up shall require confirmation by theMonetary Board.The election/appointment of thedirectors/trustees and such officers shall bedeemed to have been confirmed by theMonetary Board if after sixty (60) businessdays from receipt of the reports required inAppendix Q-3 by the BSP, no advice againstsaid election/appointment has been receivedby the QB concerned.If the Monetary Board finds grounds fordisqualification, the director/trustee/officerso elected/appointed may be removedfrom office even if he/she has assumed theposition to which he/she was electedappointed pursuant to Section 9-A ofR.A. No. 337, as amended.Sec. 4145Q (2008 - 4144Q) InterlockingDirectorships and/or Officerships. Inorder to safeguard against the excessiveconcentration of economic power, unfaircompetitive advantage or conflict ofinterest situations to the detriment ofothers through the exercise by the sameperson or group of persons of undueinfluence over the policy-making and/ormanagement functions of similar FIs whileat the same time allowing banks, QBs andNBFIs without quasi-banking functions tobenefit from organizational synergy oreconomies of scale and effective sharingof managerial and technical expertise, thefollowing regulations shall governinterlocking directorships and/orofficerships within the financial systemconsisting of banks, QBs and NBFIs.For purposes of this Section, QBs shallrefer to IHs, finance companies, trust entitiesand all other NBFIs with quasi-bankingfunctions while NBFIs shall refer to IHs,finance companies, trust entities, insurancecompanies, securities dealers/brokers, creditcard companies, NSSLAs, holdingcompanies, investment companies,government NBFIs, asset managementcompanies, insurance agencies/brokers,venture capital corporations, FX dealers,money changers (MCs), lending investors,pawnshops, fund managers, mutual buildingand loan associations, remittance agents andall other NBFIs without quasi-bankingfunctions.a. Interlocking directorshipsWhile concurrent directorship may be theleast prejudicial of the various relationshipscited in this Section to the interests of theFIs involved, certain measures are stillnecessary to safeguard against theQ RegulationsPart I - Page 40Manual of Regulations for Non-Bank Financial Institutions

§ 4145Q09.12.31disadvantages that could result fromindiscriminate concurrent directorship.(1) Except as may be authorized by theMonetary Board or as otherwise providedhereunder, there shall be no concurrentdirectorships between QBs or between aQB and a bank; and(2) Without the need for prior approvalof the Monetary Board, concurrentdirectorships between entities not involvingan IH shall be allowed in the followingcases:(a) A QB and a bank without quasibankingfunctions; and(b) A bank and one (1) or more of itssubsidiary bank/s, QB/s, and NBFI/s; and(c) A QB and an NBFI.For purposes of the foregoing, ahusband and his wife shall be consideredas one (1) person.b. Interlocking directorships andofficershipsIn order to prevent any conflict ofinterest resulting from the exercise ofdirectorship coupled with the reinforcinginfluence of an officer’s decision-makingand implementing powers, the followingrules shall be observed.(1) Except as may be authorized bythe Monetary Board or as otherwiseprovided hereunder, there shall be noconcurrent directorship and officershipbetween QBs, or between a QB and abank, and between a QB and an NBFI.(2) Without the need for prior approvalof the Monetary Board, concurrentdirectorship and officership shall be allowedin the following cases:(a) Between a QB and one (1) or moreof its subsidiary QB/s and NBFI/s;(b) Between a QB, other than aninvestment house and one (1) or more of itssubsidiary banks, QBs and NBFI/s otherthan investment house/s; and(c) Between a bank and one (1) or moreof its subsidiary bank/s, QB/s, and NBFIs,other than investment house/s.c. Interlocking officershipsA concurrent officership in different FIsmay present more serious problems ofself-dealing and conflict of interest. Multiplepositions may result in poor governance orunfair competitive advantage. Consideringthe full-time nature of officer positions, thedifficulties of serving two (2) offices at thesame time, and the need for effective andefficient management, the following rulesshall be observed:As a general rule, there shall be noconcurrent officerships, includingsecondments, between QBs or between aQB and a bank or between a QB and anNBFI. For this purpose, secondment shallrefer to the transfer/detachment of a personfrom his regular organization for temporaryassignment elsewhere where the secondedemployee remains the employee of thehome employer although his salaries andother remuneration may be borne by the hostorganization.However, subject to prior approval ofthe Monetary Board, concurrentofficerships, including secondments, may beallowed in the following cases:(1) Between a QB, other than an IH,and not more than two (2) of its subsidiarybank/s, QB/s,and NBFI/s other than IH/s; or(2) Between two (2) QBs, or between aQB, other than an IH, and a bank, orbetween a QB and an NBFI: Provided, Thatat least twenty percent (20%) of the equityof each of the banks, QBs or NBFIs isowned by a holding company or a QB/bankand the interlocking arrangement isnecessary for the holding company or theQB/bank to provide technical expertise ormanagerial assistance to its subsidiaries/affiliates.(3) Between a QB and not more thantwo (2) of its subsidiary QB/s, andNBFI/s; or(4) Between a bank and not more thanManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 41

§§ 4145Q - 4146Q09.12.31two (2) of its subsidiary bank/s, QB/s, andNBFIs, other than IH/s; or(5) Between a bank and not more thantwo (2) of its subsidiary QB/s, and NBFI/s.Aforementioned concurrent officershipsmay be allowed, subject to the followingconditions:(a) that the positions do not involve anyfunctional conflict of interests;(b) that any officer holding the positionsof president, CEO, chief operating officer orchief financial officer may not beconcurrently appointed to any of saidpositions or their equivalent;(c) that the officer involved, or hisspouse or any of his relatives within the firstdegree of consanguinity or affinity or by legaladoption, or a corporation, association orfirm wholly-or majority owned or controlledby such officer or his relatives enumeratedabove, does not own in his/its own capacitymore than twenty percent (20%) of thesubscribed capital stock of the entities inwhich the QB has equity investments; and(d) that where any of the positionsinvolved is held on full-time basis, adequatejustification shall be submitted to theMonetary Board.(6) Concurrent officership position inthe same capacity which do not involvemanagement functions, i.e., internalauditors, corporate secretary, assistantcorporate secretary and security officer,between a QB and one or more of itssubsidiary QB/s and NBFI/s, or between abank and one or more of its subsidiary QBsand NBFIs, or between bank/s, QB/s andNBFI/s, other than IH/s: Provided, That atleast twenty percent (20%) of the equity ofeach of the banks, QBs and NBFIs is ownedby a holding company or by any of thebanks/QBs within the group.For purposes of this Section, membersof a group or committee, includingsub-groups or sub-committees, whose dutiesinclude functions of management such asthose ordinarily performed by regularofficers, shall likewise be considered asofficers.It shall be the responsibility of theCorporate Governance Committee toconduct an annual performance evaluationof the board of directors/trustees and seniormanagement. When a director/trustee orofficer has multiple positions, theCommittee should determine whether ornot said director/trustee or officer is able toand has been adequately carrying out his/her duties and, if necessary, recommendchanges to the board based upon saidperformance/review.(As amended by Circular Nos. 646 dated 23 February 2009and 592 dated 28 December 2007)§ 4145Q.1 (2008 - 4144Q.1)Representatives of government. Theprovisions of this Subsection shall apply topersons appointed to such positions asrepresentatives of the government orgovernment-owned or controlled entitiesunless otherwise provided under existinglaws.(As amended by Circular No. 592 dated 28 December 2007)Sec. 4146Q (2008 - 4145Q) Profit Sharingof Directors/Trustees/Officers andEmployees. Profit sharing programs adoptedin favor of directors/trustees/officers andemployees shall be reflected in the by-lawsof QBs, subject to the following guidelines:a. The base in any profit sharingprogram shall be the net income for the yearof the QB, as shown in its ConsolidatedStatement of Income and Expenses (CSIE) forthe year, net of the following:(1) All cumulative dividends accruingto preferred stock to the extent not coveredby earned surplus;(2) Accrued interest receivable creditedto income but not yet collected, net ofreserves already set up for uncollectedinterest on loans;Q RegulationsPart I - Page 42Manual of Regulations for Non-Bank Financial Institutions

§§ 4146Q - 4148Q08.12.31schedule approved by the Monetary Board,as well as all amortizations due ondeferred charges;(4) Provisions for the current year’s taxes;(5) Income tax deferred for the year:Provided, however, That in case of reversalof deferred income taxes excluded from netincome in previous years’ profit sharings,the deferred income tax reversed to expenseshall be added back to net income to arriveat the basis for profit sharing for the yearduring which the reversal is made;(6) Accumulated profits not yet receivedbut already recorded by a QB representingits share in profits of its subsidiaries underthe equity method of accounting; andb. The QB may provide in its by-lawsfor other priorities in the computation of netprofits for purposes of profit sharing:Provided, That in no case shall profit sharingtake precedence over any of the items inthe preceding paragraph.Sec. 4147Q Compensation and OtherBenefits of Directors/Trustees andOfficers. To protect the funds of creditors,the Monetary Board may regulate/restrictthe payment by the QB/trust entity ofcompensation, allowances, fees, bonuses,stock options, profit sharing and fringebenefits to its directors/trustees and officersin exceptional cases and when thecircumstances warrant, such as, but notlimited to, the following:a. When the QB/trust entity is undercontrollership, conservatorship or when ithas outstanding emergency loans andadvances and such other forms of creditaccommodation from the BSP which areintended to provide it with liquidity in timesof need;b. When the institution is found by theMonetary Board to be conducting businessin an unsafe or unsound manner; andc. When it is found by the MonetaryBoard to be in an unsatisfactory financialcondition such as, but not limited to, thefollowing cases:(1) Its capital is impaired;(2) It has suffered continuous lossesfrom operations for the past three (3) years;(3) Its composite CAMELS rating in thelatest examination is below “3”; and(4) It is under rehabilitation by the BSP/PDIC which rehabilitation may includedebt-to-equity conversion, etc.In the presence of any one (1) ormore of the circumstances mentionedabove, the Monetary Board may imposethe following restrictions in thecompensation and other benefits ofdirectors and officers:a. In the case of profit sharing, theprovision of Sec. 4146Q shall be observedexcept that for purposes of this Section, thetotal amount of unbooked valuation reservesand deferred charges shall be deducted fromthe net income.b. Except for the financial assistanceto meet expenses for the medical,maternity, education and other emergencyneeds of the directors/trustees or officersor their immediate family, the other formsof financial assistance may be suspended.c. When the total compensationpackage including salaries, allowances,fees and bonuses of directors/trustees andofficers are significantly excessive ascompared with peer group averages, theMonetary Board may order their reductionto reasonable levels: Provided, That evenif a QB/trust entity is in financial trouble,it may nevertheless be allowed to grantrelatively higher salary packages in orderto attract competent officers and qualitystaff as part of its rehabilitation program.The foregoing provisions founded onSection 18 of R.A. No. 8791 shall be deemedpart of the benefits and compensationprograms of QBs/trust entities.Sec. 4148Q (Reserved)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 43

§§ 4149Q - 4149Q.909.12.31Sec. 4149Q Conducting Business in anUnsafe/Unsound Manner. Whether aparticular activity may be considered asconducting business in an unsafe orunsound manner, all relevant facts must beconsidered. An analysis of the impactthereof on the QB’s/trust entity’s operationsand financial conditions must beundertaken, including evaluation of capitalposition, asset condition, management,earnings posture and liquidity position.In determining whether a particularact or omission, which is not otherwiseprohibited by any law, rule or regulationaffecting QBs/trust entities, may bedeemed as conducting business in anunsafe or unsound manner, the MonetaryBoard, upon report of the head of thesupervising or examining departmentbased on findings in an examination or acomplaint, shall consider any of thefollowing circumstances:a. The act or omission has resulted ormay result in material loss or damage, orabnormal risk or danger to the safety,stability, liquidity or solvency of theinstitution;b. The act or omission has resultedor may result in material loss or damageor abnormal risk to the institutions,creditors, investors, stockholders, or to theBSP, or to the public in general;c. The act or omission has caused anyundue injury, or has given unwarrantedbenefits, advantage or preference to theQB/trust entity or any party in thedischarge by the director or officer of hisduties and responsibilities throughmanifest partiality, evident bad faith orgross inexcusable negligence; ord. The act or omission involvesentering into any contract or transactionmanifestly and grossly disadvantageous tothe QB/trust entity, whether or not thedirector or officer profited or will profitthereby.The list of activities which may beconsidered unsafe and unsound is shownin Appendix Q-24.(As amended by Circular No. 640 dated 16 January 2009)§§ 4149Q.1 - 4149Q.8 (Reserved)§ 4149Q.9 Sanctions. The MonetaryBoard may, at its discretion and based onthe seriousness and materiality of the actsor omissions, impose any or all of thefollowing sanctions provided under Section37 of R.A. No. 7653 and Section 56 ofR.A. No. 8791, whenever a QB/trust entityconducts business in an unsafe and unsoundmanner:a. Issue an order requiring the QB/trustentity to cease and desist from conductingbusiness in an unsafe and unsound mannerand may further order that immediate actionbe taken to correct the conditions resultingfrom such unsafe or unsound practice;b. Fines in amounts as may bedetermined by the Monetary Board to beappropriate, but in no case to exceedP30,000 a day on a per transaction basistaking into consideration the attendantcircumstances, such as the gravity of the actor omission and the size of the QB/trustentity, to be imposed on the QB/trust entity,their directors and/or responsible officers;c. Suspension of lending or FXoperations or authority to accept new depositsubstitutes and/or new trust accounts or tomake new investments;d. Suspension of responsible directorsand/or officers;e. Revocation of quasi-banking licenseand/or trust authority; and/orf. Receivership and liquidation underSection 30 of R.A. No. 7653.All other provisions of Sections 30 and37 of R.A. No. 7653, wheneverappropriate, shall also be applicable onthe conduct of business in an unsafe orunsound manner.Q RegulationsPart I - Page 44Manual of Regulations for Non-Bank Financial Institutions

§§ 4149Q.9 - 4150Q08.12.31The imposition of the abovesanctions is without prejudice to thefiling of appropriate criminal chargesagainst culpable persons as provided inSections 34, 35 and 36 of R.A. No.7653.Sec. 4150Q Rules of Procedure onAdministrative Cases Involving Directorsand Officers of Quasi-Banks. The rulesof procedure on administrative casesinvolving directors and officers of QBs areshown in Appendix Q-35.(Next page is Part I - Page 45)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 44a

§§ 4151Q - 4151Q.508.12.31I. BRANCHES AND OTHER OFFICESSec. 4151Q Establishment. Prior BSPauthority shall be obtained beforeoperating a branch, extension office oragency, including any arrangementwhereby another person or entity isauthorized to act as an agent forsolicitation, issuance or servicing ofdeposit substitutes for the QB.Agency arrangements shall refer to allor any type of services to be performedby another party as an agent other thancollection agency for loans payable ininstallments/amortization, and payingagency under a definite and specific periodfor purposes of redeeming long-term notesand/or bonds.§ 4151Q.1 Evaluation guideposts. Therate at which branches, agencies, extensionoffices, etc. are to be established shalldepend upon the ability of the companyto conduct operations from the head office,as well as correspondent/bankingarrangements.§ 4151Q.2 Additional capital, ifrequired. An applicant QB may berequired to put up additional capital in anamount to be determined by theappropriate department of the SES, basedon criteria which consider expectedgrowth of risk assets and capital accountsand for this purpose, the methods ofcomputing such additional capital, asshown in Appendix Q-2, shall be used.§ 4151Q.3 Other requirements/factorsto be considered. Other requirements/factors to be considered are the applicantQB’s general compliance with laws, rules,and regulations, and policies of the BSP,such as:a. Capital adequacy and solvency;b. Profitability and capacity to absorblosses; andc. Reserve and liquidity position.§ 4151Q.4 Conditions precludingprocessing of applications. The existenceof any of the following conditions shallpreclude/suspend the processing of theapplication:a. The applicant has not complied withthe ceilings on credit accommodations toDOSRI during the last sixty (60) daysimmediately preceding the date ofapplication;b. The net worth of the applicant isfound to be deficient during the last sixty(60) days immediately preceding the dateof application; andc. The applicant has incurred netdeficiencies in reserves against depositsubstitute liabilities during the last eight (8)weeks immediately preceding the date ofapplication.§ 4151Q.5 Documentary requirementsAll applications shall be supported by thefollowing documents:a. Ability to conduct operations fromthe head office as not to be a cause fordelayed submission of reports to the BSPand/or recording of transactions in the headoffice;b. Correspondent banking and auditarrangements between the branch and thehead office to ensure effective and efficientcash/money transactions;c. Certified true copy of the boardresolution authorizing the establishment ofa branch;d. Services to be offered, as well asany extension offices, etc. to be opened;e. Days and hours to be observed;f. Areas to be served;g. Bio-data of the proposed branchmanager and organizational chart;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 45

§§ 4151Q.5 - 4160Q.310.12.31h. Business and/or economicjustifications (including data) for theestablishment of the branch; andi. Number of FIs in the area (banks,IHs, finance companies and pawnshops).§ 4151Q.6 Filing of applicationsApplications for a certificate of authority tooperate a branch, an extension office or anagency shall be filed with the SEC, whichoffice shall refer the same to the appropriatedepartment of the SES for comments andrecommendations. A copy of the applicationfiled with the SEC, with the pertinentdocuments, shall simultaneously befurnished the appropriate department of theSES for advance verification of the QB’scompliance with the requirements under theprovisions of Sec. 4151Q.§ 4151Q.7 Period within which tosubmit complete requirements. Theapplicant QB shall have one (1) month fromnotice of the receipt of the SEC referral bythe appropriate department of the SES withinwhich to submit/complete the requirementsunder this Section, after which the nonsubmissionof complete documents shallcause the return of the application for theQB’s lack of interest to pursue the same.§ 4151Q.8 Prohibition againstoperating without Securities and ExchangeCommission license. No branch, extensionoffice or agency shall start operations unlessthe appropriate SEC license, which likewiseserves as authorization for the branch/extension office/agency to perform quasibankingfunctions, has been issued.Secs. 4152Q - 4155Q (Reserved)J. (RESERVED)Secs. 4156Q - 4159Q (Reserved)K. BANKING PREMISESSec. 4160Q (2008 - 4651Q) Quasi-BankPremises and Other Fixed Assets. Thefollowing rules shall govern the premisesand other fixed assets of QBs.§ 4160Q.1 (2008 - 4651Q.1)Appreciation or increase in book value. QBpremises, furniture, fixtures and equipmentshall be accounted for using the cost modelunder Philippine Accounting Standards(PAS) 16 “Property, Plant and Equipment.”Outstanding appraisal increment as of 13October 2005 arising from mergers andconsolidation and other cases approved bythe Monetary Board, shall be deemed partof the cost of the assets. However, appraisalincrement previously allowed to be bookedshall be reversed.Accordingly, the booking ofappreciation or increase in the book valueof QB premises and other fixed assets incases where the market value of the propertyhas greatly increased since the originalpurchase is no longer allowed.(As amended by Circular No. 520 dated 20 March 2006)§ 4160Q.2 (Reserved)§ 4160Q.3 (2008 - 4651Q.3) Reclassificationof real and other properties acquired toQB premises, furniture, fixture andequipment; Sanctions. QBs may reclassifyROPA to QB premises, furniture, fixture andequipment, subject to the followingconditions:(a) Prior written approval of themajority of the members of the board ofdirectors has been obtained for suchreclassification. The approval shall bemanifested in a resolution passed by theboard of directors during a meeting and shallcontain the following information:(1) Date ROPA was acquired;Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 46

§ 4160Q.310.12.31(2) Description of ROPA property;(3) Outstanding balance of ROPA at thetime of reclassification;(4) Specific purpose for reclassifyingsaid property to QB premises, furniture,fixture and equipment; and(5) Justification and plan for expansion,in the case of real and other propertyearmarked for future use.Said resolution shall also be madeavailable for inspection by BSP examiners,together with the supporting records anddocuments involving the ROPA account;and(b) Only such acquired asset, or aportion thereof, that will be (i) immediatelyused, or (ii) ready and available for usewithin a two (2)-year period from date ofreclassification (in case of ROPA earmarkedfor future use) may be reclassified to QBpremises, furniture, fixture and equipment;(c) ROPA reclassified to QB Premises,Furniture, Fixture and Equipment shall berecorded at its net carrying amount wherethe amounts booked as cost, accumulateddepreciation and allowances for losses forQB Premises, Furniture, Fixture andEquipment shall correspond to the balanceof these accounts under ROPA at the timeof reclassification. As such, thereclassification shall not give rise to anygains/(losses) being recognized in the QBbooks; and(d) Said reclassification shall not causethe QB to exceed the prescribed ceiling oninvestment in real estate and improvementsthereon, including QB equipment, providedunder Subsec. X160.2.Within five (5) business days from dateof reclassification, the QB shall submit theCertification on Compliance withRegulations on the Reclassification of ROPAto QB Premises, Furniture, Fixture andEquipment (Appendix Q-54) signed by thepresident of the QB or officer of equivalentrank, to the appropriate department of theSES. Said certification shall be accompaniedby the certified true copy of the resolutionof the QB’s board of directors authorizingthe reclassification.Sanctions. The following sanctions shallbe imposed for violations noted:1. On the QBa. Monetary finesA QB which fails to comply with theprovisions of this Subsec. shall besubject to monetary penalties underAppendix Q-39.1) For non-submission of the requiredcertificationA QB which fails to submit the requiredCertification on Compliance withRegulations on the ROPA to QB Premises,Furniture, Fixture and Equipment or thecertified true copy of the resolution of theboard of directors authorizing saidreclassification within the prescribeddeadline shall be subject to monetarypenalties applicable to minor offenses underAppendix Q-39 which shall be reckoned ona daily basis from the day following the duedate of submission until the requiredcertification on compliance or the certifiedtrue copy of the resolution of the board ofdirectors is filed with the BSP.2) For false/misleading statementsA QB which has been found to havewillfully made a false or misleadingstatement in the required Certification onCompliance with Rules and Regulations onthe ROPA to QB Premises, Furniture, Fixtureand Equipment or in the certified true copyof the resolution of the QB board ofdirectors shall be subject to the monetarypenalties applicable to minor offenses underAppendix Q-39 for the willful making of afalse or misleading statement which shallbe reckoned on a daily basis from the dayfollowing the due date of the saidcertification until such time that an amendedManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 46a

§ 4160Q.310.12.31or corrected certification on compliance orcertified true copy of the resolution of theboard of directors has been submitted tothe BSP.2. On the concerned directors/officers of the banka. For willful non-complianceDirectors/officers of the QB whowillfully fail/refuse to comply with theprovisions of this Subsection shall besubject to the monetary penaltiesapplicable to minor offenses underAppendix Q-39.b. For false/misleading statementsDirectors/officers of the QB whichhave been found to have willfully falselycertified or willfully submitted misleadingstatements in the required Certification onCompliance with the Regulation on theReclassification of ROPA to QB Premises,Furniture, Fixture and Equipment or in thecertified true copy of the resolution of theQB’s board of directors shall be subject tothe monetary penalties applicable to minoroffenses under Appendix Q-39, which shallbe reckoned on a daily basis from the dayfollowing the due date of the saidcertification until such time that an amendedor corrected certification on compliance orcertified true copy of the resolution of theboard of directors has been submitted tothe BSP.The imposition of the above sanctions iswithout prejudice to the filing of appropriatecriminal charges against culpable personsas provided under Section 35 of R.A. No.7653 for the willful making of a false/misleading statement.(As amended by Circular no. 701 dated 13 December 2010)(Next Page is Part I - Page 47)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 46b

§§ 4160Q.4 - 4174Q09.12.31§§ 4160Q.4 - 4160Q.9 (Reserved)§ 4160Q.10 (2008 - 4651Q.9) BatasPambansa Blg. 344 – An Act to Enhancethe Mobility of Disabled Persons byRequiring Certain Buildings, Institutions,Establishments and Public Utilities toInstall Facilities and Other Devices. Inorder to promote the realization of therights of disabled persons to participatefully in the social life and the developmentof the societies in which they live and theenjoyment of the opportunities availableto other citizens, no license or permit forthe construction, repair or renovation ofpublic and private buildings for public use,educational institutions, airports, sports andrecreation centers and complexes,shopping centers or establishments, publicparking places, workplaces, publicutilities, shall be granted or issued unlessthe owner or operator thereof shall installand incorporate in such building,establishment or public utility, sucharchitectural facilities or structural featuresas shall reasonably enhance the mobilityof disabled persons such as sidewalks,ramps, railings and the like. If feasible, allsuch existing buildings, institutions,establishments, or public utilities may berenovated or altered to enable the disabledpersons to have access to them.L. MANAGEMENT CONTRACTS ANDOUTSOURCING OF BANKINGFUNCTIONSSec. 4161Q (2008 - 4182Q) ManagementContracts. Subject to existing laws, allagreements whereby the affairs oroperations of a QB will be carried out byanother corporation, person or group ofpersons, shall be subject to prior approvalby the BSP.The agreements referred to in thepreceding paragraph shall not be enteredinto for a period longer than five (5) years.Existing agreements shall be allowed up tothe termination date thereof: Provided,however, That any renewal or extensionupon termination date shall be subject toapproval by the BSP.Sec. 4162Q (2008 - 4190Q) Duties andResponsibilities of Quasi-Banks and theirDirectors/Officers in All Cases ofOutsourcing of Quasi-Banking FunctionsThe rules on outsourcing of banking functionsas shown in Appendix Q-37 shall be adoptedin so far as they are applicable to QBs.(As amended by Circular Nos. 642 dated 30 January 2009, 610dated 26 May 2008, 596 dated 11 January 2008, 548 dated25 September 2006 and 543 dated 08 September 2006)Sec. 4163Q - 4167Q (Reserved)M. (RESERVED)Sec. 4168Q - 4172Q (Reserved)N. RISK MANAGEMENTSec. 4173Q (2008 - 4193Q) Supervision byRisks. The guidelines on supervision by riskto provide guidance on how QBs shouldidentify, measure, monitor and control risksare shown in Appendix Q-42.The guidelines set forth theexpectations of the BSP with respect to themanagement of risks and are intended toprovide more consistency in how the riskfocusedsupervision function is applied tothese risks. The BSP will review the risksto ensure that a QB’s internal riskmanagement processes are integrated andcomprehensive. All QBs should follow theguidance in their risk management efforts.(Circular No. 510 dated 19 January 2006)Sec. 4174Q (2008 - 4194Q) Market RiskManagement. The guidelines on market riskmanagement in Appendix Q-43 set forth theexpectations of the BSP with respect to themanagement of market risk and are intendedManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 47

§§ 4174Q - 4180Q.108.12.31to provide more consistency in how the riskfocusedsupervision function is applied tothis risk. QBs are expected to have anintegrated approach to risk management toidentify, measure, monitor and control risks.Market risk should be reviewed togetherwith other risks to determine overall riskprofile.The BSP is aware of the increasingdiversity of financial products and thatindustry techniques for measuring andmanaging market risk are continuouslyevolving. As such, the guidelines areintended for general application; specificapplication will depend to some extent onthe size, complexity and range of activitiesundertaken by individual QBs.The guidelines on market riskmanagement are shown in Appendix Q - 15.(Circular No. 544 dated 15 September 2006)Sec. 4175Q (2008 - 4195Q) Liquidity RiskManagement. The guidelines on liquidityrisk management in Appendix Q-44 set forththe expectations of the BSP with respect tothe management of liquidity risk and areintended to provide more consistency inhow the risk-focused supervision functionis applied to this risk. QBs are expected tohave an integrated approach to riskmanagement to identify, measure, monitorand control risks. Liquidity risk should bereviewed together with other risks todetermine overall risk profile.The guidelines are intended for generalapplication; specific application willdepend on the size and sophistication of aparticular QB and the nature andcomplexity of its activities.The guidelines on liquidity market riskmanagement are shown in Appendix Q - 15.(Circular No. 545 dated 15 September 2006)Secs. 4176Q - 4179Q (Reserved)Sec. 4180Q (2008 - 4191Q) ComplianceSystem; Compliance Officer. QBs shalldevelop and implement a compliancesystem and appoint/designate a complianceofficer to oversee its implementation.§ 4180Q.1 (2008 - 4191Q.1) Compliancesystem. The compliance system shall havethe following basic elements.a. A written compliance programapproved by the board of directors:(1) The compliance program shallenable the QB to identify the relevantPhilippine laws and regulations, analyzethe corresponding risks of non-compliance,and prioritize the compliance risks(e.g., low, medium, high).(2) The program shall provide forperiodic compliance testing withapplicable legal and regulatoryrequirements. Testing frequency shall becommensurate with identified risk levels(e.g., annual testing for low-risk, quarterlytesting for medium-risk, monthly testingfor high-risk). It shall also provide for thereporting of compliance findings noted toappropriate levels of management.(3) The program shall establish theresponsibilities and duties of the complianceofficer and other personnel (if any) involvedin the compliance function.(4) A copy of the compliance programand the written approval of the board ofdirectors shall be submitted to theappropriate department of the SES withintwenty (20) business days from date ofapproval.(5) The program shall be updated atleast annually to incorporate changes inlaws and regulations. Any changes in theprogram shall likewise be approved by theQB’s board of directors and submitted toBSP within twenty (20) business days fromthe date of approval.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 48

§§ 4180Q.1 - 4180Q.411.12.31b. A constructive working relationship withregulatory agencies.The QB, through its compliance officer, mayconsult the regulatory agencies for additionalclarification on specific provisions of laws andregulations and/or discuss compliance findingswith the regulatory authorities. A dialogue mayalso be initiated with respect to borderlineissues.c. A clear and open communicationprocess within the QB to educate and addresscompliance matters.Officers and staff shall be trained on theregulatory requirements through regularmeetings, distribution of manuals anddissemination of regulatory issuance.d. Continuous monitoring and assessmentof the compliance program.The program shall provide for the periodicreview of the compliance function to measureits effectiveness. The review may be carried outby the internal audit department of the QB.The compliance program may operateparallel to or as part of a QB’s internal controland auditing program.§ 4180Q.2 (2008 - 4191Q.2) Complianceofficera. The principal function of the complianceofficer is to oversee and coordinate theimplementation of the compliance system. Hisresponsibility shall include the identification,monitoring and controlling of compliancerisk.b. The appointment/designation of acompliance officer shall require prior approvalof the Monetary Board. The bio-data of theproposed compliance officer shall besubmitted to the appropriate department of theSES.c. The compliance officer shall havethe skills and expertise to provideappropriate guidance and direction to thebank on the development, implementationand maintenance of the complianceprogram.d. QBs with total resources of P500million and above shall appoint an independentfull-time compliance officer, who shall have arank of at least a vice president or its equivalent.e. For QBs with total resources of belowP500 million, an incumbent senior officer maybe designated concurrently as the QB’scompliance officer: Provided, That suchdesignation will not give rise to any conflict ofinterest situation and that the main function ofthe senior officer shall be that of a complianceofficer.The internal auditor of a QB may also bedesignated as its compliance officer subject tothe condition that his main function shall be thatof a compliance officer.Transitory provision. Compliance officersconcurrently holding the position of Head ofInternal Audit or Internal Auditor shall be givenone (1) year from 02 February 2008 within whichto comply with this Subsection.The documentary requirements on theapproval of the appointment of trust andcompliance officers of NBQBs and trustcorporations are listed in Appendix Q-57a.(As amended by CL-2011-045 dated 01 July 2011 and Circular No.598 dated 11 January 2008)§ 4180Q.3 (2008 - 4191Q.3) Compliancerisk. Compliance risk is the risk of legal orregulatory sanctions, financial loss, or loss toreputation a QB may suffer as a result of its failureto comply with all applicable laws, regulations,codes of conduct and standards of good practice.§ 4180Q.4 (2008 - 4191Q.4)Responsibilities of the board of directors andsenior management on compliance. Aside fromthe duties and responsibilities of the board ofdirectors mentioned under Subsec. 4141Q.3, theboard should oversee the implementation of thecompliance policy and ensure that complianceissues are resolved expeditiously. Seniormanagement should be responsible forestablishing a compliance policy, ensuring thatit is observed, reporting to the board ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 49

§§ 4180Q.4 - 4180Q.808.12.31directors on its ongoing implementationand assessing its effectiveness andappropriateness. Senior managementshould, at least once a year, report to theboard of directors or a committee of theboard on matters relevant to thecompliance policy and its implementation,recommending any required changes tothe policy. The report should assist theboard members in making an informedassessment as to whether the institution ismanaging its compliance risk effectively.However, any material breaches of laws,rules and standards shall be reportedpromptly.§ 4180Q.5 (2008 - 4191Q.5) Status ofcompliance function. The compliancefunction should have a formal status withinthe organization established by a charteror other formal document approved by theboard of directors that defines thecompliance function’s standing, authorityand independence, and addresses thefollowing issues:(1) measures to ensure theindependence of the compliance functionfrom the business activities of the QB;(2) its role and responsibilities;(3) its relationship with other functionsor units within the organization;(4) its right to obtain access toinformation necessary to carry out itsresponsibilities;(5) its right to conduct investigationsof possible breaches of the compliancepolicy;(6) its formal reporting relationships tosenior management and the board ofdirectors; and(7) its right of direct access to the boardof directors or an appropriate committeeof the board.The compliance charter or other formaldocument defining the status of thecompliance function shall be communicatedthroughout the organization.§ 4180Q.6 (2008 - 4191Q.6)Independence of compliance functionThe compliance function should beindependent from the business activities ofthe institution. It should be able to carryout its responsibilities on its own initiativein all units or departments wherecompliance risk exists and must beprovided with sufficient resources to carryout its responsibilities effectively. It mustbe free to report to senior managementand the board or a committee of the boardon any irregularities or breaches of laws,rules and standards discovered, withoutfear of retaliation or disfavor frommanagement or other affected parties. Thecompliance function should have accessto all operational areas as well as anyrecords or files necessary to enable it tocarry out its duties and responsibilities.§ 4180Q.7 (2008 - 4191Q.7) Role andresponsibilities of the compliance functionThe role and responsibilities of thecompliance function should be clearlydefined. If there is a division of duties andresponsibilities between different functionssuch as legal, compliance, internal auditor risk management, the allocation ofduties and responsibilities to each functionshould be properly delineated. Thereshould likewise be formal arrangementsfor cooperation between each function andfor the exchange of relevant information.§ 4180Q.8 (2008 - 4191Q.8) Crossborderissues. The compliance function forinstitutions that conduct business in otherjurisdictions should be structured to ensurethat local compliance concerns aresatisfactorily addressed within theframework of the compliance policy forthe organization as a whole. As there aresignificant differences in legislative andregulatory frameworks across countries orfrom jurisdiction to jurisdiction,compliance issues specific to eachQ RegulationsPart I - Page 50Manual of Regulations for Non-Bank Financial Institutions

§§ 4180Q.8 - 4185Q.908.12.31jurisdiction should be coordinated within thestructure of the institution’s group-widecompliance policy. The organization andstructure of the compliance function and itsresponsibilities should be in accordance withlocal legal and regulatory requirements.§ 4180Q.9 (2008 - 4191Q.9)Outsourcing of compliance function. QBsshould establish policies for managing therisks associated with outsourcing activities.Outsourcing of services/activities canreduce the institution’s risk profile bytransferring activities to others with thenecessary expertise to manage the risksassociated with specialized businessactivities. However, the use of third partiesdoes not diminish the responsibility of theboard of directors and senior managementto ensure that the outsourced activity isconducted in a safe and sound manner andin compliance with applicable laws andregulations.Compliance risk assessment andtesting may be outsourced, subject toappropriate oversight by the complianceofficer: Provided, That a copy of theoutsourcing agreement stating the dutiesand responsibilities as well as rights andobligations of the contracting parties, whichagreement shall be approved by the boardof directors of the institution concerned,must be submitted to the appropriatedepartment of the SES at least thirty (30)days prior to its execution to enable reviewof its compliance with existing regulationson outsourcing of quasi-banking functions.The service level agreement shallensure a clear allocation of responsibilitiesbetween the external service providersand the QB. Furthermore, the outsourcingQB should manage residual risksassociated with outsourcing arrangements,including default, operational failures, andpossible disruption of services.Secs. 4181Q - 4184Q (Reserved)Sec. 4185Q (2008 - 4171Q) InternalControl Systems. The minimum internalcontrol standards established in AppendixQ-5 shall guide all QBs. The followingrecords/data shall be compiled and madeavailable for the inspection of BSPexaminers.a. Records showing compliance withindependent balancing procedures. Theserecords should indicate the accounts andthe periodic balancing proceduresperformed.b. Statements of actual duties ofpersons assigned to handle cash andsecurities.c. All internal control audit reports ortheir equivalent.d. Information/data on the directand/or indirect equity holdings and/orconnection with any firm, partnership orcorporation organized for profit, of all theinstitution’s directors, officers, and majorstockholders, as defined under Secs.4141Q and 4142Q.e. Information/data pertaining toelectronic data processing (EDP)department or service bureau of the QBparticularly on organization, input control,processing control, output control,software, program and documentationstandards, logs on the operations ofmainframes and peripherals, hardwarecontrol and such other EDP controlstandards prescribed by the BSP in separaterules and regulations.§ 4185Q.1 - 4185Q.8 (Reserved)§ 4185Q.9 (2008 - 4164Q.1)Independence of Internal Audit FunctionThe internal audit function must beindependent of the activities audited andfrom day-to-day internal control process. Itmust be free to report audit results,findings, opinions, appraisals and otherinformation to the appropriate level ofmanagement. It shall have authority toManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 51

§§ 4185Q.9 - 4186Q.308.12.31directly access and communicate with anyofficer or employee, to examine anyactivity or entity of the institution, as wellas to access any records, files or datawhenever relevant to the exercise of itsassignment. The Audit Committee orsenior management should take allnecessary measures to provide theappropriate resources and staffing thatwould enable internal audit to achieve itsobjectives.Sec. 4186Q (2008 - 4164Q) Internal AuditFunction. Internal audit is an independent,objective assurance and consulting functionestablished to examine, evaluate andimprove the effectiveness of riskmanagement, internal control, andgovernance processes of an organization.§ 4186Q.1 (Reserved)§ 4186Q.2 (2008 - 4164Q.2) ScopeThe scope of internal audit shall include:a. Examination and evaluation of theadequacy and effectiveness of the internalcontrol systems;b. Review of the application andeffectiveness of risk management proceduresand risk assessment methodologies;c. Review of the management andfinancial information systems, including theelectronic information system andelectronic banking services;d. Assessment of the accuracy andreliability of the accounting system and ofthe resulting financial reports;e. Review of the systems andprocedures of safeguarding assets;f. Review of the system of assessingcapital in relation to the estimate oforganizational risk;g. Transaction testing and assessmentof specific internal control procedures; andh. Review of the compliance systemand the implementation of establishedpolicies and procedures.§ 4186Q.3 (2008 - 4164Q.3)Qualification standards of the internalauditor. The internal auditor of a UB or aKB must be a Certified Public Accountant(CPA) and must have at least five (5) yearsexperience in the regular audit (internalor external) of a UB or KB as auditor-incharge,senior auditor or audit manager.He must possess the knowledge, skills,and other competencies to examine allareas in which the institution operates.Professional competence as well ascontinuing training and education shall berequired to face up to the increasingcomplexity and diversity of the institution’soperations.The internal auditor of a Thrift Bank(TB), QB, trust entity or nationalCooperative Bank (Coop Bank) must be aCPA with at least five (5) years experiencein the regular audit (internal or external) ofa TB, QB, trust entity or national Coop Bankas auditor-in-charge, senior auditor or auditmanager or, in lieu thereof, at least three(3) years experience in the regular audit(internal or external) of a QB as auditor-incharge,senior auditor or audit manager.The internal auditor of an RB, NSSLA orlocal Coop Bank must be at least anaccounting graduate with two (2) yearsexperience in external audit or in the regularaudit of an Rural Bank (RB), NSSLA or localCoop Bank or, in lieu thereof, at least one(1) year experience in the regular audit(internal or external) of a UB, KB, TB, QB,trust entity or national Coop Bank asauditor-in-charge, senior auditor or auditmanager.A qualified internal auditor of a UB ora KB shall be qualified to audit TBs, QBs,trust entities, national Coop Banks, RBs,NSSLAs, local Coop Banks, subsidiariesand affiliates engaged in allied activities,and other FIs under BSP supervision.A qualified internal auditor of a TB ornational Coop Bank shall likewise bequalified to audit QBs, trust entities, RBs,Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 52

§§ 4186Q.3 - 4190Q09.12.31NSSLAs, local Coop Banks, subsidiaries andaffiliates engaged in allied activities, andother FIs under BSP supervision.§ 4186Q.4 (2008 - 4164Q.4) Code ofethics and internal auditing standards. Theinternal auditor should conform with theCode of Professional Ethics for CPAs andensure compliance with sound internalauditing standards, such as the Institute ofInternal Auditors’ International Standards forthe Professional Practice of Internal Auditing(e-mail: standards@theiia.org; Web: http://www.theiia.org.) and other supplementalstandards issued by regulatory authorities/government agencies. The standards addressindependence and objectivity, professionalproficiency, scope of work, performance ofaudit work, management of internal audit,quality assurance reviews, communicationand monitoring of results.Secs. 4187Q - 4188Q (Reserved)Sec. 4189Q (2008 - 4180Q) Selection,Appointment, Reporting Requirements andDelisting of External Auditors and/orAuditing Firm; Sanction. Pursuant to Section58, R.A. No. 8791, and the existingprovisions of the executed Memorandum ofAgreement (MOA) dated 12 August 2009,binding the BSP, SEC, ProfessionalRegulation Commission (PRC) – Board ofAccountancy (BoA) and the InsuranceCommission (IC) for a simplified andsynchronized accreditation requirements forexternal auditor and/or auditing firm,following are the revised rules andregulations that shall govern the selectionand delisting by the BSP of coveredinstitutions which under special laws aresubject to BSP supervision.Statement of policy. It is the policy ofthe BSP to ensure effective audit andsupervision of banks, QBs, trust entities and/or NSSLAs including their subsidiaries andaffiliates engaged in allied activities and otherFIs which under special laws are subject toBSP supervision, and to ensure reliance byBSP and the public on the opinion ofexternal auditors and auditing firms byprescribing the rules and regulations thatshall govern the selection, appointment,reporting requirements and delisting forexternal auditors and auditing firms of saidinstitutions, subject to the binding provisionsof and implementing regulations pursuantto the aforesaid MOA.a. Rules and regulations. The revisedrules and regulations that shall to govern theselection and delisting by the BSP of coveredinstitutions which under special laws aresubject to BSP supervision are shown inAppendix Q-30.b. Sanctions. The applicable sanctions/penalties prescribed under Sections 36 and37 of R. A. No. 7653 to the extent applicableshall be imposed on the covered institution,its audit committee and the directorsapproving the hiring of external auditors/auditing firm who/which are not in the BSPlist of selected auditors for coveredinstitution or for hiring, and/or retaining theservices of the external auditor/auditing firmin violation of any of the provisions of thisSection and for non-compliance with theMonetary Board directive under Item “K" inAppendix Q-30. Erring external auditors/auditing firm may also be reported by the BSPto the PRC for appropriate disciplinary action.(As amended by Circular Nos. 660 dated 25 August 2009 and529 dated 11 May 2006)Sec. 4190Q (2008 - 4172Q) AuditedFinancial Statements of Quasi-Banks;Financial Audit. The following rules shallgovern the utilization and submission ofaudited financial statements (AFS) of QBs.For purposes of this Section, AFS shallinclude the balance sheets, incomestatements (IS), statements of changes inequity, statements of cash flows and notesto financial statements which shall includeamong other information, disclosure of theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 53

§ 4190Q08.12.31volume of past due loans as well as loanlossprovisions. On the other hand, financialaudit report (FAR) shall refer to the AFS andthe opinion of the auditor. The AFS of QBswith subsidiaries shall be presented side byside on a solo basis (parent) and on aconsolidated basis (parent and subsidiaries).QBs shall cause an annual financialaudit by an external auditor acceptable tothe BSP not later than thirty (30) calendardays after the close of the calendar year orthe fiscal year adopted by the QB. Report ofsuch audit shall be submitted to the boardof directors and the appropriate departmentof the SES not later than 120 calendar daysafter the close of the calendar year or thefiscal year adopted by the QB. The report tothe BSP shall be accompanied by the:(1)certification by the external auditor on the:(a) dates of start and termination of audit;(b) date of submission of the FAR andcertification under oath stating that nomaterial weakness or breach in the internalcontrol and risk management systems wasnoted in the course of the audit of the QB tothe board of directors; and (c) the absenceof any direct or indirect financial interest andother circumstances that may impair theindependence of the external auditor;(2) reconciliation statement between the AFSand the balance sheet and IS for the QB andtrust department submitted to the BSPincluding copies of adjusting entries on thereconciling items; and (3) other informationthat may be required by the BSP.In addition, the external auditor shallbe required by the QB to submit to the boardof directors, a Letter of Comment (LOC)indicating any material weakness or breachin the institution’s internal control and riskmanagement systems within thirty (30)calendar days after submission of the FAR.If no material weakness or breach is notedto warrant the issuance of an LOC,a certification under oath stating that nomaterial weakness or breach in the internalcontrol and risk management systems wasnoted in the course of the audit of the QBshall be submitted in its stead, together withthe FAR.Material weakness shall be defined asa significant control deficiency, orcombination of deficiencies, that resultsin more than a remote likelihood that amaterial misstatement of the financialstatements will not be detected orprevented by the institution’s internalcontrol. A material weakness does notmean that a material misstatement hasoccurred or will occur, but that it couldoccur. A control deficiency exists when thedesign or operation of a control does notQ RegulationsPart I - Page 54Manual of Regulations for Non-Bank Financial Institutions

§ 4190Q08.12.31allow management or employees, in thenormal course of performing their assignedfunctions, to prevent or detectmisstatements on a timely basis. Asignificant deficiency is a controldeficiency, or combination of controldeficiencies, that adversely affects theinstitution’s ability to initiate, authorize,record, process, or report financial datareliably in accordance with generallyaccepted accounting principles. The termmore than remote likelihood shall meanthat future events are likely to occur or arereasonably possible to occur.The board of directors, in a regular orspecial meeting, shall consider and act onthe FAR and the certification under oathsubmitted in lieu of the LOC and shallsubmit, within thirty (30) banking daysafter receipt of the reports, a copy of itsresolution to the appropriate departmentof the SES. The resolution shall show,among other things, the actions(s) takenon the reports and the names of thedirectors present and absent.The board shall likewise consider andact on the LOC and shall submit, withinthirty (30) banking days after receiptthereof, a copy of its resolution togetherwith said LOC to the appropriatedepartment of the SES. The resolution shallshow the action(s) taken on the findingsand recommendations and the names ofthe directors present and absent, amongother things.The LOC shall be accompanied by thecertification of the external auditor of thedate of its submission to the board ofdirectors.Government-owned or -controlledbanks, including their subsidiaries andaffiliates, as well as other FIs under BSPsupervision which are under the concurrentjurisdiction of the Commission on Audit(COA) shall be exempt from theaforementioned annual financial audit byan acceptable external auditor: Provided,That when warranted by supervisoryconcern such as material weakness/breachin internal control and/or risk managementsystems, the Monetary Board may, uponrecommendation of the appropriatedepartment of the SES, require the financialaudit to be conducted by an externalauditor acceptable to the BSP, at theexpense of the QB: Provided, further , Thatwhen circumstances such as, but notlimited to loans from multilateral FIs,privatization, or public listing warrant, thefinancial audit of the QB concerned by anacceptable external auditor may also beallowed.QBs and other FIs under the concurrentjurisdiction of the BSP and COA shall,however, submit a copy of the annual auditreport (AAR) of the COA to the appropriatedepartment of the SES of the BSP withinthirty (30) banking days after receipt ofthe report by the board of directors. TheAAR shall be accompanied by the:(1) certification by the institution concernedon the date of receipt of the AAR by theboard of directors; (2) reconciliationstatement between the AFS in the AAR andthe balance sheet and IS of the QB and trustdepartment submitted to the BSP, includingcopies of adjusting entries on thereconciling items; and (3) other informationthat may be required by the BSP.The board of directors of saidinstitutions, in a regular or special meeting,shall consider and act on the AAR, as wellas on the comments and observations andshall submit, within thirty (30) banking daysafter receipt of the report, a copy of itsresolution to the appropriate department ofthe SES. The resolution shall show theaction(s) taken on the report, including thecomments and observations and the namesof the directors present and absent, amongother things.The AFS required to be submitted shallin all respect be PFRS/PAS compliant:Provided, That FIs shall submit to the BSPManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 55

§§ 4190Q - 4190Q.408.12.31adjusting entries reconciling the balancesin the financial statements for prudentialreporting with that in the audited annualfinancial statements.QBs as well as external auditors shallstrictly observe the requirements in thesubmission of the FAR and reports requiredto be submitted under Appendix Q-33.The reports and certifications of QBs,schedules and attachments required underthis Subsec. shall be considered CategoryB reports, delayed submission of whichshall be subject to the penalties underSubsec. 4192.Q.3.b.II.(As amended by Circular Nos. 554 dated 22 December 2006 and540 dated 09 August 2006 )§ 4190Q.1 (Reserved)§ 4190Q.2 (2008 - 4172Q.1) Postingof audited financial statements. QBs shallpost in conspicuous places in their headoffices, all their branches and other offices,as well as in their respective web-sites,their latest FAR.(As amended by Circular No. 540 dated 9 August 2006)§ 4190Q.3 (2008 - 4172Q.2)Disclosure of external auditor’s adversefindings to the Bangko Sentral; sanctiona. Findings to be disclosed. QBs shallrequire their external auditors to report tothe BSP any matter adversely affecting thecondition or soundness of the bank, suchas, but not limited to:(1) Any serious irregularity, includingthose involving fraud or dishonesty, thatmay jeopardize the interest of creditors;(2) Losses incurred which substantiallyreduce the capital funds of the QB; and(3) Inability of the auditor to confirmthat the claims of creditors are still coveredby the QB’s assets.The disclosure of information by theexternal auditor to the BSP shall not be aground for civil, criminal or disciplinaryproceedings against the former.QB management shall be presentduring discussions or at least be informedof the adverse findings in order to preservethe concerns of the supervisory authorityand external auditors regarding theconfidentiality of information.b. Sanction. The auditing firm(s) shallbe blacklisted by the Monetary Board fora period as the Board may deemappropriate for their failure to perform theirduty of reporting to the BSP any matteradversely affecting the condition orsoundness of the QB. QBs shall not beallowed to engage the services of theblacklisted auditing firm.§ 4190Q.4 (2008 - 4172Q.3) Disclosurerequirement in the notes to the auditedfinancial statements. QBs shall requiretheir external auditors to include thefollowing additional information in thenotes to financial statements:a. Basic quantitative indicators offinancial performance such as return onaverage equity, return on average assetsand net interest margin;b. Capital-to-risk assets ratio underSec. 4115Q;c. Concentration of credit as toindustry/economic sector whereconcentration is said to exist when total loanexposures to a particular industry/economic sector exceeds thirty percent(30%) of total loan portfolio (TLP);d. Breakdown of total loans as tosecured and unsecured and breakdownof secured loans as to type of security;e. Total outstanding loans to QB’sDOSRI, percent of DOSRI loans to totalloan portfolio, percent of unsecured DOSRIloans to total DOSRI loans, percent of pastdue DOSRI loans to total DOSRI loans andpercent of non-performing DOSRI loansto total DOSRI loans;f. Nature and amount ofcontingencies and commitments arisingfrom off-balance sheet items [include directQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 56

§§ 4190Q.4 - 4190Q.608.12.31credit substitutes (e.g., export Letter ofCredit (LCs) confirmed, underwrittenaccounts unsold), transaction-relatedcontingencies (e.g., performance bonds,bid bonds, standby LCs), short-term selfliquidatingtrade related contingenciesarising from the movement of goods(e.g., sight/usance domestic LCs, sight/usance import LCs), sale and repoagreements not recognized in the balancesheet; interest and FX rate related items;and other commitments];g. Provisions and allowances for lossesand how these are determined;h. Aggregate amount of securedliabilities and assets pledged as security; andi. Accounting policies which shallinclude, but shall not be limited to, generalaccounting principles, changes inaccounting policies/practices, principles ofconsolidation, policies and methods fordetermining when assets are impaired,recognizing income on impaired assets andlosses on non-performing credits, incomerecognition, valuation policies andaccounting policies on securitizations,foreign currency translations, loan fees,premiums and discounts, repo agreements,premises/fixed assets, income taxes,derivatives, etc.For purposes of computing theindicators in Item “a” above, the followingformulas shall be used:a. Return on Average = Net Income (or Loss) afterEquity (%) Income Tax x 100Average Total Capital AccountsWhere:Average Total = Sum of Total Capital Accounts as of theCapital Accounts 12 month-ends in the calendar/fiscalyear adopted by the QB12b. Return on Average = Net Income (or Loss) afterAssets (%) Income Tax x 100Average Total AssetsWhere:Average Total Assets = Sum of Total Assets as of the 12month- ends in the calendar/fiscalyear adopted by the QB12c. Net Interest = Net Interest Income x 100Margin (%) Average Interest Earning AssetsWhere:Net InterestIncomeExpense= Total Interest Income – Total InterestAverage Interest = Sum of Total Interest Earning Assets asEarning Assets of the 12 month-ends in the calendar/fiscal year adopted by the QB12§ 4190Q.5 (2008 - 4172Q.4) Disclosurerequirements in the annual report. QBsshall prepare an annual report which shallinclude, in addition to the AFS and otherusual information contained therein, adiscussion and/or analysis of the followinginformation:a. Financial performance;b. Financial position and changestherein;c. Overall risk managementphilosophy (a general statement of the riskmanagement policy adopted by the QB’sboard of directors which serves as the basisfor the establishment of its riskmanagement system), risk managementsystem and structure;d. Qualitative and quantitativeinformation on risk exposures (credit,market, liquidity, operational, legal andother risks); ande. Basic business management andcorporate governance information such asthe QB’s organizational structure, incentivestructure including its remunerationpolicies, nature and extent of transactionswith affiliates and related parties.§ 4190Q.6 (2008 - 4172Q.5) Posting andsubmission of annual report. A copy of thelatest annual report shall be posted by theQB in a conspicuous place in its head office,all its branches and other offices.The deadline for the submission of theannual report to the appropriate departmentof the SES is 180 calendar days after theclose of the calendar or fiscal year adoptedby the QB.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 57

§§ 4191Q - 4191Q.311.12.31Sec. 4191Q (2008 - 4161Q) Records. QBsshall have a true and accurate account,record or statement of their dailytransactions. The making of any false entryor the willful omission of entries relevant toany transaction is a ground for the impositionof administrative sanctions under Section 37of R.A. No. 7653, without prejudice to thecriminal liability of the director or officerresponsible therefor under Sections 35 and36 of R.A. No. 7653 and/or the applicableprovisions of the Revised Penal Code.Records shall be up-to-date and shall containsufficient detail so that an audit trail isestablished.§ 4191Q.1 (2008 - 4161Q.1) Uniformsystem of accounts. QBs shall strictlyadopt/implement the Uniform System ofAccounts prescribed for QBs in therecording of daily transactions includingreportorial and publication requirements.§ 4191Q.2 (Reserved)§ 4191Q.3 (2008 - 4161Q.2) PhilippineFinancial Reporting Standards/PhilippineAccounting StandardsStatement of policy. It is the policy ofthe BSP to promote fairness, transparencyand accuracy in financial reporting. It is inthis light that the BSP aims to adopt all PFRSand PAS issued by the AccountingStandards Council (ASC) to the greatestextent possible.QBs/FIs shall adopt the PFRS and PASwhich are in accordance with generallyaccepted accounting principles in recordingtransactions and in the preparation offinancial statements and reports to BSP.However, in cases where there aredifferences between BSP regulations andPFRS/PAS as when more than one (1) optionare allowed or certain maximum orminimum limits are prescribed by thePFRS/PAS, the option or limit prescribedby BSP regulations shall be adopted by FIs.For purposes hereof, the PFRS/PASshall refer to issuances of the ASC andapproved by the PRC.Accounting treatment for prudentialreporting. For prudential reporting, FIs shalladopt in all respect the PFRS and PAS exceptas follows:a. In preparing consolidated financialstatements, only investments in financialallied subsidiaries except insurancesubsidiaries shall be consolidated on aline-by-line basis; while insurance andnon-financial allied subsidiaries shall beaccounted for using the equity method.Financial/non-financial allied/non-alliedassociates shall be accounted for using theequity method in accordance with theprovisions of PAS 28 “Investments inAssociates”.b. For purposes of preparing separatefinancial statements, financial/non-financialallied/non-allied subsidiaries/associates,including insurance subsidiaries/associates,shall also be accounted for using the equitymethod; andc. FIs shall be required to meet theBSP recommended valuation reserves.Government grants extended in theform of loans bearing nil or low interestrates shall be measured upon initialrecognition at its fair value (i.e., thepresent value of the future cash flows ofthe financial instrument discounted usingthe market interest rate). The differencebetween the fair value and the netproceeds of the loan shall be recordedunder “Unearned Income-Others”, whichshall be amortized over the term of theloan using the effective interest method.The provisions on government grantsshall be applied retroactively to alloutstanding government grants received. FIsthat adopted an accounting treatment otherthan the foregoing shall consider theadjustment as a change in accountingpolicy, which shall be accounted for inaccordance with PAS 8.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 58

§§ 4191Q.3 - 4192Q11.12.31Notwithstanding the exceptions in Items“a”, “b” and “c”, the audited annual financialstatements required to be submitted to theBSP in accordance with the provision of Sec.4190Q shall in all respect be PFRS/PAScompliant: Provided, That FIs shall submitto the BSP adjusting entries reconciling thebalances in the financial statements forprudential reporting with that in the auditedannual financial statements.Guidelines on the adoption of PFRS 9.The guidelines governing theimplementation/early adoption of thePhilippine Financial Reporting Standards(PFRS 9) Financial Instrument are shown inAppendix Q-56.Penalties and sanctions. The followingpenalties and sanctions shall be imposedon FIs and concerned officers found toviolate the provisions of Appendix Q-56:(1) Fines to be imposed on FIs for eachviolation, reckoned from the date theviolation was committed up to the date itwas corrected:(i) P20,000/day for UBs;(ii) P10,000/day for KBs;(iii) P2,000/day for TBs; and(iv) P1,000/day for RBs/Coop Banks.(2) Sanctions to be imposed onconcerned officers:(i) First offense – reprimand the officersresponsible for the violation; and(ii) Subsequent offenses - suspension ofninety (90) days without pay for officersresponsible for the violation.(As amended by Circular Nos.708 dated 10 January 2011 and572 dated 22 June 2007)Sec. 4192Q (2008 - 4162Q/4162Q.2)Reports/Manner of filing. QBs shall submitto the appropriate department of the SES thereports listed in Appendix Q-3 in the formsas may be prescribed by the DeputyGovernor, SES.Any change in, or amendment to, thearticles of incorporation, by-laws or materialdocuments required to be submitted to theBSP shall be reported by submitting copiesof the amended articles of incorporation, bylaws, or material documents to theappropriate department of the SES withinfifteen (15) days following such change.In the case of the independent directors,the bio-data shall be accompanied by acertification under oath from the directorconcerned that he/she is an independentdirector as defined under Subsec. 4141Q.1that all the information thereby supplied aretrue and correct, and that he/she:1. Is not or has not been an officer oremployee of the QB/trust entity, itssubsidiaries or affiliates or related interestsduring the past three (3) years counted fromthe date of his/her election;2. Is not a director or officer of therelated companies of the institution’smajority stockholder;3. Is not a majority stockholder of theinstitution, any of its related companies, orof its majority shareholders;4. Is not a relative within the fourthdegree of consanguinity or affinity, legitimateor common-law of any director, officer ormajority shareholder of the QB/trust entityor any of its related companies;5. Is not acting as a nominee orrepresentative of any director or substantialshareholder of the QB/trust entity, any of itsrelated companies or any of its substantialshareholders;6. Is not retained as professionaladviser, consultant, agent or counsel of theinstitution, any of its related companies orany of its substantial shareholders, either inhis/her personal capacity or through his/herfirm; is independent of management and freefrom any business or other relationship, hasnot engaged and does not engage in anytransaction with the institution or with anyof its related companies or with any of itssubstantial shareholders, whether byhimself/herself or with other persons orthrough a firm of which he/she is a partneror a company of which he/she is a directorManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 59

§§ 4192Q - 4192Q.208.12.31or substantial shareholder, other thantransactions which are conducted at armslength and could not materially interferewith or influence the exercise of his/herjudgment; and7. Complies with all the qualificationsrequired of an independent director anddoes not possess any of the disqualificationstherefor and has not withheld norsuppressed any information material tohis/her qualification or disqualification asan independent director.The submission of the reports shall beeffected by filing them personally with theappropriate department of the SES or withthe BSP Regional Offices/Units, or bysending them by registered mail or specialdelivery through private couriers unlessotherwise specified in the circular ormemorandum of the BSP.Where the reports are prescribed by theBSP to be submitted through electronic mail,the original notarized affidavit/last page ofeach report, hard copy of the coveringcontrol prooflist, or any other relateddocuments required to be submitted shallbe filed in the manner prescribed in thepreceding paragraph.In line with the policy direction of R.A.No. 8792 (E-Commerce Act), the BSP isstrongly encouraging QBs to submit theirregular reports to the BSP in electronic form.However, the BSP cannot presentlyguarantee the security/confidentiality of datain the course of transmitting electronicreports to BSP. BSP recommends thatsensitive or confidential information beprovided by ordinary post or courier. TheBSP will accept no responsibility forelectronic messages/ reports/informationthat may be hacked or cracked, intercepted,copied or disclosed outside BSP’sinformation system.(As amended by Circular Nos. 591 dated 27 December 2007,CL-2007-059 dated 28 November 2007, CL-2007-050 dated 04October 2007, 576 dated 08 August 2007, 574 dated 10 July 2007,560 dated 31 January 2007, and 557 dated 12 January 2007)§ 4192Q.1 (2008 - 4162Q.1)Categories and signatories of reportsReports required to be submitted to theBSP are classified into Categories A-1,A-2, A-3 and B reports as indicated in thelist of reports required to be submitted tothe BSP in Appendix Q-3.Appendix Q-4 prescribes thesignatories for each report category andthe requirements on signatoryauthorization.Reports submitted by QBs incomputer media shall be subject to thesame requirements.A report submitted to the BSP underthe signature of an officer who is notauthorized in accordance with therequirements in this Subsection shall beconsidered as not having beensubmitted.§ 4192Q.2 (2008 - 4162Q.3) Sanctionsin case of willful delay in the submissionof reports/refusal to permitexaminationa. Definition of terms. For purposesof this Subsection, the followingdefinitions shall apply:(1) Report shall refer to any report orstatement required of a QB to besubmitted to the BSP periodically orwithin a specified period.(2) Willful delay in the submission ofreports shall refer to the failure of a QB tosubmit a report on time. Failure to submita report on time due to fortuitous events,such as fire and other natural calamitiesand public disorders, including strike orlockout affecting a QB as defined in theLabor Code or national emergencyaffecting operations of QBs, shall not beconsidered as willful delay.(3) Examination shall include, butneed not be limited to, the verification,review, audit, investigation and inspectionof the books and records, business affairs,administration and financial condition ofQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart I - Page 60

§ 4192Q.208.12.31any QB including the reproduction of itsrecords, as well as the taking possession ofthe books and records and keeping themunder the BSP’s custody after giving properreceipt therefore. It shall also include theinterview of the directors and personnel ofthe QB including its EDP servicer. Booksand records shall include, but shall not belimited to, data and information stored inmagnetic tapes, disks, printouts, logbooksand manuals kept and maintained by theQB or the EDP servicer, necessary andincidental to the use of EDP systems by theQB.(4) Refusal to permit examination shallmean any act or omission which impedes,delays, or obstructs the duly authorized BSPofficer/examiner/employee from conductingan examination, including the act of refusingto accept or honor a letter of authority toexamine presented by any officer/examiner/employee of the BSP.(Next Page is Part I - Page 61)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 60a

§§ 4192Q.2 - 4192Q.308.12.31b. Fines for willful delay in submissionof reports. QBs incurring willful delay inthe submission of required reports shall paya fine in accordance with the followingschedule:I. For Categories A-1, A-2 and A-3reportsPer day of defaultuntil the report is filed P600II.For Category B reportsPer day of defaultuntil the report is filed P120Delay or default shall start to run on theday following the last day required for thesubmission of reports. However, should thelast day of filing fall on a non-working dayin the locality where the reporting FI issituated, delay or default shall start to runon the day following the next working day.The due date/deadline for submission ofreports to BSP as prescribed underSec. 4192Q governing the frequency anddeadlines indicated in Appendix Q-3 shallbe automatically moved to the next businessday whenever a halfday suspension ofbusiness operations in government officesis declared due to an emergency such astyphoon, floods, etc.For purposes of establishing delay ordefault, the date of acknowledgment bythe appropriate department of the SES orthe BSP Regional Offices/Units appearingon the copies of such reports filed orsubmitted, the date of mailing postmarkedon the envelope/the date of registry/special delivery receipt, as the case maybe, or the date of the acknowledgmentreceipt issued by the appropriate office ofthe BSP if the reports were submittedthrough electronic mail, shall beconsidered as the date of filing by the QB.Delayed schedules/attachments andamendments shall be considered latereporting subject to the above penalties.c. Fines for refusal to permitexamination(1) Amount of fine - Any QB which shallwillfully refuse to permit examination shallpay a fine of P3,000 daily from the day ofrefusal and for as long as such refusal lasts.(2) Procedures in imposing the fine -(a) The BSP officer/examiner/employeeshall report the refusal of the QB to permitexamination to the head of the appropriatedepartment of the SES, who shall forthwithmake a written demand upon the concernedfor such examination. If the QB continuesto refuse said examination without anysatisfactory explanation therefore, the BSPofficer/examiner/employee concerned shallsubmit a report to that effect to the saiddepartment head.(b) The fine shall be imposed startingon the day following the receipt by the saiddepartment of the written report submittedby the BSP officer/examiner/employeeconcerned regarding the continued refusalof the QB to permit the desired examination.d. Manner of payment or collection offines - The regulations embodied in Sec.4902Q shall be observed in the collectionof the fines from QBs.e. Other penalties - The imposition ofthe foregoing penalties shall be withoutprejudice to the imposition of the otheradministrative sanctions and to the filing ofa criminal case as provided for in otherprovisions of law.f. Appeal to the Monetary Board -Any aggrieved QB may appeal to theMonetary Board a ruling of the appropriatedepartment of the SES imposing a fine.(As amended by Circular No. 585 dated 15 October 2007)§ 4192Q.3 (2008 - 4181Q) Publicationrequirements. The quarterly CSOC of a QB/trust entity and its subsidiaries andassociates shall be published side-by-sidewith the SOC of its head office and itsbranches/other offices as of such dates asthe BSP may require, within twenty (20)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart I - Page 61

§§ 4192Q.3 - 4199Q09.12.31working days from receipt of call letter, inany newspaper of general circulation in thecountry in the prescribed format.The CSOC of a QB/trust entity and itssubsidiaries and associates shall conformwith the guidelines of PAS 27“Consolidated and Separate FinancialStatements”, except that for purposes ofconsolidated financial statements, onlyinvestments in financial allied subsidiariesexcept insurance subsidiaries shall beconsolidated on a line-by-line basis; whileinsurance and non-financial alliedsubsidiaries shall be accounted for usingthe equity method. Financial/non-financialallied/non-allied associates shall beaccounted for using the equity method inaccordance with the provisions of PAS 28“Investments in Associates”. For purposesof separate financial statements,investments in financial/non-financialallied/non-allied subsidiaries/associates,including insurance subsidiaries/associates, shall be accounted for usingthe equity method.a. The following information shall bedisclosed in the Statements of Condition:(1) Non-performing loans (NPLs) andratio to total loan portfolio;(2) Classified loans and other riskassets;(3) General loan loss reserve;(4) Specific loan loss reserve;(5) Return on equity (ROE);(6) DOSRI loans/advances and ratio tototal loan portfolio; and(7) Past due DOSRI loans/advancesand ratio to total loan portfolio.For uniform calculation of the additionalinformation required, the guidelines inAnnex Q-3-f of Appendix Q-3 shall beobserved.b. The names and positions/designations of:(1) members of the board of directors;and(2) president and executive vicepresidents(senior vice-presidents, if there areno executive vice-president) or equivalentpositions shall be presented in the right sidecolumn of the published SOC as of June ofevery year.O. PROMPT CORRECTIVE ACTIONFRAMEWORKSec. 4193Q (2008 - 4192Q) PromptCorrective Action Framework. Theframework for the enforcement of promptcorrective action (PCA) on banks which isin Appendix Q-40, shall govern the PCAtaken on QBs to the extent applicable, orby analogy.(Circular No. 523 dated 23 March 2006, as amended by CircularNo. 664 dated 15 September 2009)Sec. 4194Q (Reserved)P. (RESERVED)Secs. 4195Q - 4198Q (Reserved)Q. GENERAL PROVISION ONSANCTIONSSec. 4199Q General Provision onSanctions. Any violation of the provisionsof this Part shall be subject to Sections 36and 37 of R.A. No. 7653.The guidelines for the imposition ofmonetary penalty for violations/offenseswith sanctions falling under Section 37 ofR. A. No. 7653 on QBs, their directors and/orofficers are shown in Appendix Q-39.Q RegulationsPart I - Page 62Manual of Regulations for Non-Bank Financial Institutions

§§ 4201Q - 4235Q.308.12.31PART TWODEPOSIT SUBSTITUTES AND BORROWING OPERATIONSA. - D. (RESERVED)Secs. 4201Q - 4234Q (Reserved)E. DEPOSIT SUBSTITUTE OPERATIONSSection 4235Q (2008 - 4211Q) DepositSubstitute Instruments. Only the followingtypes of instruments may be issued by QBsas evidence of deposit substitute liabilities:a. Promissory notes;b. Repurchase agreements (Repos); andc. Certificates of assignment/participation with recourse.§ 4235Q.1 (2008 - 4211Q.1) Prohibitionagainst use of certain instruments as depositsubstitutes. Acceptances, bills of exchange andtrust certificates shall not be used as evidence ofdeposit substitute liabilities. This prohibitionshall not apply to the acceptance or negotiationof bills of exchange in connection with tradetransactions, or to the issuance of trustcertificates creating trust relationship.§ 4235Q.2 (2008 - 4211Q.2) Negotiationsof promissory notes. Negotiable promissorynotes acquired by QBs shall not benegotiated by mere indorsement and/or delivery,if they do not conform with the minimumfeatures prescribed under Subsec. 4235Q.3. Ifthese notes do not contain the features in saidSubsection, their negotiation shall be coveredby any of the appropriate deposit substituteinstruments mentioned in Sec. 4235Q.§ 4235Q.3 (2008 - 4211Q.3) Minimumfeatures. Deposit substitute instrumentsissued by QBs shall have the followingminimum features.a. The present value and maturityvalue and/or the principal amount andinterest rate and such other information asmay be necessary to enable the parties todetermine the cost or yield of the borrowingor placement shall be specified.b. The date of issuance shall beindicated at the upper right corner of theinstrument, and directly below which shallbe the maturity period or the word“demand”, if it is a demand instrument.c. The payee may be identified by histrust account/deposit account number in bothnegotiable and non-negotiable instruments.d. Securities which are the subject ofa repo or a certificate of assignment/participation with recourse, shall beparticularly described on the face of saidinstruments or on a separate instrumentattached and specifically referred to thereinand made an integral part thereof as to themaker, value, maturity, serial number, andsuch other particulars as shall clearlyidentify the securities.e. The instrument shall provide for thepayment of liquidated damages, in additionto stipulated interest, in case of default bythe maker/issuer, as well as attorney’s feesand cost of collection in case of suit.f. A conspicuous notice at the lowercenter margin of the face of the instrument thatthe transaction is not insured by the PDIC.g. The corporate name of the issuershall be printed at the upper center marginof the instrument and directly below whichshall be a designation of the instrument,such as, “Promissory Note” or “Repo”.h. The words “duly authorized officer”shall be placed directly below the signatureof the person signing for the maker/issuer.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 1

§§ 4235Q.3 - 4235Q.511.12.31i. Each instrument shall be serially prenumbered.j. The copy delivered to the payee shallbear the word “Original” and the copiesretained by the issuer shall be identified as“Duplicate,” “File Copy” or words of similarimport.k. Only security paper with adequatesafeguards against alteration or falsificationshall be used.Deposit substitute instruments shallconform to the language prescribed by theBSP.Any substantial deviation therefrom orany additional stipulation therein shall bereferred to the BSP for prior approval. Thesize and appearance of these instrumentsshall not be similar to the size andappearance of checks. Formats ofstandardized instruments in AppendicesQ-6 to Q-6-k shall be followed.Rubber stamping, typewriting andhandwriting some provision shall not beconsidered compliance with saidregulations.Borrowings of QBs from the loans anddiscounts window of banks or QBs shallbe exempted from the documentationrequirements of this Section: Provided,That the exemption from thedocumentation requirements shall not beconstrued or interpreted as exemption ofsaid borrowings from the other rules onborrowings by QBs and from other BSPregulations on deposit substitutes.§ 4235Q.4 (2008 - 4211Q.7) Interbankborrowings. Except for interbankborrowings which are settled through theQB's respective DDAs with the BSP viaPhilPaSS, all interbank borrowings shall beevidenced by deposit substitute instrumentcontaining the minimum features prescribedin Subsec. 4235Q.3.(As amended by Circular No, 703 dated 23 December 2010)§ 4235Q.5 (2008 - 4211Q.4) Deliveryof securitiesa. Securities, warehouse receipts,quedans and other documents of title whichare the subject of quasi-banking functions,such as repos, shall be physically delivered,if certificated, to a BSP accredited custodianthat is mutually acceptable to the lender/purchaser and borrower/seller, or by meansof book-entry transfer to the appropriatesecurities account of the BSP accreditedcustodian in a registry for said securities, ifimmobilized or dematerialized while theoverlying principal borrowing instrumentshall be physically delivered to the lender/purchaser. The custodian shall hold thesecurities in the name of the borrower/seller, but shall keep said securitiessegregated from the regular securitiesaccount of the borrower/seller if theborrower/seller has an existing securitiesaccount with the custodian. Provided, Thata financial institution (NBFI) authorized bythe BSP to perform custodianship functionmay not be allowed to be custodian ofsecurities issued or owned by saidinstitution, its subsidiaries or affiliates, orof securities in bearer form.The delivery shall be effected uponpayment and shall be evidenced by asecurities delivery receipt duly signed byauthorized officers of the custodian anddelivered to both the lender/purchaser andseller/borrower.Sanctions. Violation of any provision ofItem “a” shall be subject to the followingsanctions/penalties:(1) Monetary penaltiesFirst Offense – Fine of P10,000 a dayfor each violation reckoned from the datethe violation was committed up to the dateit was corrected.Subsequent offenses – Fine of P20,000a day for each violation reckoned from thedate the violation was committed up to theQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart II - Page 2

§§ 4235Q.5 - 4235Q.611.12.31date it was corrected.(2) Other sanctionsFirst offense – Reprimand for the directors/officers responsible for the violation.Subsequent offense –(a) Suspension for ninety (90) dayswithout pay of directors/officers responsiblefor the violation;(b) Suspension or revocation of theaccreditation to perform custodianshipfunction;(c) Suspension or revocation of theauthority to engage in quasi-bankingfunction; and/or(d) Suspension or revocation of the authorityto engage in trust and other fiduciary business.b. The guidelines to implement thedelivery by the seller of securities to thebuyer or to his designated third partycustodian are shown in Appendix Q-38.Sanctions. Without prejudice to thepenal and administrative sanctions providedfor under Sections 36 and 37, respectivelyof the R.A. No. 7653 (The New CentralBank Act), violation of any provision of theguidelines in Appendix Q-38 shall be subjectto the following sanctions/penaltiesdepending on the gravity of the offense:(a) First offense –(1) Fine of up to P10,000 a day or theinstitution for each violation reckoned fromthe date the violation was committed upto the date it was corrected; and(2) Reprimand for the directors/officersresponsible for the violation.(b) Second offense -(1) Fine of up to P20,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed upto the date it was corrected; and(2) Suspension for ninety (90) dayswithout pay of directors/officers responsiblefor the violation.(c) Subsequent offenses–(1) Fine of up to P30,000 a day for theinstitution for each violation from the datethe violation was committed up to the dateit was corrected;(2) Suspension or revocation of theauthority to act as securities custodian and/or registry; and(3) Suspension for 120 days without payof the directors/officers responsible for theviolation.(As amended by Circular No. 714 dated 10 March 2011,M-2007-002 dated 23 January 2007; M-2006-009 dated 06 July2006, M-2006-002 dated 05 June 2006 and Circular No. 524dated 31 March 2006)§ 4235Q.6 (2008 - 4211Q.5) Otherrules and regulations governing the issuanceand treatment of deposit substituteinstrumentsa. If there is any stipulation that paymentof the deposit substitute shall be chargeableagainst a particular deposit account of themaker or issuer that is maintained withanother bank, it shall further provide thatthe liability of the maker or issuer of theinstrument shall not be limited to theoutstanding balance of said deposit account.b. Any agreement allowing the issueror maker to substitute the underlyingsecurities shall further provide that theactual substitution shall be with the priorwritten consent of the payee.c. Automatic renewal upon maturity ofthe instrument may be effected only underterms and conditions previously stipulatedby the parties.d. Stipulations between the maker or issuerand the payee which are embodied in separateinstruments shall be specifically referred to inthe deposit substitute instruments and madean integral part thereof.e. In the case of repurchase agreementsand certificates of assignment/participationwith recourse, the stipulation shall clearly stateeither (a) that the underlying securities arebeing delivered to the buyer or assignee asManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 3

§§ 4235Q.6 - 4235Q.1210.12.31collaterals or (b) that the ownership thereofis being transferred to the buyer or assignee.f. The regulations on interbank loantransactions prescribed in Sec. 4343Q shallalso apply to interbank borrowings.(As amended by Circular No, 703 dated 23 December 2010)§ 4235Q.7 (2008 - 4211Q.6) Substitutionof underlying securities(Deleted by Circular No. 703 dated 23 December 2010)§ 4235Q.8 (2008 - 4211Q.7) Call slips/tickets for 24-hour loans(Renumbered by Circular No. 703 dated 23 December 2010)§ 4235Q.9 (2008 - 4211Q.8) Requirementto state nature of underlying securities(Deleted by Circular No. 703 dated 23 December 2010)§ 4235Q.10 (2008 - 4211Q.9) Compliancewith SEC rules. QBs shall comply with thenew rules on the registration of short-termand long-term commercial papers appendedhereto as Appendices Q-7 and Q-8.§ 4235Q.11 (Reserved)§ 4235Q.12 (2008 - 4211Q.12)Repurchase agreements coveringgovernment securities, commercial papersand other negotiable and non-negotiablesecurities or instruments. The followingregulations shall govern REPOs coveringgovernment securities, commercial papersand other negotiable and non-negotiablesecurities or instruments of QBs as well assale on a without recourse basis of saidsecurities by QBs.a. Proper recording anddocumentation of repos.QBs shall have a true and accurateaccount, record or statement of their dailytransactions. As such, repos coveringgovernment securities, commercial papersand other negotiable and non-negotiablesecurities or instruments must be properlyrecorded and documented in accordancewith existing BSP regulations.The absence of proper documentationfor repos is tantamount to willful omissionof entries relevant to any transaction,which shall be a ground for the impositionof administrative sanctions and thedisqualification from office of any directoror officer responsible therefor underexisting laws and regulations.b. Responsibilities of the chiefexecutive officer (CEO) or officer ofequivalent rank.It shall be the responsibility of theCEO or the officer of equivalent rank in aQB to:(1) Institute policies and proceduresto prevent undocumented or improperlydocumented repos covering governmentsecurities, commercial papers and othernegotiable and non-negotiable securitiesor instruments;(2) Submit a notarized certificationat the end of every semester that the QBdid not enter into any repo coveringgovernment securities, commercial papersand other negotiable and non-negotiablesecurities or instruments that are notdocumented in accordance with existingBSP regulations and that the QB hasstrictly complied with the pertinent rulesof the SEC and the BSP on the proper saleof securities to the public and performedthe necessary representations anddisclosures on the securities particularlythe following:(a) Informed the clients that suchsecurities are not deposits and as such,do not benefit from any insuranceotherwise applicable to deposits such as,but not limited to, R.A. No. 3591, asamended, otherwise known as the PDIClaw;(b) Informed and explained to theclient all the basic features of the securityQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart II - Page 4

§ 4235Q.1208.12.31being sold on a without recourse basis, suchas but not limited to:(i) issuer and its financial condition;(ii) term and maturity date;(iii) applicable interest rate and itscomputation;(iv) tax features (whether taxable, taxpaid or tax-exempt);(v) risk factors and investmentconsiderations;(vi) liquidity feature of the instrument:(aa) procedures for selling the security inthe secondary market (e.g., OTC or exchange);(bb) authorized selling agents; and(cc) minimum selling lots.(vii) disposition of the security:(aa) registry (address and contactnumbers);(bb) functions of the registry; and(cc) pertinent registry rules andprocedures.(viii) collecting and paying agent of theinterest and principal; and(ix) other pertinent terms andconditions of the security and if possible, acopy of the prospectus or information sheetof the security.(c) Informed the client that pursuantto Subsecs. 4235Q.5 and 4101Q.4:(i) Securities sold under repos shallbe physically delivered, if certificated, to aBSP accredited custodian that is mutuallyacceptable to the client and the QB, or bymeans of book-entry transfer to the appropriatesecurities account of the BSP accreditedcustodian in a registry for said securities, ifimmobilized or dematerialized; and(ii) Securities sold on a withoutrecourse basis are required to be deliveredphysically to the purchaser, or to hisdesignated custodian duly accredited by theBSP, if certificated, or by means of bookentrytransfer to the appropriate securitiesaccount of the purchaser or his designatedcustodian in a registry for said securities ifimmobilized or dematerialized.(d) Clearly stated to the client that:(i) The QB does not guarantee thepayment of the security sold on a “withoutrecourse basis” and in the event of defaultby the issuer, the sole credit risk shall beborne by the client; and(ii) The QB is not performing anyadvisory or fiduciary function.(3) Report to the appropriate departmentof the SES any undocumented repo withinseventy-two (72) hours from knowledge ofsuch transactions.c. Treatment as deposit substitutesAll sales of government securities,commercial papers and other negotiable andnon-negotiable securities or instruments thatare not documented in accordance withexisting BSP regulations shall be deemed tobe deposit substitutes subject to regularreserves.d. Certification. The submissiondeadline for the required certification fromthe CEO/officer of equivalent rank of the QBshall initially be 1 February 2005 using theformat in Appendix Q-36-a. Thereafter, therequired succeeding certification shall besubmitted within five (5) banking days fromend of reference semester using the formatin Appendix Q-36.e. Sanctions. The Monetary Board may,at its evaluation and discretion, impose anyor all of the following sanctions to a QB orthe director/s or officer/s found to beresponsible for repos covering governmentsecurities, commercial papers and othernegotiable and non-negotiable securities orinstruments that are not documented inaccordance with existing BSP regulations:(1) Fine of up to P30,000 a day to theconcerned entity for each violation from thedate the violation was committed up to thedate it was corrected;(2) Suspension of interbank clearingprivileges/immediate exclusion fromManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 5

§§ 4235Q.12 - 4237Q.210.12.31clearing;(3) Suspension of access to BSPrediscounting facilities;(4) Suspension of lending or foreignexchange operations or authority toaccept new deposits or make newinvestments;(5) Revocation of quasi-banking license;(6) Revocation of authority to performtrust operations; and(7) Suspension for 120 days without payof the directors/officers responsible for theviolation.§ 4235Q.13 (2008 - 4212Q) Recording;payment; maturity; renewal(Deleted by Circular No. 703 dated 12 December 2010)§ 4235Q.14 (2008 - 4214Q) Interbankborrowings(Deleted by Circular No. 703 dated 23 December 2010)§ 4235Q.15 (2008 - 4215Q)Borrowings from trust departments ormanaged funds of banks or investmenthouses. Funds borrowed by QBs fromtrust departments or managed funds ofbanks or IHs are not considered asinterbank borrowings and, therefore, aresubject to the:a. reserve requirement on depositsubstitutes; andb. minimum trading lot rule.(As amended by Circular No. 703 dated 23 December 2010)Sec. 4236Q (2008 - 4213Q) Minimum TradingLot. The minimum size of any single depositsubstitute transaction shall be P50,000.In connection with the minimum tradinglot rule above stated, no QB shall issuedeposit substitute instruments in the nameof two (2) or more persons or accountsexcept those falling under the followingrelationships in which cases, comminglingmay be allowed: (a) husband and wife; (b)persons related to each other within thesecond degree of consanguinity; and (c) intrust for (ITF) arrangements.Sec. 4237Q (2008 - 4216Q) MoneyMarket Placements of Rural Banks. QBsshall not accept money market placementsfrom any RB unless the latter presents acertification under oath stating: (a) that ithas no overdue special time deposits;(b) that it has no past due obligations withthe BSP or other government FIs; (c) theamount of its current obligations, if any,with said government FIs; and (d) theamount of its total outstanding moneymarket placements. However, in no caseshall such QBs sell receivables to RBswithout recourse.§ 4237Q.1 (2008 - 4216Q.1) Definitionof terms. As used in this Section, thefollowing terms shall have the followingmeanings:Money market placements shall includeinvestments in debt instruments, includingpurchases of receivables with recourse tothe lending institution, except purchasesof government securities on an outrightbasis.Government securities shall includeevidences of indebtedness of the Republicof the Philippines and the BSP and otherevidences of indebtedness or obligationsof government entities, the servicing andrepayment of which are fully guaranteedby the Republic of the Philippines.§ 4237Q.2 (2008 - 4216Q.2) Conditionsrequired on accepted placementsPlacements accepted must comply with thefollowing conditions:a. That the total money marketplacements of an RB, as stated in thecertification, including the placement beingaccepted by the entity concerned, shall notexceed the RB’s combined capital accountsor net worth less current obligations withthe BSP or other government FIs;b. The maturity of the money marketplacement shall not exceed sixty (60)days; andQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart II - Page 6

§§ 4237Q.2 - 4237Q.308.12.31c. That placements shall beevidenced in all cases by promissorynotes of accepting entities/REPOs and/or certificates of participation/assignment with recourse and thatunderlying instruments shall begovernment securities the servicing andrepayment of which are guaranteed bythe Republic of the Philippines.§ 4237Q.3 (2008 - 4216Q.3) SanctionsViolations of the provisions of this Section shallbe subject to the following sanctions/penalties:a. FinesFirst offense - Fines of P3,000 a day,reckoned from the date placement startedup to the date when said placement waswithdrawn, for each violation shall beassessed on the bank.(Next Page is Part II - Page 7)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 6a

§§ 4237Q.3 - 4239Q.308.12.31Subsequent offenses - Fines of P5,000a day, reckoned from the date placementstarted up to the date placement waswithdrawn, for each violation shall beassessed on the bank.b. Other sanctionsFirst offense - Reprimand for thedirectors/officers who approved theacceptance/placement with a warning thatsubsequent violations will be subject tomore severe sanctions.Subsequent offenses -(1) Suspension for ninety (90) dayswithout pay for directors/officers whoapproved the placement.(2) Suspension or revocation of theauthority to engage in quasi-banking functions.Sec. 4238Q (2008 - 4391Q.2) WithoutRecourse Transactions. No QB shall sell,discount, assign, negotiate, in whole or inpart such as thru syndications, participationsand other similar arrangements, any note,receivable, loan, debt instrument and anytype of financial asset or claim, exceptgovernment securities, on a withoutrecourse basis, or be a party in any capacityin any such transactions on a withoutrecourse basis, unless such receivable, note,loan, debt instrument and financial asset orclaim is registered with the SEC. Thisprohibition includes transactions betweenan investment house and its trustdepartment.Sec. 4239Q (2008 - 4217Q) Bond Issues ofQuasi-banks. The following guidelines shallgovern the bond issues of QBs.§ 4239Q.1 (2008 - 4217Q.1) Definitionof terms. For purposes of this Section, thefollowing terms shall mean:a. Government securities shall refer tothe evidences of indebtedness of theRepublic of the Philippines or itsinstrumentalities, or of the BSP, and mustbe freely negotiable and regularly serviced.b. Net book value shall refer to theacquisition cost of property or accounts,plus additions and improvements thereon,less valuation reserves, if any.c. Current market value shall refer tothe value of the property as established by aduly licensed and independent appraiser.d. Affiliate shall refer to an entity linkeddirectly or indirectly to a QB by means of:(1) Ownership, control or power to vote,of ten percent (10%) or more of the outstandingvoting stocks of the entity, or vice-versa;(2) Interlocking directorships orofficerships;(3) Common stockholders owning tenpercent (10%) or more of the outstandingvoting securities;(4) Management contract or anyarrangement granting power to direct orcause the direction of management andpolicies;(5) Voting trustee holding ten percent(10%) or more of the outstanding votingsecurities;(6) Permanent proxy or voting trustconstituting ten percent (10%) or more ofthe outstanding voting securities.e. Subsidiary shall refer to a corporationor firm more than fifty percent (50%) ofthe outstanding voting stock of which isdirectly or indirectly owned, controlled, orheld with power to vote by another.§ 4239Q.2 (2008 - 4217Q.3) Compliancewith SEC rules. QBs issuing or intending toissue bonds shall comply with the new ruleson the registration of long-term commercialpapers (Appendix Q-8).§ 4239Q.3 (2008 - 4217Q.4) Noticeto Bangko Sentral . Within three (3) daysfrom approval by the SEC of its bond issue,a QB shall notify the appropriatedepartment of the BSP of the approval,attaching documents required by the SECfor the issuance and registration of thebond issue.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 7

§§ 4239Q.4 - 4239Q.608.12.31§ 4239Q.4 (2008 - 4217Q.5) Minimumfeatures. Bond issues by QBs shall havethe following minimum features:a. Form; issue price; denomination. Thetrust indenture and the name of the indenturetrustee shall be indicated on the face of thebond certificate.The SEC-assigned bond registrationnumber and expiry date, if any, shalllikewise be indicated, stamped on the faceof each bond certificate issued.Bonds may be issued at face value, at adiscount, or at a premium. Minimumdenomination shall be P20,000.b. Term. The minimum maturity of thebonds shall be four (4) years. No optionalredemption before the fourth year shall beallowed.c. Interest; manner; form of paymentThe bonds shall not be subject to interestrate ceilings prescribed by the MonetaryBoard or Act No. 2655, as amended.Interest paid in advance shall not exceedthe interest for one (1) year: Provided, Thatinterest shall not be paid in kind.d. Trust indenture; collaterals; sinkingfund. A trust indenture shall be executedbetween the issuer and a qualified trustcorporation as trustee, which shall neither bean affiliate nor a subsidiary of the issuer.The following shall be deemed as eligiblecollateral and shall be maintained at respectivevalues indicated in relation to the face valueof the bond issue:(1) Government securities - Aggregate currentmarket value of100%(2) High-grade privatesecurities listed in thebig board of stockexchanges(3) Real estate - Net book value of100%(4) Unmatured receivablesacquired with recourse;lease contracts receivable(5) Unmatured receivablesacquired without recourse- Aggregate currentmarket value of150%- Net book value of150%- Net book value of200%Government and private securities,certificates of title and documentsevidencing receivables offered as securityshall be physically delivered to the indenturetrustee.Substitution of collaterals shall beallowed: Provided, That in no case shall thecollateral fall below the herein-requiredratios.The issuer may, at his option, providefor the retirement at maturity of the bondissue through a sinking fund to bedeposited with and managed by theindenture trustee.e. Bond registry. The bonds shall befully registered as to principal and interest.The issuer, its trustee, agent or underwritermust maintain a bond registry duly approvedby the SEC for recording, in initial andsubsequent transfers, the names oftransferees, date of transfer, purchase priceand serial numbers of bonds transferred.§ 4239Q.5 (2008- 4217Q.2) Underwritingof bonds. Bond issues may beunderwritten by entities including thosewhich are affiliates or subsidiaries of theissuer. The investment of affiliates orsubsidiaries in said bond issue shall besubject to:(a) individual and aggregateceilings of ten percent (10%) and thirtypercent (30%), respectively, of the bondissue; and (b) the condition that theinvesting affiliate or subsidiary does nothave any outstanding loan from the issueror that it shall not incur any indebtednessfrom the issuer during the period that theinvestment remains outstanding.§ 4239Q.6 (2008 - 4217Q.6) Reserverequirement. A five percent (5%) reserveshall be maintained against all bond issuesof QBs.The form/composition of reservesfor bond issues shall be in accordancewith the applicable rules on reserveagainst deposit substitute liabilities andborrowings.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart II - Page 8

§§ 4239Q.7 - 4254Q11.12.31§ 4239Q.7 (2008 - 4217Q.7)Inapplicability of certain regulations. Secs.4235Q and 4236Q shall not apply to bondsissued under these guidelines.F. (RESERVED)Sec. 4240Q (Reserved)G. INTERESTSec. 4241Q (2008 - 4236Q) Yield/Interest Ratesa. Deposit substitutes of QBs shallnot be subject to yield or interest rateceilings.b. A matured and an unclaimeddeposit substitute shall be payable ondemand and shall earn interest or yieldfrom maturity to actual withdrawal orrenewal at a rate applicable to a depositsubstitute with a maturity of fifteen (15)days.Secs. 4242Q - 4252Q (Reserved)H. RESERVESSec. 4253Q (2008 - 4246Q) ReservesAgainst Deposit Substitutes. QBs shallmaintain regular reserves of ten percent(10%) of deposit substitute liabilities asdefined in Section 95 of R.A. No. 7653,regardless of maturities except:(a) borrowings from the BSP through thesale of government securities underrepo agreements made in connectionwith the provisions of Sec. 4601Q;(b) deposit substitutes arising fromspecial financing programs of theGovernment and/or international FIs;(c) interbank call loan transactionsunder Sec. 4343Q; and (d) bonds underSec. 4239Q for which the reserverequirement shall be five percent (5%).On top of the regular reserverequirements, an additional elevenpercent (11%) liquidity reserves againstdeposit substitute liabilities (except Items“a” to “d” above) of QBs shall be imposedwhich may be maintained in the formprescribed in Item “a” of Sec. 4254Q. Anydeficiency shall be in the form prescribedin Item “b” of Sec. 4254Q.Provided, That deposit substitutesevidenced by repo agreements coveringgovernment securities up to the amountequivalent to the adjusted Tier 1 capitalof the QB shall be subject to the statutoryreserve of four percent (4%): Provided,further, That such rate shall apply only torepo agreements, the documentation ofwhich conforms with, and were deliveredto a BSP accredited third party custodianas required under existing BSPregulations.(As amended by Circular Nos. 732 dated 03 August 2011,726 dated 27 June 2011 and 632 dated 19 November 2008)Sec. 4254Q (2008 - 4246Q.1)Composition of Reserves. Thecomposition of the reserves shall be asfollows:a. Not more than the percentage ofliquidity reserves required under Sec.4253Q shall be maintained in the ReserveDeposit Account (RDA) with the BSP ormay be in the form of the following:Provided, That it complies with theguidelines shown in Appendix Q-41.(1) Short-term market-yieldinggovernment securities purchased directlyfrom the BSP-Treasury Department;(2) NDC Agri-Agra ERAP Bonds,regardless of maturity; and(3) Poverty Eradication andAlleviation Certificates (PEACe)bonds only to the extent of the original gross issue proceeds determinedat the time of the auction, plusManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 9

§§ 4254Q - 4254Q.308.12.31capitalized interest on the underlyingzero-coupon Treasury Notes as and whenthe corresponding interest is earned over thelife of the bonds.Any deficiency in the liquidity reserveshall continue to be in the forms or modesprescribed under existing regulations for thecomposition of required reserves.b. The balance shall be as follows:(1) At least ten percent (10%) in theform of deposit balances with the BSP;(2) A maximum of seventy-five percent(75%) in the form of government securities;and(3) The balance in the form of demanddeposit accounts with banks which are notrestricted as to withdrawal or use for currentoperations but not with FIs which have beenclosed and are under receivership orliquidation.For purposes of this Subsection,government securities eligible as reservesagainst deposit substitute liabilities of QBsas referred to in Item "b(2)" above shall belimited to bonds or other evidences ofindebtedness representing direct obligationsof the government of the Republic of thePhilippines having the following minimumfeatures/conditions:(i) The securities must bear an interestrate of not more than four percent (4%) perannum, must be non-negotiable and shallcarry BSP support; and(ii) The instrument must expressly statein its face the amount, maturity date andinterest rate of the obligation.A list of reserves-eligible andnon-eligible securities may be found inAppendix Q-9.Other government securities being usedfor reserve purposes shall continue to be eligibleas such: Provided, That whenever said securitiesshall have matured, they shall be replaced bysecurities carrying the above features.Securities held as reserves shall bevalued at cost of acquisition, and the QBmay freely alter its composition: Provided,That any substitution or acquisition satisfiesthe eligibility requirements prescribedabove: Provided, further, That the QB notifiesthe BSP of any such change not later than thereporting day following the change.Securities counted as reserves whichare hypothecated or encumbered in anyway or earmarked for any other purposeshall automatically lose their eligibility asreserves.Only the buying/lending QB in a resaleagreement covering eligible governmentsecurities may use such securities asreserves against deposit substitute liabilities.Conversely, the selling/borrowing QB in arepo agreement covering eligiblegovernment securities may not use suchsecurities as reserves against depositsubstitute liabilities.The reserve eligibility of governmentsecurities under the reverse repo operationsof the BSP shall be suspended during theterm of the repo agreement. The phrase nonreserveeligible shall be stamped on the faceof the custodian receipt being issued by theBSP to buyer FIs.(As amended by Circular Nos. 551 dated 17 November 2006and 539 dated 09 August 2006)§ 4254Q.1 (2008 - 4246Q.5) Maturedand unclaimed deposit substitutes. Maturedand unclaimed deposit substitutes shallcontinue to be subject to reserves.§ 4254Q.2 (Reserved)§ 4254Q.3 (2008 - 4246Q.7) Intereston reserve deposit with Bangko SentralDeposits maintained by QBs with the BSPup to forty percent (40%) of their reserverequirement (excluding the percentage ofliquidity reserves required on depositsubstitute liabilities of QBs under Sec.4253Q) shall be paid interest at four percent(4%) per annum based on the average dailybalance of said deposits to be creditedquarterly.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart II - Page 10

§§ 4254Q.3 - 4256Q.508.12.31The computation of quarterly interestpayments credited to the QBs’ DDAs withBSP are shown in Appendix Q-27.Effective 1 July 2003, published interestrates that will be applied on BSP’s RegularDDAs of QBs shall be inclusive of the tenpercent (10%) Value Added Tax (VAT).§ 4254Q.4 (2008 - 4246Q.6) Book entrymethod for reserve securities. Transactionsconcerning reserve-eligible securities shallbe entered in the respective securitiesaccount of each QB with the BSP and shallbe evidenced by securities account debit orcredit advices to be promptly furnished theinstitution/s concerned. No certificates shallbe issued for any purpose. Transactions withthird parties other than the BSP shall not berecognized.Sec. 4255Q (2008 - 4246Q.4) ExemptionsCertificates of assignment issued withrecourse by QBs under the IGLF Programare not covered by the reserve requirements.Sec. 4256Q (2008 - 4246Q.2) Computationof Reserve Position. The reserve positionof any QB and the penalty on reservedeficiency shall be computed based on aseven (7)-day week, starting Friday andending Thursday, including Saturdays,Sundays, public special/legal holidays,non-business days, unexpected declarednon-business days or declared half-dayholidays and days when there is no clearing:Provided, That with reference to publicspecial/legal holidays, non-businessunexpected declared non-business days,declared halfday holidays and days whenthere is no clearing, the reserve position ascalculated at the close of the business dayimmediately preceding such publicspecial/legal holidays, non-business daysand unexpected declared non-business day/sand declared half-day holidays and days whenthere is no clearing, shall apply thereon. Forthis purpose, the principal office in thePhilippines and all other offices locatedtherein shall be treated as a single unit.The guidelines on the computation ofa bank's reserve position during publicsector holidays are shown in AppendixQ-49.The required reserves in the currentperiod (reference reserve week) shall becomputed based on the correspondinglevels of deposit substitute liabilities of theprior week.(As amended by M-2008-025 dated 13 August 2008)§§4256Q.1 - 4256Q.4 (Reserved)§ 4256Q.5 (2008 - 4246Q.8) Guidelinesin calculating and reporting to the BSPthe required reserves on depositsubstitutes evidenced by repurchaseagreements covering governmentsecuritiesa. The Supervisory Data Center (SDC)shall determine the maximum allowableamount of repo agreements coveringgovernment securities that will qualify forthe reduced statutory reserve requirementsof two percent (2%). It shall be based onthe amount reported by QBs in their weeklyConsolidated Daily Report of Condition. Theadjusted Tier 1 capital reported daily shouldapproximate the quarterly adjusted Tier 1capital as submitted by banks in compliancewith the provisions of Sec. 4115Q.b. Any material differences that may benoted by the SDC between the daily andthe quarterly report shall be considered aserroneous reporting and shall be subject tothe penalties under existing regulations. TheSDC shall also make a re-run of itscomputation of the QB’s reserve positionand in the event that the reserve positionresulted to a reserve deficiency/ies, thecorresponding penalties on reservedeficiencies shall also apply.c. The lagged system in themeasurement of a QB’s reserve requirement,as provided in Sec.4256Q, shall also beManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 11

§§ 4256Q.5 - 4277Q08.12.31adopted in the calculation of the two percent(2%) statutory reserve requirements for repoagreements covering government securities.d. Deposit substitutes evidenced byrepo agreements covering governmentsecurities in excess of the adjustedTier 1 capital shall be treated as regulardeposit substitutes and shall be subject tothe regular statutory and liquidity reserverequirements under existing regulations.Sec.4257Q (2008 - 4246Q.3) ReserveDeficiencies; Sanctionsa. Whenever the reserve position ofany QB computed in the manner specifiedin Sec.4256Q is below the requiredminimum, the QB concerned shall pay theBSP one-tenth of one percent (1/10 of 1%)per day on the amount of the deficiencyor the prevailing ninety-one (91)- day T-Bill rate plus three (3) percentage points,whichever is higher: Provided, however,That the QB shall be permitted to offsetany reserve deficiency occurring one (1)or more days of the week covered by thereport against excess reserves which itmay hold on other days of the same week,and shall be required to pay the penaltyonly on the average daily net deficiencyduring the week.In case of abuse, the QB shallautomatically lose the privilege of offsettingreserve deficiency in the aforesaid manneruntil such time that it maintains its dailyreserve position at the required minimumfor at least two (2) consecutive weeks.As used in this Section, abuse in theprivilege of offsetting reserve deficienciesagainst excess reserves shall mean havingreserve deficiencies occurring four (4) ormore times during any given week for two(2) consecutive weeks, whether or notresulting in net weekly deficiencies.b. In cases where the QB has chronicreserve deficiency on deposit substituteliabilities, the Monetary Board may (1) limitor prohibit the making of new loans orinvestments by the QB concerned; (2)prohibit the declaration of cash dividends;and/or (3) impose such other sanctions, asit may deem necessary. The board ofdirectors of such QB shall be notified ofsuch chronic reserve deficiency and thepenalties therefor, and shall be required toimmediately correct the reserve position ofthe QB.As used in this Section, thefollowing terms shall have the followingmeanings:Chronic reserve deficiency shall meanhaving net reserve deficiency for two (2)consecutive weeks.New loan and new investment shallrefer to any loan and any investmentinvolving disbursement of funds.c. Fines on legal reserve deficiencieson deposit substitute liabilities shall bepaid by the QB in accordance with Sec.4902Q: Provided, That where the creditbalance of the QB's demand depositaccount (DDA) with the BSP is insufficientand it fails to settle the assessment withinfifteen (15) days from receipt, theMonetary Board may limit or prohibit themaking of new loans or investments bythe QB.I. (RESERVED)Secs. 4258Q - 4269Q (Reserved)J. BORROWINGS FROM THEBANGKO SENTRALSec. 4270Q (2008 - 4276Q) RepurchaseAgreements with the Bangko Sentral. Repoagreements with the BSP under its openmarket operations (OMOs) shall begoverned by the provisions of Subsec.4601Q.1.Secs. 4271Q - 4277Q (Reserved)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart II - Page 12

§§ 4278Q - 4299Q08.12.31Sec. 4278Q Enhanced Intraday LiquidityFacility. The ILF is a smootheningmechanism which is available to eligibleparticipant QBs in the Philippine Paymentsand Settlements System (PhilPaSS) to supporttheir liquidity requirements and avoidpayment gridlocks in PhilPaSS. The revisedfeatures of the enhanced intraday liquidityfacility are shown in Appendix Q-13-B.(As superseded by the MOA between the BSP, BTr, BAPand Money Market Association of the Philippines dated25 March 2008)Secs. 4279Q - 4280Q (Reserved)K. OTHER BORROWINGSSec. 4281Q Borrowings from theGovernment. QBs shall not borrow anyfund or money from the Government andgovernment entities, through the issuanceor sale of its acceptances, notes or otherevidence of debt, except as may beauthorized by existing statutes.§ 4281Q.1 Definition of terms. Forpurposes of this Section, the following termsshall have the meaning indicated unless thecontext clearly indicates otherwise:a. Fund or money from theGovernment and government entitiesincludes public moneys of every sort,whether pertaining to the NationalGovernment, province, city, municipality,or other branch or agency of theGovernment, including government-ownedor controlled corporations (GOCCs) asdefined herein, and shall comprise "revenuefunds", "trust funds", and "depository funds"as these terms are defined in the RevisedAdministrative Code of 1987, anddeposits of, borrowings from, and all otherliabilities to, the Government andgovernment entities.b. GOCCs shall refer to GOCCs whichare created by special laws. It shall excludegovernment FIs such as the DevelopmentBank of the Philippines (DBP), Land Bankof the Philippines (LBP) and Al-AmanahIslamic Investment Bank of the Philippines,corporations which are organized assubsidiaries of GOCCs under the provisionsof the Corporation Law (Act No. 1459, asamended) or the Corporation Code (BP Blg.68) and private corporations which are takenover by GOCCs.Secs. 4282Q - 4298Q (Reserved)L. GENERAL PROVISION ONSANCTIONSSec. 4299Q General Provision onSanctions. Any violation of the provisionsof this Part shall be subject to Sections 36and 37 of R.A. No. 7653.The guidelines for the imposition ofmonetary penalty for violations/offenseswith sanctions falling under Section 37of R.A. No. 7653 on QBs, theirdirectors and/or officers are shown inAppendix Q-39.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart II - Page 13

§ 4301Q08.12.31PART THREELOANS, INVESTMENTS AND SPECIAL CREDITSSection 4301Q Management of RiskAssets/Minimum Guidelines on LendingOperations. It shall be the responsibilityof the board of directors of a QB to formulatewritten policies on the extension of creditand risk diversification and to set theguidelines for evaluation of risk assets.Well-defined lending policies and soundlending practices are essential if a QB is toperform its credit-extension functioneffectively and minimize the risk inherentin any extension of credit. The responsibilityshould be approached in a way that willprovide assurance to the public, thestockholders and supervisory authorities thattimely and adequate action will be taken tomaintain the quality of the loan portfolio andother risk assets.a. Requirement of lending policiesQBs shall have well-defined lending policieswhich shall ensure that lending shall beupon terms which are in the best interest ofthe institution and in accordance withexisting policy, rules and regulations of theMonetary Board. Such policies shall be inwriting to form part of the institution’spermanent records and shall be madeavailable for inspection by the BangkoSentral.b. Lending operations, definitionLending operations refer to any creditaccommodation and purchase ofreceivables and commercial papers,including purchase of commercial papersin the secondary market.c. Creditworthiness of borrowersBefore extending credit in any form, theQB must exercise proper caution toascertain that the debtors, co-makers,endorsers, sureties and/or guarantors arecapable of fulfilling their commitments.For this purpose, credit investigations mustbe conducted and appropriate statements ofassets and liabilities and of income andexpenditures shall be required of creditapplicants.d. Amounts, purpose and terms ofcredit accommodations. Loans/creditaccommodations shall be granted only inamounts and for periods necessary for thecompletion of the operations to be financed,and for purposes which are attuned togovernment economic policies. Theamount and period of the loan shall bejustified by the financial statementssubmitted or by specific feasibility/projectstudies for a particular operation to befinanced by the loan applied for.e. Documentation of loans. All loans/credit extensions shall be supported byevidences of indebtedness and/or loanagreements which shall contain, amongother things, a statement of the purpose ofthe loan and a program of repayment ofthe obligation.f. Credit files. Adequate credit files ofborrowers shall be maintained which shallcontain documents such as creditinvestigation reports, balance sheets,statements of assets and liabilities, incomeand expense statements, income taxreturns, bank and trade checkings, and otherdocuments/papers showing informationwhich form the bases for the creditextension.g. Periodic review. A periodic reviewof the loan portfolio and the credit standingof borrowers shall be made.h. Arm’s length transactions. A QBshall not relend to or purchasereceivables or other obligations of othercorporations, majority of the voting stockManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 1

§§ 4301Q - 4301Q.609.12.31of which is owned by subject corporation,unless the terms of the transactions are notmore favorable than those of other similartransactions.§§ 4301Q.1 - 4301Q.5 (Reserved)§ 4301Q.6 Large exposures and creditrisk concentrations. The followingguidelines shall govern managing largeexposures and credit risk concentrations inline with the objective of strengthening riskmanagement in the quasi-banking system.a. General principles(1) A QB can be exposed to variousforms of credit risk concentration which ifnot properly managed may cause significantlosses that could threaten its financialstrength and undermine public confidencein the QB.(2) Credit risk concentrations may arisefrom excessive exposures to individualcounterparties, groups of relatedcounterparties and groups of counterpartieswith similar characteristics (e.g.,counterparties in specific geographicallocations, economic or industry sectors).(3) Diversification of risk is essential inquasi-banking. Many past QB failures havebeen due to credit risk concentrations ofsome kind. It is essential for QBs to preventundue credit risk concentrations fromexcessive exposures to particularcounterparties, industries, economic sectors,regions or countries.(4) While concentration of credit risksis inherent in quasi-banking and cannot betotally eliminated, they can be limited andreduced by adopting proper risk controland diversification strategies. Safeguardingagainst credit risk concentrations shouldform an important component of aQB’s risk management system.(5) The board of directors of a QB shallbe responsible for establishing andmonitoring compliance with policiesgoverning large exposures and credit riskconcentrations of the QB. The boardshould review these policies regularly (atleast annually) to ensure that theyremain adequate and appropriate for theQB. Subsequent changes to theestablished policies must be approved bythe board.(6) The policy on large exposures andcredit risk concentrations shall, at aminimum, covers the following:(a) Exposure limits that are reasonablein relation to capital and resources for –(i) Various types of borrowers/counterparties (e.g. government, banks andother FIs, corporate and individualborrowers);(ii) A group of related borrowers/counterparties;(iii) Individual industry sectors;(iv) Individual countries; and(v) Various types of investments.(b) The circumstances in which theabove limits can be exceeded and the partyauthorized to approve such excesses, e.g.,the QB’s board of directors or creditcommittee with delegated authority fromthe board;(c) The delegation of credit authoritywithin the QB for approving largeexposures;(d) The procedures for identifying,reviewing, managing and reporting largeexposures of the QB;(e) The definition of exposure.QBs should take into account the nature oftheir business and the complexity of theirproducts. In any case, a QB’s exposures toa counterparty should include its on and offbalancesheet exposures and indirectexposures; and(f) The criteria to be used foridentifying a group of related persons;(7) The board and senior managementof a QB should ensure that:(a) Adequate systems and controls arein place to identify, measure, monitor andreport large exposures and credit riskQ RegulationsPart III - Page 2Manual of Regulations for Non-Bank Financial Institutions

§ 4301Q.609.12.31concentrations of the QB in a timelymanner; and(b) Large exposures of the QB are keptunder regular review. “Large exposures”shall refer to exposures to a counterparty ora group of related counterparties equal orgreater than five percent (5%) of QB’squalifying capital as defined under Section4115Q.(8) A QB should, where appropriate,conduct stress testing and scenarioanalysis of its large exposures to assessthe impact of changes in market conditionsor key risk factors (e.g., economic cycles,interest rate, liquidity conditions or othermarket movements) on its profile andearnings.(9) It is expected that QBs wouldgenerally observe a lower internal SBL thanthe prescribed limit of twenty-five percent(25%) as a matter of sound practice.b. Monitoring of large exposures/creditrisk concentrations(1) QBs should have a central liabilityrecord (preferably based on automatedsystem) for each loan exposure. QBs shouldbe able to monitor such exposures againstprescribed and internal limits on a dailybasis.(2) Every QB should have adequatemanagement information and reportingsystems that enable management to identifycredit risk concentrations within the assetportfolio of the QB or of the group(including subsidiaries and overseasbranches) on a timely basis. If aconcentration does exist, QBs should reduceit in accordance with their prescribedpolicies. Large exposures shall be subjectto more intensive monitoring.(3) QBs should ensure that theirinternal or external auditors conduct at leastan annual review of the quality of largeexposures and controls to safeguard againstcredit risk concentrations. Their reviewshould ascertain whether:(a) The QB’s relevant policies, limitsand procedures are complied with; and(b) The existing policies and controlsremain adequate and appropriate for theQB’s business.(4) Management should take promptcorrective action to address concerns andexceptions raised.(5) There should also be anindependent compliance function to ensurethat all relevant internal and prescribedrequirements and limits are complied with.Breaches of prescribed requirements anddeviations from established policies andlimits should be reported to seniormanagement in a timely manner.c. Unsafe and unsound practiceNon-observance of the principles andthe requirements of Items “a” and “b” abovemay be a ground for a finding of unsafeand unsound practice under Section 56 ofR.A. No. 8791 (Appendix Q-24) and maybe subject to appropriate sanction as maybe determined by the Monetary Board.d. Notification requirementsA QB must inform BSP immediatelywhere it has concerns that its large exposuresor credit risk concentrations have thepotential to impact materially upon itscapital adequacy, along with proposedmeasures to address these concerns.e. ReportingQB’s records on monitoring of largeexposures shall be made available to the BSPexaminers for verification at any given time.When warranted, the BSP may imposeadditional reporting requirements on QB inrelation to its large exposures and credit riskconcentrations.f. SanctionAny failure or delay in complying withthe requirements under Items “d” and “e”of this Subsection shall be subject topenalty applicable to those involvingmajor reports.(As amended by Circular No. 640 dated 16 January 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 3

§§ 4302Q - 4303Q11.12.31Sec. 4302Q Loan Portfolio and Other RiskAssets Review System. To ensure that timelyand adequate management action is takento maintain the quality of the loan portfolioand other risk assets and that adequate lossreserves are set up and maintained at a levelsufficient to absorb the loss inherent in theloan portfolio and other risk assets, QBsshall establish a system of identifying andmonitoring existing or potential problemloans and other risk assets and of evaluatingcredit policies vis-a-vis prevailingcircumstances and emerging portfoliotrends. Management must also recognize thatloss reserve is a stabilizing factor and thatfailure to account appropriately for lossesor make adequate provisions for estimatedfuture losses may result in misrepresentationof the QB’s financial condition.The system of identifying and monitoringproblem loans and other risk assets andsetting up of allowance for probable lossesshall include, but is not limited to, theguidelines in Appendix Q-10.(As amended by Circular Nos. 622 dated 16 September 2008and 520 dated 20 March 2006)§ 4302Q.1 Provisions for losses;booking. The board of directors of QBs areresponsible for ensuring that theirinstitutions have controls in place todetermine the allowance for probable losseson loans, other credit accommodations,advances and other assets consistent withthe institutions’ stated policies andprocedures, generally accepted accountingprinciples (GAAP), the BSP rules andregulations and the safe and sound bankingpractices. The board of directors, in fulfillingthis responsibility, shall requiremanagement to develop and maintain anappropriate, systematic and uniformlyapplied process consistent and incompliance with existing BSP rules andregulations to determine the amount ofreserves for bad debts or doubtful accountsor other contingencies.The specific allowance for probablelosses for classified loans and other riskassets and the general loan loss provisionas required in Appendix Q-10 shall be setup immediately.§ 4302Q.2 Sanctions. Non-compliancewith the requirement to book the valuationreserves required under the precedingSubsection shall be a ground for theimposition of any or all of the followingsanctions:a. Denial of requests for authority toestablish branches/offices; andb. Fine of P5,000 a day, counted asfollows:(1) from the date the QB was informedthat the recommendation of the appropriatedepartment of the SES was confirmed by theMonetary Board up to the date that saidrecommended valuation reserves wereactually booked, in case of the allowancefor probable losses for loans and other riskassets classified as Substandard(Unsecured), Doubtful and Loss as requiredby the BSP; and(2) from the dates prescribed under thepreceding Subsection up to the date of theactual booking in cases of the two percent(2%) general provision for probable loanlosses, the twenty-five percent (25%)allowance for probable losses on securedloans classified as Substandard, and the fivepercent (5%) allowance for probable losseson Loans Especially Mentioned.A. LOANS IN GENERALSec. 4303Q (2008 - 4306Q) Loan Limit toa Single Borrower. The total liabilities ofany person, company, corporation or firm,to a QB for money borrowed, excluding (a)loans secured by obligations of the BSPor of the Philippine Government; (b) loansfully guaranteed by the government as toQ RegulationsPart III - Page 4Manual of Regulations for Non-Bank Financial Institutions

§§ 4303Q11.12.31the payment of principal and interest; (c)loans fully secured by US Treasury Notesand other securities issued by centralgovernments and central banks of foreigncountries with the highest credit qualitygiven by any two (2) internationallyaccepted rating agencies; (d) loans to theextent covered by the hold-out on orassignment of, deposits maintained in thelending QB and held in the Philippines;(e) loans and acceptances under letters ofcredit to the extent covered by margindeposits; and (f) other loans or creditswhich the Monetary Board may, from timeto time, specify as non-risk assets, shallat no time exceed twenty-five percent(25%) of the combined capital accountsas defined in Sec. 4111Q.The total liabilities of any borrowermay amount to a further fifteen percent(15%) of the combined capital accountsof such QB: Provided, That the additionalliabilities are adequately secured by realestate mortgage, assignment or pledge ofreadily marketable bonds and other highgradedebt securities, except those issuedby the lending entity.The total amount of loans, creditaccommodations and guaranteesprescribed in the first paragraph may befurther increased by an additional fifteenpercent (15%) of the net worth of suchQB: Provided, That the additional loans,credit accommodations and guaranteesare granted to finance oil importation ofoil companies which are not subsidiariesor affiliates of the lending QB engaged inenergy and power generation: Provided,further, That the oil companies qualifyunder the credit underwriting standardsof the lending QB and the lending QBshall comply with Subsec. 4301Q.6 onthe guidelines in managing largeexposures and credit risk concentration:Provided, furthermore, That the credit riskconcentration arising from total exposuresto all oil companies shall be consideredby the QB in its internal assessment ofcapital adequacy relative to its overall riskprofile and operating environment andshall be incorporated in the ICAAPdocument required to be submitted underSec. 4119Q: Provided finally, That theadditional fifteen percent (15%) shall onlybe allowed for a non-extendable periodof two (2) years from 03 March 2011. Saidadditional loans, credit accommodationsand guarantees outstanding as of the endof the two (2)-year period and in excessof twenty five percent (25%) of the lendingQB’s net worth shall not be increased butshall be reduced and once reduced, saidexposures shall not be increasedthereafter.For purposes of this Section, the termliabilities shall mean the direct liability ofthe maker or acceptor of paper discountedwith or sold to such QB and the liabilityof the endorser, drawer or guarantor whoobtains a loan from or discounts paperwith or sells papers under his guaranty tosuch QB and shall include in the case ofliabilities of a co-partnership orassociation, the liabilities of the severalmembers thereof and shall include, in thecase of liabilities of a corporation, allliabilities of its subsidiaries: Provided, Thateven in cases where the parentcorporation, co-partnership or associationhas no liability to the QB, the liabilities ofsubsidiary corporations or members of theco-partnership or association shall becombined for purposes of the singleborrower’s limit (SBL).Loans, credit accommodations andguarantees to any person, partnership,association, corporation or other entityor group of companies in excess of theapplicable SBL arising from acquisition,merger or consolidation of borrower-Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 5

§§ 4303Q - 4304Q.111.12.31corporations, which loans, creditaccommodations and guarantees weregranted prior to and are outstanding as ofdate of acquisition, merger or consolidationof borrower-corporations shall not beincreased, but shall be reduced and oncereduced, shall not be increased beyond theapplicable SBL.(As amended by Circular Nos. 712 dated 09 February 2011 and700 dated 06 December 2010)§ 4303Q.1 (2008 - 4306Q.1) Exclusionsfrom loan limit. In addition to thoseenumerated in Sec. 4303Q, the totalliabilities of a commercial paper issuer forcommercial papers held by a QB as a firmunderwriter shall not be counted indetermining compliance with the SBLwithin a period of 180 days from theacquisition of the commercial paper by aQB: Provided, That in no case shall suchliabilities exceed five percent (5%) of the networth of the selling agent beyond the normalapplicable SBL.In case a stand–alone trust corporationis a subsidiary or affiliate of QB, the assetunder management of the trust corporationshall not form part of the relevant exposuresof the parent QB for purposes of calculatingthe SBL and the ceilings for accommodationto DOSRI of the said parent QB.The purchase by the trust corporation,in behalf of its clients, of securities orinstruments issued by its parent QB shallnot form part of the relevant exposure of thetrust corporation for purposes of calculatingthe SBL and DOSRI ceilings of the said trustcorporation.(As amended by Circular Nos. 710 dated 19 January 2011)§ 4303Q.2 (2008 - 4306Q.2)Contingent liabilities included in loan limitOutstanding foreign and domestic standbyand deferred letters of credit less margindeposits, and outstanding guarantees, thenature of which requires the guarantor toassume the liabilities/obligations of thirdparties in case of their inability to pay, shallbe included in determining the SBL exceptthose fully secured by cash, hold-out ondeposit substitutes, or governmentsecurities.§§ 4303Q.3 - 4303Q.4 (Reserved)§ 4303Q.5 (2008 - 4306Q.3) SanctionsViolations of the provisions of the foregoingrules shall be subject to the followingsanctions/penalties:a. Fines. Fines of one-tenth of onepercent (1/10 of 1%) of the excess but notto exceed P30,000 a day for each violation,reckoned from the date the excess startedup to the date when such excess waseliminated, shall be assessed on the QB.b. Other sanctionsFirst OffenseReprimand for the directors/officerswho approved the credit line or availmentwhich resulted in the excess with a warningthat subsequent violations will be subjectto more severe sanctions.Subsequent offenses(1) For the duration of each violation,imposition of a fine of P500 a day for eachof the directors/officers who approved thecredit line or availment which resulted inan excess.(2) Suspension of the QB frombranching privileges until the excess iseliminated.Sec. 4304Q (2008 - 4312Q) Grant of Loansand Other Credit Accommodations. Thefollowing regulations shall be observed inthe grant of loans and other creditaccommodations.§ 4304Q.1 (2008 - 4312Q.1) Generalguidelines. Consistent with safe and soundbusiness practices, a QB shall grant loansor other credit accommodations only inQ RegulationsPart III - 6Manual of Regulations for Non-Bank Financial Institutions

§§ 4304Q.110.12.31amounts and for the periods of timeessential for the effective completion of theoperation to be financed.Before granting loans or other creditaccommodations, a QB must ascertain thatthe borrower, co-maker, endorser, surety and/or guarantor, if applicable, is/are financiallycapable of fulfilling his/their commitmentsto the QB. For this purpose, a QB shall obtainadequate information on his/their creditstanding and financial capacities.In addition to the usual informationsheet about the borrower, a QB shall requirefrom the credit applicant the following:a. A copy of the latest Income TaxReturn (ITR) of the borrower and hisco-maker, if applicable, duly stamped asreceived by the BIR;b. Except as otherwise provided by lawand in other regulations, if the borrower isengaged in business, a copy of theborrower’s latest financial statements assubmitted for taxation purposes to the BIR;andc. A waiver of confidentiality of clientinformation and/or an authority of the QBto conduct random verification with the BIRin order to establish authenticity of the ITRand accompanying financial statementssubmitted by the client.The documents under Items “a” and ”b”above shall be required to be submittedannually for as long as the loan and/or creditaccommodation is outstanding.(Next Page is Part III- Page 7)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - 6a

§§ 4304Q.110.12.31The consistency of the data/figures in saidITRs and financial statements shall also bechecked and considered in the evaluationof the financial capacity andcreditworthiness of credit applicants. Thewaiver of confidentiality of clientinformation and/or an authority of the QBto conduct random verification with the BIRneed not be submitted annually since oncesubmitted these documents remain validunless revoked.Should the document(s) submittedprove to be spurious or incorrect in materialdetail, the QB may terminate any loan orother credit accommodation granted on thebasis of said document(s) and shall have theright to demand immediate repayment orliquidation of the obligation. Moreover, theQB may seek redress from the court for anyharm done by the borrower’s submissionof spurious documents.The required submission of additionaldocuments shall cover loans, other creditaccommodations, and credit lines granted,restructured, renewed or extended after02 November 2006 including any availmentand/or re-availment against existing creditlines, except:(1) Microfinance loans as definedunder Subsec. X361.1 (a);(2) Loans to registered BMBEs;(3) Interbank loans;(4) Loans secured by hold-outs on orassignment of deposits or other assetsconsidered non-risk by the Monetary Board;(5) Loans to individuals who are notrequired to file ITRs under BIR regulations,as follows:(a) Individuals whose grosscompensation income does not exceed theirtotal personal and additional exemptions,or whose compensation income derivedfrom one (1) employer does not exceedP60,000 and the income tax on which hasbeen correctly withheld;(b) Those whose income has beensubjected to final withholding tax;(c) Senior citizens not required to file areturn pursuant to R.A. No. 7432, asamended by R.A. No. 9257, in relation tothe provisions of the National InternalRevenue Code (NIRC) or the Tax ReformAct of 1997; and(d) An individual who is exempt fromincome tax pursuant to the provisions of theNIRC and other laws, general or special;and(6) Loans to borrowers, whose onlysource of income is compensation and thecorresponding taxes on which has beenwithheld at source: Provided, That theborrowers submitted, in lieu of the ITR, acopy of their Employer’s Certificate ofCompensation Payment/Tax Withheld (BIRForm 2316) or their payslips for at least three(3) months immediately preceding the dateof loan application.Loans to micro and small enterpriseswhich are not specifically exempted fromthe additional documentary requirementsspecified under the third paragraph of thisSubsection shall be exempted from saidadditional documentary requirement up to31 December 2011.Consumer loans, with original amountsnot exceeding P2.0 million, are exemptedfrom updating requirements or the requiredannual submission of the samerequirements forwarded during the initialsubmission under this Subsection but notin their restructuring, renewal, or extensionsor availment/re-availment against existingcredit lines: Provided, That these loans aresupported by ITRs or by BIR Form 2316 orpayslips for at least three (3) monthsimmediately preceding the date of loanapplication, and financial statementssubmitted for taxation purposes to the BIR,as may be applicable, at the time the loanswere granted, restructured, renewed, orManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 7

§§ 4304Q.1 - 4304Q.1010.12.31extended.For purposes of this Subsection, thefollowing definitions shall apply:1. Micro and small enterprises shall bedefined as any business activity or enterpriseengaged in industry, agribusiness and/orservices whether single proprietorship,cooperative, partnership or corporationwhose total assets, inclusive of those arisingfrom loans but exclusive of the land onwhich the particular business entity’s office,plant and equipment are situated, must havea value of up to P3.0 million and P15.0million respectively, or as may be definedby the SMED Council or other competentgovernment agency.2. Consumer loans is defined to includehousing loans, loans for purchase of car,household appliance(s), furniture and fixtures,loans for payment of educational and hospitalbills, salary loans and loans for personalconsumption, including credit card loans.(As amended by Circular Nos. 694 dated 14 October 2010,622 dated 16 September 2008, 607 dated 30 April 2008 and549 dated 09 October 2006)§ 4304Q.2 (2008 - 4312Q.2) Purposeof loans and other credit accommodationsBefore granting a loan or other creditaccommodation, QBs shall ascertain thepurpose of the loan or other creditaccommodation which shall be clearlystated in the application and in the contractbetween the QB and borrower. Theproceeds of a loan or other creditaccommodation shall be utilized only forthe purpose(s) stated in the application andcontract; otherwise, the QB may terminatethe loan or other credit accommodation anddemand immediate repayment of theobligation. Notwithstanding the precedingsentence, the proceeds of a loan or othercredit accommodation may be utilized bythe borrower for a purpose(s) other than thatoriginally stated in the application andcontract: Provided, That such otherpurpose(s) is/are among those for which thelending QB may grant loans and other creditaccommodations under existing laws andregulations: Provided, further, That suchutilization shall be with prior writtenapproval of duly authorized officer(s)/committee/board of directors of the lendingQB and such written approval shall formpart of the contract between the QB andthe borrower.(Circular No. 622 dated 16 September 2008)§ 4304Q.3 (2008 - 4312Q.3) Prohibiteduse of loan proceeds. QBs are prohibitedfrom requiring their borrowers to acquireshares of stock of the lending QB out of theloan or other credit accommodationproceeds from the same QB.(Circular No. 622 dated 16 September 2008)§ 4304Q.4 (2008 - 4312Q.4)Signatories. QBs shall require that loans andother credit accommodations be madeunder the signature of the principalborrower and, in the case of unsecured loansand other credit accommodations to anindividual borrower, at least one (1) comaker,except that a co-maker is not requiredwhen the principal borrower has thefinancial capacity and a good track recordof paying his obligations.(As amended by Circular No. 622 dated 16 September 2008)§§ 4304Q.5 - 4304Q.9 (Reserved)§ 4304Q.10 Minimum requireddisclosure. QBs shall provide a table of theapplicable fees, penalties and interest rateson loan transactions, including the periodcovered by and the manner of and reasonfor the imposition of such penalties, feesand interests; fees and applicable conversionreference rates for third currencytransactions, in plain sight and language,Q RegulationsPart III - Page 8Manual of Regulations for Non-Bank Financial Institutions

§§ 4304Q.10- 4304Q.1210.12.31on materials for marketing loans, such asbrochures, flyers, primers and advertisingmaterials, on loan application forms, andon billing statements: Provided, That thesedisclosures are in addition to the fulldisclosure of the fees, charges and interestrates in the terms and conditions of the loanagreement found elsewhere on theapplication form and billing statement:Provided further, That such table of fees,penalties and interest rates shall be printedin plain language and in bold black lettersagainst a light or white background, andusing the minimum Arial 12 theme font andsize, or its equivalent in readability, and onthe first page, if the applicable documenthas more than one (1) page.Transitory provision: QBs shall be givena period of 120 days from 6 January 2011to fully implement the required disclosurerequirements.(Circular No. 702 dated 15 December 2010)§ 4304Q.11 Unfair collection practicesQBs, collection agencies, counsels andother agents may resort to all reasonableand legally permissible means to collectamounts due them under the loanagreement: Provided, That in the exerciseof their rights and performance of duties,they must observe good faith andreasonable conduct and refrain fromengaging in unscrupulous or untoward acts.Without limiting the general application ofthe foregoing, the following conduct is aviolation of this Subsection:a. the use or threat of violence or othercriminal means to harm the physical person,reputation, or property of any person;b. the use of obscenities, insults, or profanelanguage which amount to a criminal act oroffense under applicable laws;c. disclosure of the names of borrowerswho allegedly refuse to pay debts, exceptas allowed under Subsec. 4304Q.12;d. threat to take any action that cannotlegally be taken;e. communicating or threat tocommunicate to any person creditinformation which is known to be false,including failure to communicate that a debtis being disputed;f. any false representation or deceptivemeans to collect or attempt to collect anydebt or to obtain information concerning aborrower; andg. making contact at unreasonable/inconvenient times or hours which shall bedefined as contact before 6:00 A.M. or after10:00 P.M., unless the account is past duefor more than sixty (60) days or the borrowerhas given express permission or said timesare the only reasonable or convenientopportunities for contact.QBs shall inform their borrowers inwriting of the endorsement of the collectionof their account to a collection agency/agent,or the endorsement of their account fromone collection agency/agent to another, atleast seven (7) days prior to the actualendorsement. The notification shall includethe full name of the collection agency andits contact details: Provided, That therequired notification in writing shall beincluded in the terms and conditions of theloan agreement. QBs shall adopt policiesand procedures to ensure that personnelhandling the collection of accounts, whetherthese are in-house collectors, or third-partycollection agents, shall disclose his/her fullname/true identity to the borrower.(As amended by Circular No. 702 dated 15 December 2010)§4304Q.12 Confidentiality ofinformation. QBs shall keep strictlyconfidential the data on the borrower orconsumer, except under the followingcircumstances:a. disclosure of information is with theconsent of the borrower or consumer;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 8a

§§ 4304Q.12 - 4305Q.310.12.31b. release, submission or exchange ofcustomer information with other financialinstitutions, credit information bureaus,lenders, their subsidiaries and affiliates;c. upon orders of court of competentjurisdiction or any government office oragency authorized by law, or under suchconditions as may be prescribed by theMonetary Board;d. disclosure to collection agencies,counsels and other agents of the QB toenforce its rights against the borrower;e. disclosure to third party serviceproviders solely for the purpose of assistingor rendering services to the QB in theadministration of its lending business; andf. disclosure to third parties such asinsurance companies, solely for the purposeof insuring the QB from borrower defaultor other credit loss, and the borrower fromfraud or unauthorized charges.(Circular No. 702 dated 15 December 2010)§§ 4304Q.13 - 4304Q.14 (Reserved)§ 4304Q.15 Sanctions. Violations of theprovisions of Subsecs. 4304Q.10 to 4304Q.12shall be subject to any or all of the followingsanctions depending upon their severity:a. First offense. Reprimand for thedirectors/officers responsible for the violation;b. Second offense. Disqualification ofthe bank concerned from the credit facilitiesof the BSP except as may be allowed underSection 84 of R. A. No. 7653;c. Subsequent offense/s:i. Prohibition on the QB concernedfrom the extension of additional creditaccommodation against personal security;andii. Penalties and sanctions providedunder Sections 36 and 37 of R. A. No. 7653.(Circular No. 702 dated 15 December 2010)Sec. 4305Q (2008 - 4307Q) Interest andOther Charges. The following rules shallgovern the rates of interest on loans by QBs.§ 4305Q.1 (2008 - 4307Q.6) Rate ofinterest in the absence of stipulation. Therate of interest for the loan or forbearanceof any money, goods or credit and the rateallowed in judgments, in the absence ofexpress contract as to such rate of interest,shall be twelve percent (12%) per annum.§ 4305Q.2 (2008 - 4307Q.5) Escalationclause; when allowable. Parties to anagreement pertaining to a loan orforbearance of money, goods or credits maystipulate that the rate of interest agreed uponmay be increased in the event that theapplicable maximum rate of interest isincreased by law or by the Monetary Board:Provided, That such stipulation shall bevalid only if there is also a stipulation in theagreement that the rate of interest agreedupon shall be reduced in the event that theapplicable maximum rate of interest isreduced by law or by the Monetary Board:Provided, further, That the adjustment in therate of interest agreed upon shall take effecton or after the effectivity of the increase ordecrease in the maximum rate of interest.§ 4305Q.3 (2008 - 4307Q.2) Floatingrates of interest. The rate of interest on afloating rate loan during each interest periodshall be stated based on the ManilaReference Rate (MRR), Treasury Bill Rate(TBR) or other market-based reference rates,plus a margin as may be agreed upon bythe parties.The MRRs for various interest periodsshall be determined and announced by theBSP every week and shall be based on theweighted average of the interest rates paidduring the immediately preceding week bythe ten (10) commercial banks with thehighest combined levels of outstandingdeposit substitutes and time deposits, inpromissory notes issued and time deposits(Next page is Part III - Page 9)Q RegulationsPart III - Page 8bManual of Regulations for Non-Bank Financial Institutions

§§ 4305Q.3 - 4305Q.408.12.31received by such banks, of P100,000 andover per transaction account, with maturitiescorresponding to the interest periods forwhich such MRRs are being determined.Such rates and the composition of the samplecommercial banks shall be reviewed anddetermined at the beginning of everycalendar semester on the basis of the banks’combined levels of outstanding depositsubstitutes and time deposits as of May 31or November 30, as the case may be.The rate of interest on floating rate loansexisting and outstanding as of 23 December1995 shall continue to be determined onthe basis of the MRRs obtained inaccordance with the provisions of the rulesexisting as of 01 January 1989: Provided,however, That the parties to such existingfloating rate loan agreement are notprecluded from amending or modifying theirloan agreements by adopting a floating rateof interest determined on the basis of TBRor other market-based reference rates.Where the loan agreement provides fora floating interest rate, the interest period,which shall be such period of time for whichthe rate of interest is fixed, shall be suchperiod as may be agreed upon by the parties.§ 4305Q.4 (2008 - 4307Q.7) Accrualof interest earned on loans. QBs areallowed to accrue interest earned on loans,subject to the following guidelines and/orprocedures.a. No accrual of interest income isallowed if a loan has become nonperformingas defined in Sec. 4309Q.Likewise, interest income shall not beaccrued for unmatured loans/receivableswith indications that collectibility thereofhas become doubtful. These indicationsinclude declaration of bankruptcy,insolvency, cessation of operations, or suchother conditions of financial difficulties orinability to meet financial obligations asthey mature. Separate appropriate recordsshall be maintained for these non-accruingunmatured loans.Interest on non-performing loanaccounts shall be taken up as income onlywhen actual payments thereon are received.Interest income on past due loans arisingfrom discount amortization (and not fromthe contractual interest of the accounts) shallbe accrued as provided in PAS 39.b. Interest earned on an extended orrenewed loans may be accrued: Provided,That there is no previously accrued butuncollected interest thereon.Interest income on restructured loans(principal plus capitalized interest thereon)may be accrued: Provided, That these are:(1) In current status; and(2) Fully secured by real estate with loanvalue of up to sixty percent (60%) of theappraised value of the real estate securityand the insured improvements thereon, andsuch other first class collaterals as may bedeemed appropriate by the Monetary Board.c. Accrued interest earned but not yetcollected/received shall not be consideredas profits and/or earnings eligible fordividend declaration and/or profit sharing.d. A contra account to be designatedAllowance for Uncollected Interest onLoans shall be set up in accordance withAppendix 10 if accrued interest receivableon loans or loan installments is stilluncollected after three (3) months from thedate such loans and loan installmentshave matured or have become nonperforming.e. The amount representing Allowancefor Uncollected Interest on Loans may bechargeable against the excess of outstandingvaluation reserves for loans and other riskassets as appearing in the QB’s books overthose recommended by the appropriatedepartment of the SES. The balance thereof,if any, shall be chargeable againstoperations.f. For all purposes, the Allowance forUncollected Interest on Loans shall beconsidered a valuation reserve/allowanceagainst the Accrued Interest Receivableaccount.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 9

§§ 4305Q.5 - 4306Q.108.12.31§ 4305Q.5 (2008 - 4307Q.1) Rateceilings. The rate of interest, includingcommissions, premiums, fees and othercharges on loan transactions, regardless ofmaturity and whether secured or unsecured,shall not be subject to any ceiling.§ 4305Q.6 (2008 - 4307Q.3) Effect ofprepayment. If there is no agreement on therebate of interest in the event of prepaymentof the loan, the QB is not under any legalobligation to return the interestcorresponding to the period from date ofprepayment to the stipulated maturity dateof the loan. Any prepayment made by thedebtor should not, therefore, affectcomputation of the effective rate stipulatedin the loan contract.§ 4305Q.7 (2008 - 4307Q.4) Loanprepayment. The borrower of a QB shall notbe prohibited from prepaying a loan. Astipulation requiring the consent of thelending QB to such prepayment shall becontrary to this provision. In case ofprepayment in the loan contract, suchprepayment shall not be subject to penaltyin the absence of any stipulation as topenalty. However, the parties may stipulatethat prepayment shall be subject to penalty:Provided, That the penalty is not excessiveor unconscionable.Sec. 4306Q (2008 - 4308Q) Past DueAccounts. Past due accounts of a QB shall, asa general rule, refer to all accounts in its loanportfolio, all receivable components of tradingaccount securities and other receivables, asdefined in the manual of accounts for NBFIs,which are not paid at maturity.§ 4306Q.1 (2008 - 4308Q.1) Accountsconsidered past due. The following shall beconsidered as past due:a. Loans or receivables payable ondemand - if not paid on the date indicatedon the demand letter, or within three (3)months from date of grant, whichever comesearlier;b. Bills discounted and time loans,whether or not representing availmentsagainst a credit line - if not paid on therespective maturity dates of the promissorynotes;c. Customers’ liability on drafts underletters of credit/trust receipts:(1) Sight Bills - if dishonored uponpresentment for payment or not paid withinthirty (30) days from date of original entry,whichever comes earlier;(2) Usance Bills - if dishonored uponpresentment for acceptance or not paid ondue date, whichever comes earlier; and(3) Trust Receipts - if not paid on duedate.d. Bills and other negotiableinstruments purchased - if dishonored uponpresentment for acceptance/payment or notpaid on maturity date, whichever comesearlier: Provided, however, That an out-oftowncheck and a foreign check shall beconsidered as past due if outstanding forthirty (30) days and forty-five (45) days,respectively, unless earlier dishonored;e. Loans/receivables payable ininstallments - the total outstanding balancethereof shall be considered past due inaccordance with the following schedule:Minimum NumberMode of Payment of Installments in ArrearsMonthly 3Quarterly 1Semestral 1Annual 1Provided, however, That when the totalamount of arrearages reaches twentypercent (20%) of the total outstandingbalance of the loan/receivable, the totaloutstanding balance of the loan/receivable shall be considered as pastdue, regardless of the number ofinstallments in arrears: Provided, further,That for modes of payment other than thoseQ RegulationsPart III - Page 10Manual of Regulations for Non-Bank Financial Institutions

§§ 4306Q.1 - 4306Q.508.12.31listed above (e.g. daily, weekly orsemi-monthly), the entire outstandingbalance of the loan/receivable shall beconsidered as past due when the totalamount of arrearages reaches ten percent(10%) of the total loan/receivable balance;For this purpose, the term installmentsshall refer to principal and/or interestamortizations that are due on several dates asindicated/specified in the loan documents.f. Credit card receivables - if theamount due is not paid within ten (10) daysfrom the deadline indicated in the billingstatement; andg. (Deleted by Circular No. 202dated 27 May 1999)For the purpose of determiningdelinquency in the payment of obligationsas defined in Subsec. 4143Q.1(e), any dueand unpaid loan installment or portionthereof, from the time the obligor defaults,shall be considered as past due.§ 4306Q.2 (2008 - 4308Q.4) Demandloans. QBs shall, in case of non-payment of ademand loan, make a written demand withinthree (3) months following the grant of suchloan. The demand shall indicate a period ofpayment which shall not be later than three(3) months from the date of said demand.§ 4306Q.3 (2008 - 4308Q.2) Renewal/extension. No loan shall be renewed norits maturity date extended unless thecorresponding accrued interest receivableshall have been paid.§ 4306Q.4 (2008 - 4308Q.3) Restructuredloans. A restructured loan shall beimmediately classified past due in case ofdefault of any principal or interest payment.§ 4306Q.5 (2008 - 4308Q.5) Write-offof loans as bad debtsa. QBs, upon approval by their boardof directors, may write-off loans, other creditaccommodations, advances and other assetsagainst allowance for probable losses(valuation reserves) or current operations assoon as they are satisfied that such loans,other credit accommodations, advances andother assets are worthless as follows:(1) In the case of secured loans, QBsmay write-off loans, other creditaccommodations and other assets in anamount corresponding to the bookedvaluation reserves: Provided, That thebalance of the secured loans, other creditaccommodations, advances and other assetsshall remain in the books.(2) In the cases of unsecured loans,other credit accommodations, advances andother assets, QBs shall write-off said loans,other credit accommodations, advances andother assets in full amount outstanding.However, write-off of loans, other creditaccommodations, advances and other assetsconsidered transactions with DOSRI shallbe with prior approval of the MonetaryBoard.b. Definitions. For purposes of thisSection, the following terms are herebydefined as follows:(1) Loans. The term loans shall refer toall the accounts under the loan portfolio ofa QB as enumerated in the Manual ofAccounts for Quasi-Banks.(2) Other credit accommodations. Theterm other credit accommodations shall referto exposures of QBs other than loans suchas sales contract receivables, accountsreceivables, accrued interest receivables,lease receivables, and rental receivables.(3) Advances. The term advances shallrefer to any advance by means of anincidental or temporary overdraft, cash“vale”, any advance by means of DAUDand any advances of unearned salary orunearned compensation.(4) Other assets. The term other assetsshall refer to investments, placements,ROPAs and all other asset accounts that willnot fall under loans and other creditaccommodations.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 11

§§ 4306Q.5 - 4307Q.108.12.31(5) Bad debts. The term bad debts shallrefer to the definition under Subsec.4136Q.1.c. Reporting requirements. Notice ofwrite-off of loans, other creditaccommodations, advances and otherassets shall be submitted in the prescribedform to the appropriate department of theSES at least twenty five (25) banking daysprior to the intended date of write-off.The income tax expense deferredcorresponding to the amount of loan, othercredit accommodation, advances and otherasset written-off considered deductible forincome tax purposes shall be recognizedand reversed in QB’s books.§ 4306Q.6 (Reserved)§ 4306Q.7 (2008 - 4308Q.6) Updatingof information provided to creditinformation bureaus. QBs which haveprovided adverse information, such as thepast due or litigation status of loan accounts,to credit information bureaus, or anyorganization performing similar functions,shall submit monthly reports to these bureausor organizations on the full payment orsettlement of the previously reportedaccounts within five (5) business days fromthe end of the month when such full paymentwas received. For this purpose, it shall bethe responsibility of the reporting QBs toensure that their disclosure of anyinformation about their borrowers/clientsis with the consent of borrowers/clientsconcerned.(Circular No. 589 dated 18 December 2007)Sec. 4307Q (2008 - 4309Q) “Truth inLending Act” Disclosure RequirementQBs are required to strictly adhere to theprovisions of R.A. No. 3765, otherwiseknown as the “Truth in Lending Act”, andshall make the true and effective cost ofborrowing an integral part of every loancontract.The following regulations shall apply toall QBs engaged in the following types ofcredit transactions:a. Any loan, mortgage, deed of trust,advance and discount;b. Any conditional sales contract, anycontract to sell, or sale or contract of sale ofproperty or services, either for present orfuture delivery, under which part or all ofthe price is payable subsequent to themaking of such sale or contract;c. Any rental-purchase contract;d. Any contract or arrangement for thehire, bailment, or leasing of property;e. Any option, demand, lien, pledge,or other claim against, or for delivery ofproperty or money;f. Any purchase, or other acquisitionof, or any credit upon the security of, anyobligation or claim arising out of any of theforegoing; andg. Any transaction or series oftransactions having a similar purpose or effect.The following categories of credittransactions are outside the scope of theseregulations:(1) Credit transactions which do notinvolve the payment of any finance chargeby the debtor; and(2) Credit transactions in which thedebtor is the one specifying a definite andfixed set of credit terms such as bank deposits,insurance contracts, sale of bonds, etc.§ 4307Q.1 (2008 - 4309Q.1) Definitionof termsa. Person means any individual,partnership, corporation, association, orother organized group of persons, or thelegal successor or representative of theforegoing, and includes the PhilippineGovernment or any agency thereof, or anyother government, or any of its politicalsubdivisions, or any agency of the foregoing.b. Cash price or delivered price, incase of trade transactions, is the amount ofmoney which would constitute fullQ RegulationsPart III - Page 12Manual of Regulations for Non-Bank Financial Institutions

§§ 4307Q.1 - 4307Q.208.12.31payment upon delivery of the property(except money) or service purchased at theQB’s place of business. In the case offinancial transactions, cash price representsthe amount of money received by the debtorupon consummation of the credittransaction, net of finance charges collectedat the time the credit is extended, if any.c. Down payment represents theamount paid by the debtor at the time of thetransaction in partial payment for theproperty or service purchased.d. Trade-in represents the value of anasset agreed upon by the QB and debtor,given at the time of the transaction as partialpayment for the property or servicepurchased.e. Non-finance charges correspond tothe amounts advanced by the QB for itemsnormally associated with the ownership ofthe property or the availment of the servicepurchased which are not incidental to theextension of credit. For example, in the caseof the purchase of an automobile on credit,the QB may advance the insurance premiumas well as the registration fee for the accountof the debtor.f. Amount to be financed consists ofthe cash price plus non-finance charges lessthe amount of the down payment and valueof the trade-in.g. Finance charge represents theamount to be paid by the debtor incidentalto the extension of credit such as interestor discount, collection fee, creditinvestigation fee, attorney’s fee and otherservice charges.The total finance charge represents thedifference between (i) the aggregateconsideration (down payment plusinstallments) on the part of the debtor, and(ii) the sum of the cash price and nonfinancecharges.h. Simple annual rate is the uniformpercentage which represents the ratio, onan annual basis, between the financecharges and amount to be financed.In the case of single payment uponmaturity, the simple annual rate (R) in percentis determined by the following method:finance charge 12R = amount to be x maturity period x 100financed in monthsIn the case of the normal installment typeof credit of at least one (1) year in duration,where installment payments of equal amountare made in regular time periods spaced notmore than one (1) year apart, the R in percentis computed by the following method:number ofpaymentsfinance charge in a yearR = 2 x amount to be x total number x 100financed of paymentsplus oneIn cases where the credit matures in lessthan one (1) year (e.g., installment paymentsare required every month for six (6) months),the same formula will apply except thatnumber of payments in a year would referto the number of installment periods, asdefined in the credit contract, as if the creditmatures in one (1) year. For example,number of payments in a year would betwelve (12) for this purpose in cases wheresix (6) monthly installment payments arecalled for in the credit transaction 1 . In caseswhere credit terms provide for premium orpenalty charges depending on, for instance,the timeliness of the debtor’s payments, theannual rate to be disclosed in writing shallbe the rate for regular payments, i.e., thepremium and penalty need not be taken intoaccount in the determination of the annualrate. Such premium or penalty charges shall,however, be indicated in the credit contract.§ 4307Q.2 (2008 - 4309Q.2) Informationto be disclosed. QBs shall furnish to eachperson to whom credit is extended, prior tothe consummation of the transaction, a clear1This can be determined by dividing twelve, the number of months in a year, by the number or fraction of monthsbetween installment payments.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 13

§§ 4307Q.2 - 4309Q.108.12.31statement in writing setting forth thefollowing information:a. The cash price or delivered priceof the property or service to be acquired;b. The amounts, if any, to be creditedas down payment and/or trade-in;c. The difference between the amountsset forth under Items “a” and “b”;d. The charges, individually itemized,which are paid or to be paid by such personin connection with the transaction but whichare not incident to the extension of credit;e. The total amount to be financed;f. The finance charges expressed interms of pesos and centavos; andg. The percentage that the finance chargebears to the total amount to be financedexpressed as a simple annual rate on theoutstanding unpaid balance of the obligation.The contract covering the credittransaction, or any other document to beacknowledged and signed by the debtor,shall indicate the above seven (7) items ofinformation. In addition, the contract ordocument shall specify additional charges,if any, which will be collected in casecertain stipulations in the contract are notmet by the debtor.In case the seven (7) items ofinformation mentioned are not disclosed inthe contract covering the credit transaction,all of the items, to the extent applicable,shall be disclosed in another document inthe form (Appendix Q-11) prescribed by theMonetary Board, to be signed by the debtorand appended to the main contract. A copyof such disclosure statement shall befurnished to the borrower.§ 4307Q.3 (2008 - 4309Q.3) Inspectionof contracts covering credit transactions.QBsshall keep in their office or place of businesscopies of contracts which involve theextension of credit and the payment offinance charges therefore. Such copies shallbe available for inspection or examinationby the appropriate department of the SES.§ 4307Q.4 (2008 - 4309Q.4) PostersAn abstract of R.A. No. 3765 (AppendixQ-12) shall be reproduced in a format sixty(60) cm. wide and seventy-five (75) cm. longand posted on a conspicuous place in theQB’s place(s) of business.Sec. 4308Q(Reserved)Sec. 4309Q (2008 - 4311Q) Non-Performing Loans§ 4309Q.1 (2008 - 4311Q.1) Accountsconsidered non-performing; definitionsa. Non-performing loans (NPLs) shall,as a general rule, refer to loan accountswhose principal and/or interest is unpaidfor thirty (30) days or more after due dateor after they have become past due inaccordance with existing rules and regulations.This shall apply to loans payable in lump sumand loans payable in quarterly, semi-annualor annual installments, in which case, the totaloutstanding balance thereof shall beconsidered non-performing.b. In the case of loans payable inmonthly installments, the total outstandingbalance thereof shall be considerednon-performing when three (3) or moreinstallments are in arrears.c. In the case of loans payable in daily,weekly or semi-monthly installments, thetotal outstanding balance thereof shall beconsidered non-performing at the sametime that they become past due inaccordance with Sec. 4306Q, i.e., the entireoutstanding balance of the loan/receivableshall be considered as past due when thetotal amount of arrearages reaches tenpercent (10%) of the total loan/ receivablebalance.d. Restructured loans shall beconsidered non-performing in accordancewith existing rules and regulations.e. All items in litigation as defined inthe Manual of Accounts shall be consideredNPLs.Q RegulationsPart III - Page 14Manual of Regulations for Non-Bank Financial Institutions

§§ 4309Q.2 - 4320Q.108.12.31§ 4309Q.2 (2008 - 4311Q.2) Interestaccrual on past due loans. No accrual ofinterest income is allowed if a loan hasbecome non-performing as defined underSubsec. 4322Q.1. Interest on NPLs shall betaken up as income only when actualpayment thereon is received.Interest income on past due loans arisingfrom discount amortization (and not fromthe contractual interest of the accounts) shallbe accrued as provided in PAS 39.§ 4309Q.3 (2008 - 4311Q.3) Allowancefor uncollected interest on loans. A contraaccount to be designated Allowance forUncollected Interest on Loans shall be setup in accordance with Appendix Q-10 ifaccrued interest receivable on loans andloan installments is still uncollected afterthree (3) months from the date such loanshave become non-performing.§ 4309Q.4 (2008 - 4311Q.4) Reportingrequirement. QBs shall report the followingdata at the end of each month as additionalinformation in the monthly ConsolidatedStatement of Condition starting with theirreport as of 31 May 1999.Total non-performing loans xxxNon -performing regular loans xxxNon -performing restructured loan xxxSec. 4310Q - 4313Q (Reserved)B. (RESERVED)Secs. 4314Q - 4318Q (Reserved)C. UNSECURED LOANSSec. 4319Q (2008 - 4336Q) Loans AgainstPersonal Security. The grant, renewal,restructuring or extension of unsecured loansshall, in addition to the requirements ofSec. 4304Q, be made under the signature ofthe principal borrower and, at least one (1)co-maker, except that a co-maker is notrequired when the principal borrower hasthe financial capacity and a good trackrecord of paying his obligations.(As amended by Circular No. 622 dated 16 September 2008)§ 4319Q.1 (2008 - 4336Q.1) Generalguidelines(Deleted by Circular No. 622 dated16 September 2008)§ 4319Q.2 (2008 - 4336Q.2) Proof offinancial capacity of borrower(Deleted by Circular No. 622 dated16 September 2008)§ 4319Q.3 (2008 - 4336Q.3) Signatories(Deleted by Circular No. 622 dated16 September 2008)§ 4319Q.4 (2008 - 4336Q.4) (Reserved)Sec. 4320Q (2008 - 4337Q) Credit CardOperations; General Policy. The BSP shallfoster the development of consumer creditthrough innovative products such as creditcards under conditions of fair and soundconsumer credit practices. The BSP likewiseencourages competition and transparency toensure more efficient delivery of services andfair dealings with customers.Towards this end, the following rules andregulations shall govern the credit card operationsof QBs and subsidiary/affiliate credit cardcompanies, aligned with global best practices.§ 4320Q.1 (2008 - 4337Q.1) Definitionof termsa. Credit card. Means any card, plate,coupon book or other credit device existingfor the purpose of obtaining money, property,labor or services on credit.b. Credit card receivables. Representsthe total outstanding balance of creditcardholders arising from purchases of goodsand services, cash advances, annualmembership/renewal fees as well as interest,Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 15

§§ 4320Q.1 - 4320Q.210.12.31penalties, insurance fees, processing/servicefees and other charges.c. Minimum amount due or minimumpayment required. Means the minimumamount that the credit cardholder needs topay on or before the payment due date for aparticular billing period/cycle as definedunder the terms and conditions or remindersstated in the statement of account/billingstatement which may include: (1) totaloutstanding balance multiplied by therequired payment percentage or a fixedamount whichever is higher; (2) any amountwhich is part of any fixed monthlyinstallment that is charged to the card; (3)any amount in excess of the credit line; and(4) all past due amounts, if any.d. Default or delinquency. Shall meannon-payment of, or payment of any amountless than, the “Minimum Amount Due” or“Minimum Payment Required” within two(2) cycle dates, in which case, the “TotalAmount Due” for the particular billingperiod as reflected in the monthly statementof account may be considered in default ordelinquent.e. Acceleration clause. Shall mean anyprovision in the contract between the QBand the cardholder that gives the QB theright to demand the obligation in full in caseof default or non-payment of any amountdue or for whatever valid reason.f. Subsidiary refers to a corporationor firm more than fifty percent (50%) ofthe outstanding voting stock of which isdirectly or indirectly owned, controlled orheld with the power to vote by a QB orother FI.g. Affiliate refers to an entity linkeddirectly or indirectly to a QB or other FIthrough any one or a combination of any ofthe following:(1) Ownership, control or power tovote, whether by permanent or temporaryproxy or voting trust, or other similarcontracts, by a QB or other financialinstitution of at least ten percent (10%) ormore of the outstanding voting stock of theentity, or vice-versa;(2) Interlocking directorship orofficership, except in cases involvingindependent directors as defined underexisting regulations;(3) Common stockholders owningat least ten percent (10%) of theoutstanding voting stock of each FI andthe entity; or(4) Management contract or anyarrangement granting power to theQB or other FI to direct or cause thedirection of management and policies of theentity, or vice-versa.§ 4320Q.2 (2008 - 4337Q.2) Riskmanagement system. To safeguard theirinterests, QBs and subsidiary/affiliatecredit card companies are required toestablish an appropriate system formanaging risk exposures from credit cardoperations which shall be documented ina complete and concise manner. The riskmanagement system shall cover theorganizational set-up, records and reports,accounting, policies and procedures andinternal control.Written policies, procedures andinternal control guidelines shall beestablished on the following aspects ofcredit card operations:a. Requirements for application;b. Solicitation and applicationprocessing;c. Determination and approval ofcredit limits;d. Issuance, distribution and activationof cards;e. Supplementary or extension cards;f. Cash advances;g. Billing and payments;h. Deferred payment program orspecial installment plans;i. Collection of past due accounts;j. Handling of accounts for write-off;k. Suspension, cancellation andQ RegulationsPart III - Page 16Manual of Regulations for Non-Bank Financial Institutions

§§ 4320Q.2 - 4320Q.410.12.31withdrawal or termination of card;l. Renewal of cards, upgrade ordowngrade of credit limit;m. Lost or stolen cards and theirreplacement;n. Accounts of DOSRI and employees;o. Disposition of errors and/orquestions about the billing statement/statement of account and other customers’complaints; andp. Dealings with marketing agents/collection agents.(As amended by Circular No. 702 dated 15 December 2010)§ 4320Q.3 (2008 - 4337Q.3) Minimumrequirements. QBs and their subsidiary oraffiliate credit card companies shall notissue pre-approved credit cards.Before issuing credit cards, QBs and/ortheir subsidiary/affiliate credit cardcompanies must exercise, in accordancewith the provisions of Subsec. 4304Q.1,proper diligence by ascertaining thatapplicants possess good credit standing andare financially capable of fulfilling theircredit commitments.The net take home pay of applicantswho are employed, the net monthly receiptsof those engaged in trade or business, orthe net worth or cash flow inferred fromdeposits of those who are neither employednor engaged in trade or business or the creditbehavior exhibited by the applicant from hisother existing credit cards, or other lifestyleindicators such as but not limited to clubmemberships, ownership and location ofresidence and motor vehicle ownershipshall be determined and used as basis forsetting credit limits. The gross monthlyincome may also be used providedreasonable deductions are estimated forincome taxes, premium contributions, loanamortizations and other deductions.All credit card applications, speciallythose solicited by third partyrepresentatives/agents, shall undergo astrict credit risk assessment process andthe information stated thereon validated andverified by authorized personnel of the QBsand their subsidiary or affiliate credit cardcompanies, other than those handlingmarketing.(As amended by Circular No. 702 dated 15 December 2010)§ 4320Q.4 (2008 - 4337Q.4)Information to be disclosed. QBs or theirsubsidiaries/affiliate credit card companiesshall disclose to each person to whom thecredit card privilege is extended in theagreement, contract or any equivalentdocument governing the issuance or use ofthe credit card or any amendment theretoor in such other statement furnished to thecardholder from time to time, prior to theimposition of the charges and to the extentapplicable, the following information:a. non-finaqnce charges, individuallyitemized, which are paid or to be paid bythe cardholder in connection with thetransaction but which are not incident tothe extension of credit;b. the percentage that the interest bearsto the total amount to be financed expressedas a simple monthly or annual rate, as thecase may be, on the outstanding balance ofthe obligation;c. the effective interest rate per annum;d. for installment loans, the number ofinstallments, amount and due dates orperiods of payment schedules to repay theindebtedness;e. the default, late payment/penaltyfees or similar delinquency-related chargespayable in the event of late payments;f. the conditions under which interestmay be imposed, including the time period,within which any credit extended may berepaid without interest;g. the method of determining thebalance upon which interest and/ordelinquency charges may be imposed;h. the method of determining theamount of interest and/or delinquencycharges, including any minimum or fixedManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 17

§§ 4320Q.4 - 4320Q.710.12.31amount imposed as interest and/ordelinquency charge;i. where one (1) or more periodic ratesmay be used to compute interest, each suchrate, the range of balances to which it isapplicable, and the corresponding simpleannual rate;j. other fees, such as membership/renewal fees, processing fees, collectionfees, credit investigation fees and attorney’sfees; andk. for transactions made in foreigncurrencies and/or outside the Philippines,for dual currency accounts (peso and dollarbillings), as well as payments made by creditcardholders in any currency other than thebilling currency: the application ofpayments; the manner of conversion fromthe transaction currency and paymentcurrency to Philippine pesos or billingcurrency; definition or general descriptionof verifiable blended exchange/conversionrates (e.g., MASTERCARD and/or VISAInternational rates on the day the item wasprocessed/posted to the billing statement,plus markup, if any) including conversioncommission; and/or other currencyconversion charges and costs arising fromthe purchase by the card company of foreigncurrency to settle the customer’s transactionsshall also be disclosed.QBs and their subsidiary or affiliatecredit card companies shall also provide thefollowing information to their cardholders:1. A table of the applicable fees,penalties and interest rates on credit cardtransactions, including the period coveredby and the manner of and reason for theimposition of such penalties, fees andinterests; fees and applicable conversionreference rates for third currencytransactions, in plain sight and language, onmaterials for marketing credit cards, suchas brochures, flyers, primers and advertisingmaterials, on credit card application forms,and on credit card billing statements:Provided, That these disclosures are inaddition to the full disclosure of the fees,charges and interest rates in the terms andconditions of the credit card agreementfound elsewhere on the application formand billing statement; and2. A reminder to the cardholder in themonthly billing statement, or its equivalentdocument, that payment of only theminimum amount due or any amount lessthan the total amount due for the billingcycle/period, would mean the impositionof interest and/or other charges:Provided, That such table of fees, penaltiesand interest rates and reminder shall beprinted in plain language and in bold blackletters against a light or white background,and using the minimum Arial 12 theme fontand size, or its equivalent in readability, andon the first page, if applicable document hasmore than one page.Transitory provisions. QBs and theirsubsidiary or affiliate credit card companiesshall be given a period of 120 days from06 January 2011 to fully implement therequired disclosure requirements.(As amended by Circular No. 702 dated 15 December 2010)§ 4320Q.5 (2008 - 4337Q.5) Accrualof interest earned. Interest accrued and/orbooked shall be reversed and no accrual ofinterest shall be allowed ninety (90) daysafter the credit card receivable has becomepast due as defined in Subsec. 4306Q.1.§ 4320Q.6 (2008 - 4337Q.6) Financecharges. The amount of finance charges inconnection with any credit card transactionshall refer to interest charged to the cardholder.§ 4320Q.7 (2008 - 4337Q.7) Deferralcharges. The QB and the cardholder may,prior to the consummation of thetransaction, agree in writing to a deferral ofall or part of one (1) or more unpaidinstallments and the QB may collect aQ RegulationsPart III - Page 18Manual of Regulations for Non-Bank Financial Institutions

§§ 4320Q.7 - 4320Q.1208.12.31deferral charge which shall not exceed therate previously disclosed pursuant to theprovisions on disclosure.§ 4320Q.8 (2008 - 4337Q.8) Latepayment/penalty fees. No late payment orpenalty fee shall be collected fromcardholders unless the collection thereof isfully disclosed in the contract between theissuer and the cardholder: Provided, Thatlate payment or penalty fees shall be basedon the unpaid minimum amount due or aprescribed minimum fixed amount:Provided, further, That said late paymentor penalty fees may be based on the totaloutstanding balance of the credit cardobligation, including amounts payableunder installment terms or deferredpayment schemes, if the contract betweenthe issuer and the cardholder contains an“acceleration clause” and the totaloutstanding balance of the credit card isclassified and reported as past due.§ 4320Q.9 (2008 - 4337Q.9)Confidentiality of information. QBs andsubsidiary/affiliate credit card companiesshall keep strictly confidential the data onthe cardholder or consumer, except underthe following circumstances:a. disclosure of information is with theconsent of the cardholder or consumer;b. release, submission or exchange ofcustomer information with other FIs, creditinformation bureaus, credit card issuers,their subsidiaries and affiliates;c. upon orders of court of competentjurisdiction or any government office oragency authorized by law, or under suchconditions as may be prescribed by theMonetary Board;d. disclosure to collection agencies,counsels and other agents of the QB or cardcompany to enforce its rights against thecardholder;e. disclosure to third party serviceproviders solely for the purpose of assistingor rendering services to the QB or cardcompany in the administration of its creditcard business; andf. disclosure to third parties such asinsurance companies, solely for the purposeof insuring the QB from cardholder defaultor other credit loss, and the cardholder fromfraud or unauthorized charges.§ 4320Q.10 (2008 - 4337Q.10)Suspension, termination of effectivity andreactivation. QBs or their subsidiary/affiliatecredit card companies shall formulatecriteria or parameters for suspension,revocation and reactivation of the right touse the card and shall include in theircontract with cardholders a provisionauthorizing the issuer to suspend or terminateits effectivity, if circumstances warrant.§ 4320Q.11 (2008 - 4337Q.11)Inspection of records covering credit cardtransactions. QBs or their subsidiary/affiliatecredit card companies shall make availablefor inspection or examination by theappropriate department of the SES completeand accurate files on card applicant/cardholder to support the consideration forapproval of the application anddetermination of the credit limit which shallbe in accordance with the verified debtrepayment ability and/or net worth of thecard applicant/cardholder.§ 4320Q.12 (2008 - 4337Q.12) OffsetsFor purposes of transparency and adequatedisclosure, the credit card issuer shallinform/notify the credit cardholder in theagreement, contract or any equivalentdocument governing the issuance or use ofthe credit card that, pursuant to theprovisions of Articles 1278 to 1290 of theNew Civil Code of the Philippines, asamended the use of his credit card willsubject his deposit/s with the QB to offsetManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 19

§§ 4320Q.12 - 4320Q.1410.12.31against any amount/s due and payable onhis credit card which have not been paid inaccordance with the terms of the agreement/contract.§ 4320Q.13 (2008 - 4337Q.13)Handling of complaints. QBs or subsidiary/affiliate credit card companies shall givecardholders at least twenty (20) calendardays from statement date to examinecharges posted in his/her statement ofaccount and inform the QB/subsidiarycredit card companies in writing of anybilling error or discrepancy. Within ten(10) calendar days from receipt of suchwritten notice, the QB/subsidiary creditcard company shall send a writtenacknowledgement to the cardholder unlessthe action required is taken within such ten(10)-day period.Not later than two (2) billing cycles ortwo (2) months which in no case shallexceed ninety (90) days after receipt of thenotice and prior to taking any action tocollect the contested amount, or any partthereof, QBs/subsidiary credit cardcompanies shall make appropriatecorrections in their records and/or send awritten explanation or clarification to thecardholder after conducting aninvestigation. Nothing in this Subsectionshall be construed to prohibit any actionby the QB/subsidiary credit card companyto collect any amount which has not beenindicated by the cardholder to contain abilling error or apply against the credit limitof the cardholder the amount indicated tobe in error.§ 4320Q.14 (2008 - 4337Q.14) Unfaircollection practices. QBs, subsidiary/affiliate credit card companies,collection agencies, counsels and otheragents may resort to all reasonable andlegally permissible means to collectamounts due them under the credit cardagreement: Provided, That in the exerciseof their rights and performance of duties,they must observe good faith andreasonable conduct and refrain fromengaging in unscrupulous or untoward acts.Without limiting the general application ofthe foregoing, the following conduct is aviolation of this Subsection:a. the use or threat of violence or othercriminal means to harm the physical person,reputation, or property of any person;b. the use of obscenities, insults, orprofane language which amount to a criminalact or offense under applicable laws;c. disclosure of the names of creditcardholders who allegedly refuse to pay debts,except as allowed under Subsec. 4320Q.9;d. threat to take any action that cannotlegally be taken;e. communicating or threat tocommunicate to any person creditinformation which is known to be false,including failure to communicate that a debtis being disputed;f. any false representation or deceptivemeans to collect or attempt to collect anydebt or to obtain information concerning acardholder; andg. making contact at unreasonable/inconvenient times or hours which shall bedefined as contact before 6:00 A.M. or after10:00 P.M., unless the account is past duefor more than sixty (60) days or thecardholder has given express permission orsaid times are the only reasonable orconvenient opportunities for contact.QBs and their subsidiary/affiliate creditcard companies shall inform theircardholders in writing of the endorsementof the collection of their account to acollection agency/agent, or the endorsementof their account from one collection agency/agent to another, at least seven (7) days priorto the actual endorsement. The notificationshall include the full name of the collectionagency and its contact details: Provided,Q RegulationsPart III - Page 20Manual of Regulations for Non-Bank Financial Institutions

§§ 4320Q.14 - 4322Q.110.12.31That the required notification in writing shallbe included in the terms and conditions ofthe credit card agreement. QBs and theirsubsidiary/affiliate credit card companiesshall adopt policies and procedures toensure that personnel handling thecollection of accounts, whether these arein-house collectors, or third-party collectionagents, shall disclose his/her full name/trueidentity to the cardholder.(As amended by Circular No. 702 dated 15 December 2010)§ 4320Q.15 (2008-4337Q.15)Sanctions. Violations of the provisions ofSubsecs. 4320Q.1, 4320Q.5 to 4320Q.13shall be subject to any or all of the followingsanctions depending upon their severity:a. Disqualification of the QBconcerned from the credit facilities of theBSP except as may be allowed under Section84 of R.A. No. 7653;b. Prohibition of the QB concerned fromthe extension of additional creditaccommodation against personal security; andc. Penalties and sanctions providedunder Sections 36 and 37 of R.A. No. 7653.Violations of the provisions of Subsecs.4320Q.2 to 4320Q.4 and 4320Q.14 shallbe subject to any or all of the followingsanctions depending upon their severity:a. First offense. Reprimand for thedirectors/officers responsible for theviolation;b. Second offense. Disqualification ofthe bank concerned from the credit facilitiesof the BSP except as may be allowed underSection 84 of R. A. No. 7653;c. Subsequent offense/s:i. Prohibition on the QB concernedfrom the extension of additional creditaccommodation against personal security; andii. Penalties and sanctions providedunder Sections 36 and 37 of R. A. No. 7653.(As amended by Circular No. 702 dated 15 December 2010)Sec. 4321Q (Reserved)D. RESTRUCTURED LOANSSec. 4322Q (2008 - 4351Q) RestructuredLoans; General Policy. QBs shall have fulldiscretion in the restructuring of loans inorder to provide flexibility in arranging therepayment of such loans without impairingor endangering the lending QB’s financialinterest, except in special cases approvedby the Monetary Board such as loans fundedpartly or wholly by foreign currencyobligations. However, the restructuring ofloans granted to DOSRI shall be upon termsnot less favorable to the QB than thoseoffered to others. While agreements on loanrestructuring should be considered asmanagement tools to maintain or improvethe soundness of the QB’s lendingoperations, these should be drawn mainlyto assist borrowers towards the settlementof their loan obligations, taking into accounttheir capacity to pay.§ 4322Q.1 (2008 - 4351Q.1)Definition; when to consider performing/non-performing. Restructured loans areloans the principal terms and conditionsof which have been modified inaccordance with a restructuringagreement setting forth a new plan ofpayment or a schedule of payment on aperiodic basis. The modification mayinclude, but is not limited to, change inmaturity, interest rate, collateral orincrease in the face amount of the debtresulting from the capitalization of accruedinterest/accumulated charges. Items inlitigation and loans subject of judiciallyapprovedcompromise, as well as thosecovered by petitions for suspension or fornew plans of payment approved by thecourt or the SEC, shall not be classified asrestructured loans.A loan which is restructured shall beconsidered non-performing except:(Next page is Part III - Page 21)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 20a

§§ 4322Q.1 - 4322Q.208.12.31(1) When the loan is current andperforming (i.e., with updated principal andinterest payments) on the date ofrestructuring, in which case, the loan shallretain its performing status; and(2) Fully secured by real estate with loanvalue of up to sixty percent (60%) of theappraised value of the real estate securityand the insured improvements thereon, andsuch other first class collaterals as may bedeemed appropriate by the Monetary Board:Provided, That a restructured loan, with orwithout capitalized interest, must be yieldinga rate of interest equal to or greater than theQB’s average cost of funds at the date ofrestructuring, otherwise, it shall be considerednon-performing.The restoration to a performing loanshall only be effective after a satisfactorytrack record of payments of the requiredamortizations of principal and/or interesthas been established.For this purpose, a satisfactory trackrecord of payments of principal and/orinterest shall mean three (3) consecutivepayments of the required amortizations ofprincipal and/or interest have been made.However, in the case of a restructured loanwith capitalized interest but not fullysecured by real estate with loan value of upto sixty percent (60%) of the appraised valueof the real estate security and the insuredimprovements thereon or other first classcollaterals, six (6) consecutive payments ofthe required amortizations of principal and/or interest must have been made.A restructured loan which has beenrestored to a performing loan status shall beimmediately considered non-performing incase of default of any principal or interestpayment in accordance with Sec. 4306Q.§ 4322Q.2 (2008 - 4351Q.2) Proceduralrequirementsa. A loan may be restructured subjectto the approval of the QB’s board ofdirectors in a resolution which shallembody, among other things:(1) the basis of or justification for theapproval;(2) determination of the borrower’scapacity to pay, such as viability of thebusiness; and(3) the nature and extent of protectionof the QB’s exposure.The authority to approve therestructuring of loans may be delegated bythe QB’s board of directors to a committeeor officer(s): Provided, That there are boardprescribedguidelines specifically onrestructuring of loans: Provided, further, Thatsaid guidelines shall be submitted to theappropriate department of the SES withinthirty (30) days following the date ofapproval thereof. However, loans previouslyapproved by the executive committee as wellas those granted to DOSRI shall be subjectto approval by the board as provided underexisting rules and regulations. Loansrestructured other than those approved bythe board shall be reported to it forconfirmation.b. A second restructuring of a loanshall be allowed only if there are reasonablejustifications: Provided that it shall beconsidered a non-performing loan andclassified, at least, “Substandard”. Therestoration to a performing loan statusand/or the upgrading of loan classification,e.g., from “Substandard” to “LoansEspecially Mentioned”, if circumstanceswarrant an upgrading in accordance withthe criteria under Appendix Q-10, shallonly be allowed after a satisfactory trackrecord of at least six (6) consecutivepayments of the required amortization ofprincipal and/or interest has beenestablished.c. In the restructuring process, the QBshall encourage the borrower to improve thequality of the loan either by strengtheningfinancial capacity or providing additionalcollateral.The real estate security and/or other firstclass collaterals offered shall be appraisedat the time of restructuring to ensure thatManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 21

§§ 4322Q.2 - 4326Q08.12.31current market values are being used. Realestate security shall be appraised by anindependent appraisal company acceptableto the BSP and shall be reappraised everyyear thereafter.The term “first class collaterals” refersto assets and securities which have relativelystable and clearly definable value and/orgreater liquidity and are free from lien/encumbrance, such as:(1) Real estate;(2) Evidences of indebtedness of theRepublic of the Philippines and of the BSP,and other evidences of indebtedness orobligations the servicing and repayment ofwhich are fully guaranteed by the Republicof the Philippines;(3) Hold-out on and/or assignment ofdeposit substitutes maintained in the lendinginstitutions;(4) “Blue chip” shares of stocks, exceptthose issued by the lending entity or by itsparent company which owns more than fiftypercent (50%) of its outstanding shares ofstocks. For this purpose, the issuercorporation must be a listed corporation witha net worth of at least P1.0 billion and withannual net earnings during the immediatelypreceding five (5) years; and(5) Such other collaterals that theMonetary Board may declare as first classcollaterals from time to time.It is understood that the loan value to beassigned the collateral shall be as prescribedunder existing regulations.§ 4322Q.3 (Reserved)§ 4322Q.4 (2008 - 4351Q.3)Classification. The classification of a loanprior to restructuring, e.g., “Loans EspeciallyMentioned”, “Substandard” or “Doubtful”shall be retained: Provided, That a loan thatis not classified but which is non-performingprior to restructuring shall be classified, atleast, “Loans Especially Mentioned”:Provided, further, That restructured loanswith capitalized interest shall be classified,at least, “Substandard” and the requiredvaluation reserves shall be set upaccordingly: Provided, finally, That a moreadverse classification may be given, i.e.,“Substandard”, “Doubtful” or “Loss”, if thecircumstances warrant it as provided underAppendix Q-10.The upgrading of loan classification, e.g.,from “Substandard” to “Loans EspeciallyMentioned”, if circumstances warrant anupgrading in accordance with the criteriain Appendix Q-10, shall only be effectiveafter a satisfactory track record of paymentsof the required amortizations of principaland/or interest has been established.For this purpose, a satisfactory trackrecord of payments of principal and/orinterest shall mean three (3) consecutivepayments of the required amortizations ofprincipal and/or interest have been made.However, in the case of a restructured loanwith capitalized interest but not fullysecured by real estate with loan value ofup to sixty percent (60%) of the appraisedvalue of the real estate security and theinsured improvements thereon or otherfirst class collaterals, six (6) consecutivepayments of the required amortizations ofprincipal and/or interest must have beenmade.Secs. 4323Q - 4325Q (Reserved)E. LOANS/CREDITACCOMMODATIONS TO DIRECTORS,OFFICERS, STOCKHOLDERS ANDTHEIR RELATED INTERESTSSec. 4326Q (2008 - 4356Q) GeneralPolicy. Dealings of a QB with any of itsDOSRI shall be in the regular course ofbusiness and upon terms not lessfavorable to the QB than those offeredto others.Q RegulationsPart III - Page 22Manual of Regulations for Non-Bank Financial Institutions

§§ 4326Q - 4326Q.108.12.31No QB shall grant, renew or extend anycredit accommodation to its DOSRIwhenever its combined capital accounts isdeficient relative to risk assets held underSec. 4115Q, or whenever its paid-in capitalis deficient relative to the required minimumcapitalization. Neither shall it grant, renewor extend any credit accommodation to anyof its DOSRI who has past due creditaccommodations with the QB.§ 4326Q.1 (2008 - 4356Q.1)Definitions. For purposes of theseregulations, the following definitions shallapply.a. Directors shall refer to QB directorsas defined in Sec. 4141Q.b. Officers shall refer to QB officers asdefined in Sec. 4142Q.c. Stockholder shall refer to anystockholder of record in the books of theQB/trust entity, acting personally, or throughan attorney-in-fact; or any other person dulyauthorized by him or through a trusteedesignated pursuant to a proxy or votingtrust or other similar contracts, whosestockholdings in the lending QB/trust entity,individual and/or collectively with thestockholdings of: (i) his spouse and/orrelative within the first degree byconsanguinity or affinity or legal adoption;(ii) a partnership in which the stockholderand/or the spouse and/or any of theaforementioned relatives is a generalpartner; and (iii) corporation, association orfirm of which the stockholder and/or hisspouse and/or the aforementionedrelatives own more than fifty percent (50%)of the total subscribed capital stock of suchcorporation, association or firm, amount toone percent (1%) or more of the totalsubscribed capital stock of the QB/trustentity.d. Outstanding loans to andplacements with the QB shall refer to loansto and deposit substitutes of the QB whichare not subject of an assignment orhold-out agreement.e. Book value of the paid-in capitalcontribution shall mean the proportionalamount of the QB’s total capital accounts (netof such unbooked valuation reserves and othercapital adjustments as may be required by theBSP) as the corresponding paid-in capitalcontribution of each director, officer orstockholder concerned bears to the total paidincapital of the QB: Provided, That as a basisfor determining the individual ceilingreferred to in Sec. 4330Q, correspondingbook value of the shares of stock of suchdirector, officer or stockholder which arethe subject of pledge, assignment or anyother encumbrance shall be deductedtherefrom.f. Secured loan, borrowing, or creditaccommodation shall refer to any loan,discount, credit or advance, or portionthereof referred to in Sec. 4327Q which issecured by real estate mortgage, chattelmortgage on tangible assets, standby lettersof credit issued by foreign banks,assignments of or hold-out on depositsubstitutes issued by the lending entity, cashmargin deposits, assignment or pledge ofgovernment securities or readily marketablebonds and other highgrade debt securitiesexcept those issued by the lending entity,or by its parent company which owns morethan fifty percent (50%) of its outstandingshares of stocks, or receivables arising fromfinancial leases to the extent of the guarantydeposit plus sixty percent (60%) of theremaining value of the leased equipment.For this purpose, the remaining value of theequipment under lease shall be determinedby dividing the acquisition cost by theoriginal term of the lease and multiplyingthe resulting ratio by the unexpired portionof the term.For investment houses withquasi-banking functions, a secured loan,borrowing or credit accommodation shalllikewise include:(1) Customer’s liability under importbills outstanding for not more than thirty(30) days from date of original entry;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 23

§§ 4326Q.1 - 4328Q08.12.31(2) Sales contract receivable arising outof sale of real property on credit whereintitle to the property is retained by the QB;and(3) Customer’s liability-import billsunder trust receipts outstanding for notmore than thirty (30) days from date ofbooking: Provided, That the booking undertrust receipts shall have been made not laterthan the thirty-first (31st) day from the dateof original entry referred to in Sub-item (1)above.g. Unsecured loan, borrowing orcredit accommodation shall refer to anyloan, discount, credit or advance, or portionthereof referred to in Sec. 4327Q which isnot secured in accordance with Item “f”above.Sec. 4327Q (2008 - 4357) TransactionsCovered. The terms loan, borrow, moneyborrowed and credit accommodations asused herein shall refer to transactions whichinvolve the grant, renewal, extension orincrease of any loan, discount, credit oradvance in any form whatsoever, and shallinclude:a. Outstanding availments under anestablished credit line;b. Drawings against an existing letterof credit;c. The acquisition by discount,purchase, exchange or otherwise of any note,draft, bill of exchange or other evidence ofindebtedness upon which a director, officeror stockholder may be liable as a maker,drawer, acceptor, endorser, guarantor, orsurety;d. Any advance of unearned salary orunearned compensation for periods in excessof thirty (30) days;e. Loans or other credit accommodationsgranted by another FI to such director, officeror stockholder from funds of the QB investedin the other institution’s trust or otherdepartment when there is a clearrelationship between the transactions;f. The increase of an existingindebtedness, as well as additionalavailments under a credit line or additionaldrawings against a letter of credit;g. The sale of assets, such as sharesof stock, on credit;h. Leasing transactions under R.A.No. 5980, as amended; andi. Any other transaction as a result ofwhich a director, officer or stockholderbecomes obligated or may becomeobligated to the lending QB, directly orindirectly, by any means whatsoever to paymoney or its equivalent.Sec. 4328Q (2008 - 4358Q) TransactionsNot Covered. The terms loan, borrow,money borrowed or credit accommodationas used herein shall not refer to thefollowing transactions:a. Advances against accruedcompensation, or for the purpose ofproviding payment of authorized travel,legitimate expenses or other transactionsfor the account of the QB or for utilizationof maternity and other leave credits;b. The increase in the amount ofoutstanding credit accommodation as aresult of additional charges or advancesmade by the QB to protect its interests suchas taxes, insurance, etc.;c. The discount of bills of exchangedrawn in good faith against actually existingvalues, and the discount of commercial orbusiness paper actually owned by theperson negotiating the same, including, butnot limited to, the acquisition of export billsfrom any of its DOSRI which are drawn inaccordance with the terms and conditionsof the covering letters of credit: Provided,That the transaction shall automatically besubject to the ceiling as herein providedonce the DOSRI who is a party to thetransaction becomes directly liable to theQB;d. Transactions with a foreign bank orother FI which has stockholding in the QBQ RegulationsPart III - Page 24Manual of Regulations for Non-Bank Financial Institutions

§§ 4328Q - 4328Q.509.12.31where the foreign bank or other FI acts asguarantor through the issuance of letters ofcredit, guarantee letters or assignment of adeposit in a currency eligible as part of theinternational reserves and held in a bankin the Philippines to secure creditaccommodations granted to anotherperson or entity: Provided, That the foreignbank stockholder shall automatically besubject to the ceilings as herein providedin the event that its contingent liability asguarantor becomes a real liability; ande. Deposits of a QB with a bank,whether domestic or foreign, which hasstockholdings in the QB.§ 4328Q.1 (2008 - 4358Q.1) Applicabilityto credit card operations. The credit cardoperations of QBs shall not be subject tothese regulations where the creditcardholder is a director, officer orstockholder of the QB or their relatedinterests (DOSRI): Provided, That (a) theprivilege of becoming a credit cardholderis open to all qualified persons on thebasis of selective criteria which areapplied by the QB to all applicantsthereof; and (b) the director, officer orstockholder/related interest concernedreimburses/pays the QB for the billedamount in full on or before the paymentdue date in the billing or statement ofaccount, as set by the QB for all otherqualified credit cardholders on availmentsmade for the same period on their creditcards. However, the transaction shall besubject to applicable DOSRI regulationsif the director, officer, or stockholder/related interest concerned:a. fails to reimburse/pay the QB withinthe period mentioned herein; orb. on the outset, opts for deferredpayment scheme, and the availment isbooked by the QB.Sec. 4328Q.2 - 4328Q.4 (Reserved)§ 4328Q.5 (2008 - 4328Q) Loans, othercredit accommodations and guaranteesgranted to subsidiaries and/or affiliatesa. Statement of policy. Dealings of aQB with its subsidiaries and/or affiliatesshall be in the regular course of businessand upon terms not less favorable to theinstitution than those offered to others.b. Ceilings. The total outstandingloans, other credit accommodations andguarantees to each of the QB’ssubsidiaries and affiliates shall not exceedten percent (10%) of the net worth of thelending QB: Provided, That the unsecuredloans, other credit accommodations andguarantees to each of said subsidiaries andaffiliates shall not exceed five percent (5%)of such net worth: Provided, further, Thatthe total outstanding loans, other creditaccommodations and guarantees to allsubsidiaries and affiliates shall not exceedtwenty percent (20%) of the net worth ofthe lending QB: Provided, finally, That thesesubsidiaries and affiliates are not relatedinterest of any of the director, officer, and/or stockholder of the lending institution,except where such director, officer orstockholder sits in the board of directors oris appointed officer of such corporation asrepresentative of the QB.Loans, other credit accommodationsand guarantees granted by a QB to itssubsidiaries and affiliates engaged in energyand power generation consistent with themedium-term Philippine development plan/medium-term public investment program ofthe National Government duly certified assuch by the secretary of the socio-economicplanning shall be subject to a separateindividual limit of twenty-five percent (25%)of the net worth of the lending QB: Provided,That the unsecured portion thereof shall notexceed twelve and one-half percent (12.5%)of such net worth: Provided, further, Thatthese subsidiaries and affiliates are notrelated interests of any of the director,Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 25

§ 4328Q.509.12.31officer, and/or stockholder of the lendingQB, except where such director, officer orstockholder sits in the board of directors oris appointed officer of such corporation asrepresentative of the QB.c. Exclusions from the ceilings.Loans, other credit accommodations andguarantees secured by assets consideredas non-risk under existing BSP regulationsas well as interbank call loans shall beexcluded in determining compliance withthe ceilings prescribed under Item “b”above.d. Procedural requirements. Thefollowing provisions shall apply if a QBgrants a loan, other credit accommodationor guarantee to any of its subsidiaries andaffiliates.(1) Approval of the board, when toobtain. Except with prior written approvalof the majority of all the members of theboard of directors, no loan, other creditaccommodation and guarantee shall begranted to a subsidiary or affiliate.(2) Approval by the board, howmanifested. The approval shall bemanifested in a resolution passed by theboard of directors during a meeting andmade of record.(3) Determination of majority of all themembers of the board of directors. Thedetermination of the majority of all themembers of the board of directors shall bebased on the total number of directors ofthe QB as provided in its articles ofincorporation and by-laws.(4) Contents of the resolution. Theresolution of the board of directors shallcontain the following information:(a) Name of the subsidiary or affiliate;(b) Nature of the loan or other creditaccommodation or guarantee, purpose,amount, credit basis for such loan or othercredit accommodation or guarantee,security and appraisal thereof, maturity,interest rate, schedule of repayment andother terms;(c) Date of resolution;(d) Names of the directors whoparticipated in the deliberation of themeeting; and(e) Names in print and signatures of thedirectors approving the resolution: Provided,That in instances where a director whoparticipated in the board meeting and whoapproved such resolution failed to sign, thecorporate secretary may issue a certificationto this effect indicating the reason for thefailure of the said director to sign theresolution.(5) Transmittal of copy of boardapproval; contents thereof. A copy of thewritten approval of the board of directors,as herein required, shall be submitted to theappropriate department of the SES withintwenty (20) business days from the date ofapproval. The copy may be a duplicate ofthe original, or a reproduction copy showingclearly the signatures of the approvingdirectors: Provided, That if a reproductioncopy is to be submitted, it shall be dulycertified by the corporate secretary that it isa reproduction of the original writtenapproval.e. Reportorial requirements. Each QBshall maintain a record of loans, other creditaccommodations and guarantees coveredby these regulations in a manner and formthat will facilitate verification of suchtransactions by BSP examiners.The appropriate department of the SESmay require QBs to furnish such data orinformation as may be necessary forpurposes of implementing the provisionsof the foregoing rules.f. Sanctions. Without prejudice to thecriminal sanctions under Section 36 of R.A.No. 7653 (The New Central Bank Act), anyviolation of the provisions of the foregoingrules shall be subject to any or all of thefollowing sanctions:(1) Restriction or prohibition on the QBfrom declaring dividends for noncompliancewith the herein prescribedQ RegulationsPart III - Page 26Manual of Regulations for Non-Bank Financial Institutions

§ 4328Q.509.12.31ceilings until the outstanding loans, othercredit accommodations and guaranteeshave been reduced to within the hereinprescribed ceilings;(2) For the duration of each violation,imposition of a fine of one tenth (1/10) ofone percent (1%) of the excess over theceilings per day but not to exceed P30,000a day on the following:(a) The lending QB;(b) Each of the directors voting for theapproval of the loan, other creditaccommodation or guarantee in excess ofany of the ceilings prescribed above.g. Transitory provisions. Outstandingloans, other credit accommodation andguarantees to subsidiaries/affiliates that willexceed the ceilings mentioned above shallnot be subject to penalty until 09 April 2007or until said accommodations become pastdue, or are extended, renewed orrestructured, whichever comes later.(Circular No. 560 dated 31 January 2007, as amended by 654dated 12 May 2009)(Next page is Part III - Page 27)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 26a

§ 4329Q08.12.31Sec. 4329Q (2008 - 4359Q) Direct orIndirect Borrowings. For purposes of thisSection, a credit accommodation shall beconsidered a direct or indirect borrowingin accordance with the following criteria.a. Direct borrowing - If the director,officer or stockholder of the lendingQB is a party to any of the transactionsenumerated in Sec. 4327Q for himself oras a representative or agent of others, orif he acts as a guarantor, endorser or suretyfor loans from the QB, or if the loan orcredit accommodation to another party issecured by a property interest or right ofthe director, officer or stockholder.b. Indirect borrowing - If in any ofthe transactions in Sec. 4327Q theborrower, guarantor, indorser, or suretyis a:(1) Spouse or relative within the firstdegree of consanguinity or affinity, orrelative by legal adoption of a director,officer or stockholder of the QB;(2) Partnership of which a director,officer, or stockholder or his spouse orrelative within the first degree ofconsanguinity or affinity, or relative bylegal adoption, is a general partner;(3) Co-owner with the director,officer, stockholder or his spouse orrelative within the first degree ofconsanguinity or affinity, or relative bylegal adoption, of the property or interestor right mortgaged, pledged or assignedto secure the loans or creditaccommodations, except when themortgage, pledge or assignment coversonly said co-owner’s undivided interest;(4) Corporation, association, or firmof which a director or officer of the QB,or his spouse is also a director or officerof such corporation, association or firm,except (i) where the securities of suchcorporation, association or firm are listedand traded in the domestic stock exchangeand less than fifty percent (50%) of thevoting stock thereof is owned by any one(1) person or by persons related to eachother within the third degree ofconsanguinity or affinity; or (ii) where thedirector, officer or stockholder of the lendingQB sits as a representative of the QB in theboard of directors of such corporation:Provided, That the QB representative shallnot have any equity interest in the borrowercorporation except for the minimum sharesrequired by law, rules and regulations, orby the by-laws of the corporation, to qualifya person as director of the corporation:Provided, further, That the borrowingcorporation under (i) or (ii) is not amongthose mentioned in Items “b(5)” and “b(6)”of this Section;(5) Corporation, association or firm ofwhich any or a group of directors, officers,stockholders of the lending QB and/or theirspouses or relatives within the first degreeof consanguinity or affinity or relative bylegal adoption, hold/own more than twentypercent (20%) of the subscribed capital ofsuch corporation, or of the equity of suchassociation or firm; or(6) Corporation, association or firmwholly or majority-owned or controlled byany or a group of related entities mentionedin Items “b(2)”, “b(4)” and “b(5)” of thisSection.Other cases of direct/indirect borrowingshall be resolved on a case-to-case basis.It shall be the responsibility of theQB concerned to ascertain whether theborrower, guarantor, representative,endorser or surety is related to personsmentioned in Item “b(1)” of this Sectionor connected with any of the directors,officers or stockholders of the QB in anyof the capacities mentioned in Items“b(2)”, “b(3)”, “b(4)”, “b(5)” and “b(6)” ofthis Section.In determining indirect borrowings asenumerated above, only those casesinvolving living relatives shall be considered.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 27

§§ 4330Q - 4333Q08.12.31Sec. 4330Q (2008 - 4360Q) IndividualCeiling; Single- Borrower Limit. The totaloutstanding direct credit accommodationsto each of the QB’s directors, officers orstockholders, excluding those granted underofficers’ fringe benefit plans, shall notexceed, at any time, an amount equivalentto the unencumbered portion of his loansto, and placements with, the QB and thebook value of his paid-in capitalcontribution in the lending QB: Provided,That unsecured credit accommodations toeach of the QB’s directors, officers orstockholders shall not exceed thirtypercent (30%) of his total creditaccommodations.Notwithstanding the provisions ofthis Section, credit accommodations ofa QB to any one of its directors, officers,stockholders or their related interestsshall not exceed the SBL prescribed forQBs.Sec. 4331Q (2008 - 4361Q) AggregateCeiling; Ceiling On UnsecuredLoans. Except with prior approval of theMonetary Board, the total outstandingborrowings of directors, officers, orstockholders, whether direct orindirect,shall not exceed 100% ofcombined capital accounts, net of deferredincome tax as defined in Item “i” of Subsec.4116Q.2 and such unbooked valuationreserves and other capital adjustments asmay be required by the BSP: Provided,That in no case shall the total unsecureddirect and indirect borrowings ofdirectors, officers, and stockholdersexceed thirty percent (30%) of theaggregate ceiling or the outstanding direct/indirect loans thereto, whichever is lower.For the purpose of determiningcompliance with the ceiling on unsecuredloans, QBs shall be allowed to averagetheir ceiling on unsecured loans andtheir outstanding unsecured loans everyweek.In evaluating requests for extension ofloans in excess of the aggregate ceiling, theBSP shall consider the credit standing of theborrower, viability of the projects financedby such loans in relation to nationalobjectives, collateral or security and otherpertinent considerations.Sec. 4332Q (2008 - 4362Q) Exclusionsfrom Aggregate Ceiling. The following creditaccommodations shall be excluded indetermining compliance with theaggregate ceiling:a. Credit accommodations to theextent covered by a hold-out on, orassignment of, deposit substitutes in thelending QB, or covered by cash margindeposits or secured by evidences ofindebtedness of the Republic of thePhilippines or of the Bangko Sentral, or byother evidences of indebtedness orobligations, the servicing and repaymentof which are fully guaranteed by theRepublic of the Philippines;b. Credit accommodations to acorporate stockholder which meets all thefollowing conditions:(1) The corporation is a non-financialinstitution;(2) Its shares are listed and traded in thedomestic stock exchanges;(3) Its stockholdings in the lending QBdo not exceed thirty percent (30%) of thevoting stock of the QB; and(4) No person or group of personsrelated within the first degree ofconsanguinity or affinity holds/owns morethan twenty percent (20%) of the subscribedcapital of the corporation; andc. Credit accommodations grantedunder officers’ fringe benefit plans.Sec. 4333Q (2008 - 4363Q) CreditAccommodations Under Officers’ FringeBenefit Plans. The aggregate outstandingliabilities to a QB of its officers, extendedunder officers’ fringe benefit plans for theQ RegulationsPart III - Page 28Manual of Regulations for Non-Bank Financial Institutions

§§ 4333Q - 4336Q08.12.31purpose of house, car, and appliancefinancing, and meeting educational,medical, hospital, and other similarexpenses, shall not exceed thirty percent(30%) of the combined capital accounts ofthe lending entity: Provided, That QBs shallsubmit, for record purposes, copies of theirofficers’ fringe benefit plans to theappropriate department of the BSP.Sec. 4334Q (2008 - 4364Q) ProceduralRequirements. The following provisionsshall apply if a director or officer is aparty, directly or indirectly, to, or actsas the representative or agent of, othersin any of the transactions under Sec.4327Q.a. Approval of the board of directors;when to obtain. Except with the priorwritten approval of the majority of thedirectors, excluding the director concerned,no loan or other credit accommodationshall be granted nor any of the transactionsunder Sec. 4327Q be entered into.b. Approval by the board; howmanifested. The approval shall bemanifested in a resolution passed by theboard of directors duly assembled during aregular or special meeting for the purposeand made of record.c. Majority of the directors;computation of. The computation of themajority of the directors, excluding thedirector concerned, shall be based on thetotal number of directors of the QB, asprovided in its articles of incorporation andby-laws.d. Contents of the resolution. Theresolution of the board of directors shallcontain the following information:(1) Name of the director or officerconcerned and his relationship as regardsthe credit accommodation, such asprincipal, endorser, spouse of borrower,etc.;(2) Nature of the loan or other creditaccommodation, purpose, amount, creditbasis for such loan or credit accommodation,security and appraisal thereof, maturity,interest rate, schedule of repayment, andother terms of the loan or creditaccommodation;(3) Date of the resolution;(4) Names of the directors who werepresent and who participated in thedeliberations of the meeting;(5) Names in print and signatures ofthe directors approving the resolution:Provided, That the corporate secretary maysign, under a power-of-attorney, in behalfof a director who was present in the boardmeeting and who approved suchresolution, in instances where suchsignature is necessary, to indicate thatsuch resolution was approved by amajority of the directors; and(6) Such other information as may berequired by the appropriate department ofthe SES.e. Transmittal of copy of board ofdirectors’ approval; contents thereof. Acopy of the written approval of the boardof directors, as herein required, shall besubmitted to the appropriate departmentof the SES within twenty (20) businessdays from the date of approval. The copymay be a duplicate of the original, or areproduction copy showing clearly thesignatures of the approving directors:Provided, That if a reproduction copy isto be submitted, it shall contain, on its faceor reverse side, a signed certification bythe secretary that it is a reproduction ofthe original written approval.Sec. 4335Q (Reserved)Sec. 4336Q (2008 - 4365Q) Sanctions. Anyviolation of the provisions of the foregoingrules shall be subject to any or all of thefollowing sanctions:a. Restriction or prohibition on the QBfrom declaring dividends until theoutstanding loans and other creditManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 29

§§ 4336Q - 4340Q08.12.31accommodations have been reduced towithin the herein prescribed ceilings;b. Disqualification of the directorsvoting for the approval of the loan or creditin excess of any of the ceilings prescribed inSecs. 4330Q and 4331Q from participatingin the approval of loans or credit to officers,directors, and stockholders of the QB:Provided, however, That the disqualificationmay be lifted by the BSP, as thecircumstances warrant;c. Application of (1) the borrowingdirector’s or officer’s share in the QB’s profitsharing program and (2) the share of thedirector voting for the approval of the loanor credit accommodation against the excessof such loan or credit accommodation overany of the herein prescribed ceilings for suchperiod of time as may be approved by theMonetary Board; andd. For the duration of each violation,imposition of a fine of one-tenth of onepercent (1/10 of 1%) of the excess over theceilings per day but not to exceed P30,000a day on (1) the lending QB and thedirector, officer, or stockholder whoseborrowing exceeds his individual ceilingand (2) each of the directors voting for theapproval of the loan or credit accommodationin excess of any of the ceilings prescribedin Secs. 4330Q and 4331Q.The penalty for exceeding the individualceiling, aggregate ceiling and ceiling onunsecured loans shall be computed on theaverage amount of loans in excess of saidceilings during the same week.Secs. 4337Q - 4339Q (Reserved)Sec. 4340Q (2008 - 4366Q) Bank DOSRIRules and Regulations Applicable toGovernment Borrowings in Government-Owned or - Controlled Quasi-Banks. Theprovisions of Secs. X326 to X337 of theManual of Regulations for Banks (MORB),to the extent applicable, shall also apply toloans, other credit accommodations, andguarantees granted to the NationalGovernment or Republic of the Philippines,its political subdivisions andinstrumentalities as well as GOCCs, subjectto the following clarifications:a. Loans, other credit accommodations,and guarantees to the Republic of thePhilippines and/or its agencies/departments/bureaus shall be considered: (1) non-risk;and (2) not subject to any ceiling;b. Loans, other credit accommodations,and/or guarantees to: (1) GOCCs; and(2) corporations where the Republic of thePhilippines, its agencies/departments/bureaus, and/or GOCCs own at leasttwenty percent (20%) of the subscribedcapital stock shall be considered indirectborrowings of the Republic of thePhilippines and shall form part of theindividual ceiling as well as the aggregateceiling: Provided, That the following loans,other credit accommodations, and/orguarantees to GOCCs and corporationswhere the Republic of the Philippines, itsagencies/departments/bureaus, and/orGOCCs own at least twenty percent (20%)of the subscribed capital stock, shall beexcluded from the thirty percent (30%)ceiling on unsecured loans under Secs.X330 and X331 of the MORB:(1) Loans, other credit accommodations,and/or guarantees for the purpose ofundertaking priority infrastructure projectsconsistent with the Medium-TermDevelopment Plan/Medium-Term PublicInvestment Program of the NationalGovernment, duly certified as such by theSecretary of Socio-Economic Planning;(2) Loans, other credit accommodations,and/or guarantees granted to participatingfinancial institutions (PFIs) in the lendingprograms of the government wherein thefunds borrowed are intended for relendingto other PFIs or end-user borrowers; and(3) Loans, other credit accommodations,and/or guarantees granted for the purposeof providing (i) wholesale and retail loansQ RegulationsPart III - Page 30Manual of Regulations for Non-Bank Financial Institutions

§§ 4340Q - 4343Q10.12.31to the agricultural sector, and micro, smalland medium enterprises (MSMEs); and/or(ii) rediscounting and guarantee facilities forloans granted to the said sector orenterprises.c. Loans, other creditaccommodations, and/or guaranteesgranted to state universities and colleges(SUCs) shall be excluded from the thirtypercent (30%) ceiling on unsecured loansunder Secs. X330 and X331 of the MORB.d. In view of the fiscal autonomygranted under R.A. No. 7653 and theindependence prescribed under theConstitution, the BSP shall be consideredan independent entity, hence, not a relatedinterest of the Republic of the Philippinesand/or its agencies/departments/bureaus.Loans, other credit accommodations andguarantees of the BSP shall be considered:(1) non-risk; and (2) not subject to anyceiling;e. LGUs shall be considered separatefrom the Republic of the Philippines, othergovernment entities, and from one anotherdue to the full autonomy in the exercise oftheir proprietary functions and in themanagement of their economic enterprisesgranted to them under the LocalGovernment Code of the Philippines,subject to certain limitations provided bylaw, hence, not a related interest of theRepublic of the Philippines and/or itsagencies/departments/bureaus;f. Local Water Districts (LWDs),although GOCCs, shall be consideredseparate from the Republic of thePhilippines, other government entities, andfrom one another due to their fiscalindependence from the nationalgovernment, hence, not related interests ofthe Republic of the Philippines and/or itsagencies/department/bureaus, for purposesof these regulations;g. A director who acts as agovernment representative in the lendinginstitution shall not be excluded in thedeliberation as well as in the determinationof majority of the directors in cases of loans,other credit accommodations, andguarantees to the Republic of the Philippinesand/or its agencies/departments/bureaus;andh. A director of the lending institutionshall be excluded in the deliberation as wellas in the determination of majority of thedirectors in cases of loans, other creditaccommodations, and guarantees to theborrowing government entity other than theRepublic of the Philippines, its agencies,departments or bureaus where said directoris also a director, officer or stockholderunder existing DOSRI regulations.(Circular No. 514 dated 06 March 2006 as amended by CircularNos. 635 dated 10 November 2008, 616 dated 30 July 2008,580 dated 09 September 2007)F. (RESERVED)Secs. 4341Q - 4342Q (Reserved)G. SPECIAL TYPES OF LOANSSec. 4343Q (2008 - 4376Q) InterbankLoans. Interbank loan transactions shallinclude, among other things, (a) interbankcall loan (IBCL) transactions; (b) interbankterm loan transactions; (c) borrowingsevidenced by deposit substituteinstruments; and (d) purchases ofreceivables with recourse: Provided,however, That only IBCL transactionswhich are settled through the QBs’respective DDAs with the BSP viaPhilPaSS shall be eligible to zero percent(0%) reserve requirement: Provided,further, That funds borrowed by QBs fromtrust departments of banks/investmenthouses shall be excluded from the hereindefinition of interbank loan transactions.(As amended by Circular No. 703 dated 23 December 2010 and689 dated 16 June 2010)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 31

§§ 4343Q.1 - 4382Q10.12.31§ 4343Q.1 (2008 - 4376Q.1) Systemsand procedures for interbank call loantransactions. IBCL transactions of QBs shallbe governed by the Agreement for thePhilPaSS executed between the BSP and theInvestment Houses Association of thePhilippines (IHAP) on 12 December 2002and any subsequent amendments thereto.(As superseded by the agreement between the BSP and IHAPdated 12 December 2002)§ 4343Q.2 (2008 - 4376Q.2)Accounting proceduresa. Both lending and borrowing QBsshall immediately pass the correspondingentries in their books.b. IBCL transactions shall be recordedby the lending QB as Interbank Call LoansReceivable and by the borrowing QB as BillsPayable -Interbank Call Loans Payable.c. QBs shall reconcile their DDAs withthe BSP against monthly statements ofaccount to be furnished by the BSP FinancialAccounting Department ComptrollershipSub-Sector.(As amended by Circular No. 689 dated 16 June 2010)§ 4343Q.3 (2008 - 4376Q.4) Settlementprocedures. Interbank loan transactions(call and term) among QBs shall be settledin accordance with the provisions of theAgreement for the PhilPaSS executedbetween the BSP and the IHAP on 12December 2002 and any subsequentamendments thereto.(As superseded by the agreement between the BSP and IHAPdated 12 December 2002)§ 4343Q.4 (2008 - 4376Q.3) Transferof excess funds. The prescribed “Authorityto Debit Slip” shall be used by QBs in thetransfer of their excess funds which are nototherwise lent out in the interbank loanmarket from their BSP reserve accounts totheir operating accounts with theirdepository banks.The “Authority to Debit Slip” shall havea standard size of 4 3/4" x 8 1/2" and shallbe orange in color. It shall contain theminimum data or information as requiredand shall be accomplished and submittedto the BSP Comptrollership Department induplicate after having been duly signed and/or authenticated by authorized officers ofthe QB.Secs. 4344Q - 4380Q (Reserved)H. EQUITY INVESTMENTSSec. 4381Q Investment in Non-AlliedUndertakings. In order to avoid undueconcentration of economic power, the totalequity investments in any single non-alliedenterprise or industry of QBs, UBs and theirsubsidiaries, whether or not the parentfinancial intermediaries have equityinvestments in the enterprise, shall, in anycase, remain a minority in that enterprise,except as may be otherwise approved bythe President of the Philippines. Non-alliedenterprises are those allowed for UBs in theMORB.Equity investments as of 01 April 1980,which exceed the limitation under thisSection, may be retained but shall not beincreased percentage-wise, and wheneverreduced, shall not thereafter be increasedbeyond the prescribed limitation.Sec. 4382Q Investments Abroad. Except asmay be authorized by the Monetary Board,the total equity investments in and/or loansto any single enterprise abroad by any QBshall not at any time exceed fifteen percent(15%) of the net worth of the investing QB.Q RegulationsPart III - Page 32Manual of Regulations for Non-Bank Financial Institutions

§§ 4383Q - 4388Q.511.12.31Sec. 4383Q Underwriting Exempted. Thelimitations on equity investments underSec. 4381Q shall not apply to inventoriesof equity securities arising out of firmunderwriting commitments of investmenthouses: Provided, That such equity holdingshall be disposed of within two (2) yearsfrom acquisition by the investment house.I. (RESERVED)Secs. 4384Q - 4387Q (Reserved)J. OTHER OPERATIONSSec. 4388Q (2008 - 4391Q) Purchase ofReceivables and Other Obligations. Thefollowing rules shall govern the purchaseof receivables and other obligations.§ 4388Q.1 (2008 - 4391Q.1) Yield onpurchase of receivables. The rate of yield,including commissions, premiums, fees andother charges from the purchase of receivablesand other obligations, regardless of maturity,that may be charged or received by QBs shallnot be subject to any regulatory ceiling.Receivables and other obligations shallinclude claims collectible in money of anyamount and maturity from domestic andforeign sources. The Monetary Board shalldetermine in doubtful cases whether aparticular claim is included within said phrase.§ 4388Q.2 (Reserved)§ 4388Q.3 (2008 - 4391Q.2) Purchaseof commercial paper. Before purchasingregistered commercial paper, QBs shall:a. Require the issuing entity to submita duly certified true copy of its Certificate ofRegistration and Authority to IssueCommercial Paper; andb. Ascertain that the registrationnumber and expiry date indicated in thecommercial paper are the same as those inthe Certificate of Registration submitted.No QB shall sell, discount, assign,negotiate, in whole or in part such as thrusyndications, participations and other similararrangements, any note, receivable, loan,debt instrument and any type of financialasset or claim, except government securities,on a without recourse basis, or be a partyin any capacity in any such transactions ona without recourse basis, unless suchreceivable, note, loan, debt instrument andfinancial asset or claim is registered withthe SEC. This prohibition includestransactions between an investment houseand its trust department.Unregistered commercial papers may besold, discounted, assigned or negotiated byQBs to other financial intermediaries withquasi-banking functions.Any violation of the above rules andregulations shall be subject to any or all ofthe following sanctions:a. Suspension of quasi-bankingauthority for a period of six (6) months; andb. Monetary penalty of P500 per dayper transaction for each and every officer ofthe QB involved in any capacity in anytransaction violative of these regulations.§ 4388Q.4 (2008 - 4392Q) ReverseRepurchase Agreements with the BangkoSentral. Reverse repo agreements may beeffected with the BSP under its open marketoperations, subject to the terms andconditions in Subsec. 4601Q.2.§ 4388Q.5 (2008 - 4391Q.3)Investments in debt and marketable equitysecurities. The classification, accountingprocedures, valuation, sales and transfers ofinvestments in debt securities andmarketable equity securities shall be inaccordance with the guidelines inAppendices Q-20 and Q-20-a.Penalties and sanctions. The followingpenalties and sanctions shall be imposedon FIs and concerned officers found toviolate the provisions of these regulations:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 33

§§ 4388Q.5 - 4394Q.211.12.31a. Fines of P2,000/day to be imposedon NBFIs for each violation, reckoned fromthe date the violation was committed up tothe date it was corrected; andb. Sanctions to be imposed onconcerned officers:(1) First offense – reprimand theofficers responsible for the violation; and(2) Subsequent offenses – suspensionof ninety (90) days without pay for officersresponsible for the violation(As amended by Circular Nos. 738 dated 11 October 2011, 670dated 18 November 2009, 628 dated 31 October 2008, 626dated 23 October 2008 and 585 dated 15 October 2007,M-2007-006 dated 28 February 2007, Circular Nos. 558 dated22 January 2007, 546 dated 17 November 2006 and 509 dated01 February 2006)Secs. 4389Q - 4393Q (Reserved)Sec. 4394Q Acquired Assets in Settlementof Loans. The following rules shall governassets acquired in settlement of loans.§ 4394Q.1 (Reserved)§ 4394Q.2 (2008 - 4394Q.1) Bookinga. ROPA in settlement of loansthrough foreclosure or dation in paymentshall be booked under the ROPA accountas follows:(1) Upon entry of judgment in case ofjudicial foreclosure;(2) Upon execution of the Sheriff’sCertificate of Sale in case of extrajudicialforeclosure; and(3) Upon notarization of the Deed ofDacion in case of dation in payment (dacionen pago). ROPA shall be booked initially atthe carrying amount of the loan (i.e.,outstanding loan balance adjusted for anyunamortized premium or discount lessallowance for credit losses computed basedon PAS 39 provisioning requirements,which take into account the fair value of thecollateral) plus booked accrued interest lessallowance for credit losses (computed basedon PAS 39 provisioning requirements)plus transaction costs incurred uponacquisition (such as non-refundablecapital gains tax and documentary stamptax paid in connection with theforeclosure/purchase of the acquired realestate property): Provided, That if thecarrying amount of ROPA exceeds P5.0million, the appraisal of the foreclosed/purchased asset shall be conducted by anindependent appraiser acceptable to theBSP.b. The carrying amount of ROPAshall be allocated to land, building, othernon-financial assets and financial assets(e.g., receivables from third party or equityinterest in an entity) based on their fairvalues, which allocated carrying amountsshall become their initial costs.c. The non-financial assets portion ofROPA shall remain in ROPA and shall beaccounted for as follows:(1) Land and buildings shall beaccounted for using the cost model underPAS 40 “Investment Property”;(2) Other non-financial assets shall beaccounted for using the cost model underPAS 16 “Property Plant and Equipment”;(3) Buildings and other non-financialassets shall be depreciated over theremaining useful life of the assets, whichshall not exceed ten (10) years and three(3) years from the date of acquisition,respectively; and(4) Land, buildings and othernon-financial assets shall be subject to theimpairment provisions of PAS 36“Impairment”.d. Financial assets, shall be reclassifiedand booked according to intention underHFT, DFVPL, AFS, HTM, INMES,Unquoted Debt Securities Classified asLoans or Loans and Receivable andaccounted for in accordance with theprovisions of PAS 39, except interests insubsidiaries, associates and joint ventures,which shall be booked under EquityQ RegulationsPart III - Page 34Manual of Regulations for Non-Bank Financial Institutions

§§ 4394Q.2 - 4394Q.308.12.31Investments in Subsidiaries, Associates andJoint Ventures and accounted for inaccordance with the provisions of PAS 27,28 and 31, respectively.e. ROPAs that comply with theprovisions of PFRS 5 “Non-Current AssetsHeld for Sale” shall be reclassified andaccounted for as such.f. Claims arising from deficiencyjudgments rendered in connection with theforeclosure of mortgaged properties shallbe lodged under the real account“Deficiency Judgment Receivable”; whileprobable claims against the borrowerarising from the foreclosure of mortgagedproperties shall be lodged under thecontingent account “Deficiency ClaimsReceivable”.g. Appraisal of properties. Beforeforeclosing or acquiring any property insettlement of loans, it must be properlyappraised to determine its true economicvalue. If the amount of ROPA to be bookedexceeds P5.0 million, the appraisal must beconducted by an independent appraiseracceptable to the BSP. An in-house appraisalof all ROPAs shall be made at least everyother year: Provided, That immediatere-appraisal shall be conducted on ROPAswhich materially decline in value.h. Non-cash payment for interestFIs that accept non-cash payments forinterest on their borrowers’ loans shall bookthe acquired assets as ROPA. The amountto be booked as ROPA shall be the bookedaccrued interest less allowance for creditlosses (computed based on PAS 39provisioning requirements): Provided, Thatif the carrying amount of ROPA exceedsP5.0 million, the appraisal of the foreclosed/purchased asset shall be conducted by anindependent appraiser acceptable to theBSP. The carrying amount of ROPA shall beallocated in accordance with Item “b” andshall be subsequently accounted for inaccordance with Item “c” of this Subsection.The provisions of this Subsection shallbe applied retroactively to all outstandingROPAs and sales contract receivables:Provided: That for properties acquired before01 January 2005, the carrying amount of theacquired properties when initially bookedunder ROPA shall be the cost subject todepreciation and impairment testing, whichshall be reckoned from the time ofacquisition.(As amended by Circular Nos. 555 dated 12 January 2007 and520 dated 20 March 2006)§ 4394Q.3 (2008 - 4394Q.2) Salescontract receivablea. Sales Contract Receivable (SCR)shall be recorded based on the presentvalue of the installment receivablesdiscounted at the imputed rate of interest.Discount shall be accreted over the life ofthe SCR by crediting interest income usingthe effective interest method. Anydifference between the present value of theSCR and the derecognized assets shall berecognized in profit or loss at the date ofsale in accordance with the provisions ofPAS 18 “Revenue” Provided, furthermore,That SCR shall be subject to impairmentprovision of PAS 39.The provisions of this Section shall beapplied retroactively to all outstandingROPAs and SCRs: Provided: That forproperties acquired before 01 January2005, the carrying amount of the acquiredproperties when initially booked underROPA shall be the cost subject todepreciation and impairment testing,which shall be reckoned from the time ofacquisition.b. SCRs which meet all therequirements/conditions enumeratedbelow are hereby considered performingassets and therefore, not subject toclassification:(1) That there has been a downpaymentof at least twenty percent (20%)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 35

§§ 4394Q.3 - 4394Q.1508.12.31of the agreed selling price or in theabsence thereof, the installment paymentson the principal had already amounted toat least twenty percent (20%) of the agreedselling price;(2) That payment of the principal mustbe in equal installments or in diminishingamounts and with maximum intervals ofone (1) year;(3) That any grace period in thepayment of principal shall not be more thantwo (2) years; and(4) That there is no installmentpayment in arrear either on principal orinterest. Provided, That a “Sales ContractReceivable” account shall be automaticallyclassified “Substandard” and considerednon-performing in case of non-payment ofany amortization due: Provided, further,That a “Sales Contract Receivable” whichhas been classified “Substandard” andconsidered non-performing due tonon-payment of any amortization due mayonly be upgraded/restored to unclassifiedand/or performing status after a satisfactorytrack record of at least three (3) consecutivepayments of the required amortization ofprincipal and/or interest has been established.(As amended by Circular No. 520 dated 20 March 2006)§§ 4394Q.4 - 4394Q.9 (Reserved)§ 4394Q.10 (2008 - 4396Q) Transfer/Sale of non-performing assets to a specialpurpose vehicle or to an individual. Theprocedures governing the transfer/sale ofnon-performing assets (NPAs) to a SpecialPurpose Vehicle (SPV) or to an individualthat involves a single family residentialunit, or transactions involving dacion enpago by the borrower or third party of anon-performing loan (NPL), for the purposeof obtaining the Certificate of Eligibility(COE) which is required to avail of theincentives provided under R.A. No. 9182are presented in Appendix Q-28.The accounting guidelines on the saleof NPAs to SPVs and to qualifiedindividuals for housing under the SPV Act of2002 are presented in Appendix Q-28-a.The significant timelines relative to theimplementation of R.A. No. 9182, alsoknown as the “Special Purpose VehicleAct”, as amended by R.A. No. 9343 arepresented in Appendix Q-28b.(As amended by M-2008-014 dated 17 March 2008, M-2008-005dated 04 February 2008, M-2007-013 dated 11 May 2007 andM-2006-001 dated 11 May 2006)§§ 4394Q.11 - 4394Q.14 (Reserved)§§ 4394Q.15 Joint venture of quasibankswith real estate developmentcompaniesa. Statement of policy. It is the policyof the BSP to encourage QBs to dispose oftheir ROPA in settlement of loans and otheradvances either through foreclosure ordacion en pago as well as other propertiesacquired as a consequence of a merger/consolidation which are no longernecessary for their quasi-bankingoperations. Towards this end, QBs arehereby authorized to enter into JointVenture Agreements (JVA) with real estatedevelopment companies for thedevelopment of said properties, subject tothe requirements prescribed under thisSubsection.b. For purposes of this Subsection,joint venture shall refer to a contractualarrangement/undertaking between a QBand a duly registered real estatedevelopment company (developer) for thepurpose of developing the abovementionedproperties of the QB. The QBcontributes said properties to theundertaking while the developercontributes all the development funds,resources, technical expertise, equipment,personnel and all other requirementsdesired or needed for the implementationQ RegulationsPart III - Page 36Manual of Regulations for Non-Bank Financial Institutions

§ 4394Q.1508.12.31and completion of the undertaking includingmarketing, where applicable. The QB andthe developer shall be bound by thecontract that establishes joint control of theundertaking. Although the developer maybe designated as operator or manager of theundertaking, it does not, however,absolutely control the undertaking but onlyacts in accordance with the authoritiesgranted to him under the JVA.c. Forms of a joint venture. A QB anda developer may undertake a joint ventureunder the following forms:(1) A jointly-controlled operation/undertaking, which does not involve theestablishment of a corporation, partnershipor other entity, or a financial structure thatis separate from the QB and the developerthemselves. Under this form of jointventure, the rights and obligations of the QBand the developer shall be governedprimarily by their contract that must clearlyspecify the following:(a) authority of the developer todevelop/subdivide the property andsubsequently, to sell the individual lotsunder a special power of attorney;(b) sharing in the sales proceeds of thedeveloped ROPAs or in the developed lots;(c) sharing in taxes;(d) sharing in the assets of the jointventure particularly in the developed/subdivided lots should there still be unsoldlots at the time of termination of the jointventure; and(e) name under which the subdividedlots shall be registered pending their sale.(2) A jointly-controlled entity, whichinvolves the establishment of a newjuridical entity, preferably a corporationthat is separate and distinct from the QBand the developer. A jointly controlledcorporation may be established either forthe purpose of developing properties of QBsfor immediate sale or converting them intoearning assets such as hotels and shoppingmalls.d. Requirements and limitations in ajoint venture. A QB desiring to enter into aJVA with a developer for the purpose ofdeveloping its ROPAs and/or otherproperties acquired as a consequence ofmerger/consolidation shall comply with thefollowing:(1) The JVA shall be approved by theboard of directors of the QB.(2) The QB’s contribution to the jointventure, in whatever form undertaken,shall be limited to ROPAs and propertiesacquired as a consequence of the QB’smerger/consolidation with another QB/FI.(3) The QB shall not recognize incomeout of its contribution to the joint venture,regardless of the agreed valuation of saidproperties.(4) The QB shall not provide funds tothe joint venture either as a loan or capitalcontribution.(5) The JVA or contractualarrangement shall clearly stipulate therights and obligations of the QB and thedeveloper.(6) The QB shall secure prior MonetaryBoard approval of the JVA.e. Application for authority to enterinto JVA. A QB desiring to enter into a JVAwith a developer for the purpose ofdeveloping its ROPAs and other propertiesacquired as a consequence of its merger/consolidation with another QB/FI shallsecure prior Monetary Board approval ofsaid agreement. For that purpose, theconcerned QB shall submit an applicationfor Monetary Board approval to theappropriate department of the SES. Theapplication shall be signed by the QB’spresident or officer of equivalent rank andshall be accompanied by the followingdocuments/information:(1) The name of the developer;(2) Name of the principalstockholders and officers as well asmembers of the board of directors of saidcompany;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 37

§ 4394Q.1508.12.31(3) Relationship of the QB with thedeveloper, if any;(4) List and brief description of theproperties to be contributed by the QBincluding their market values, book valuesand the valuation agreed upon under theproposed JVA;(5) Certification by the QB’s presidentor officer of equivalent rank that the JVA isstrictly in compliance or will strictly complywith the requirements of this Subsection;and(6) Such other documents/informationthat the concerned department of the SESmay require.f. Non-financial allied undertakingAll types of QBs are hereby authorizedto invest in the equities of companiesengaged in real estate development as anon-financial allied undertaking, subjectto the following conditions:(1) Investments shall be limited toROPAs and other properties acquired asa consequence of a QB’s merger/consolidation with another QB/FI;(2) Investments shall be subject toexisting BSP requirements applicable toinvestments in non-financial alliedundertakings; and(3) If there is already an existingsubsidiary or affiliate relationship betweenthe QB and the investee corporation priorto the investment, the QB shall not recognizeincome out of its invested properties. Theexcess of the value of the capital stockreceived by the QB over the book value ofits invested properties shall be booked as“Deferred Credits”.g. Accounting treatment. Accountingtreatment of the properties contributed bya QB to a joint venture or invested in theequities of developers.(1) In a joint venture in the form of ajointly controlled operations/undertaking,which does not involve the establishmentof a corporation or other entity, the QBshall continue to recognize in its booksthe properties contributed to theundertaking. However, the regularprovisioning against probable lossesrequired under existing regulations maybe discontinued upon execution andimplementation of the JVA.(2) In a joint venture in which acorporation is created, the QB shall bookthe properties contributed to the undertakingas investment pursuant to the provisions ofPAS 31. It shall also recognize its interest inthe corporation using the proportionateconsolidation method or the equity methodas long as it continues to have joint controlover the corporation: Provided, That the QBshall not recognize income out of itscontribution to the joint venture. The excessof the value of the capital stock received bythe QB over the book value of thecontributed properties shall be credited tothe account “Deferred Credits”.(3) Properties invested in equities ofdevelopers shall be booked in accordancewith the PAS: Provided, That the QB shallnot recognize income out of the propertiesinvested if there is already an existingsubsidiary or affiliate relationship betweenthe QB and the investee corporation priorto the investment, regardless of the agreedvaluation of said properties. The excess ofthe agreed valuation of said properties overtheir book value shall be booked as“Deferred Credits”.h. Coverage. The provisions of thisSubsection shall apply to ROPAs existing,as well as those which may be acquiredby QBs in settlement of non-performingor past due loans and advancesoutstanding, as of 09 March 2006 and toproperties acquired as a consequence ofmerger or consolidation which areoutstanding in the books of QBs as of saiddate.i. Sanctions. Any violation of theprovisions of this Subsection and/or anyQ RegulationsPart III - Page 38Manual of Regulations for Non-Bank Financial Institutions

§§ 4394Q.15 - 4399Q08.12.31misrepresentation in the certification andinformation required to be submitted to theBSP under this Subsection shall subjectthe QB and the officer or officersresponsible therefore, to the penaltiesprovided under Sections 35, 36 and 37 ofR. A. No. 7653.(Circular No. 518 dated 09 March 2006)K. MISCELLANEOUS PROVISIONSSecs. 4395Q - 4398Q (Reserved)L. GENERAL PROVISION ONSANCTIONSSec. 4399Q General Provision on SanctionsUnless otherwise provided for, any violationof the provisions of this Part shall be subjectto Sections 36 and 37 of R.A. No. 7653.The guidelines for the imposition ofmonetary penalty for violations/offenses withsanctions falling under Section 37 of R. A.No. 7653 on QBs, their directors and/orofficers are shown in Appendix Q-39.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart III - Page 39

§§ 4401Q - 4403Q11.12.31PART FOURTRUST, OTHER FIDUCIARY BUSINESSAND INVESTMENT MANAGEMENT ACTIVITIESSection 4401Q Statement of PrinciplesThe cardinal principle common to all trust andother fiduciary relationships is fidelity.Policies predicated upon this principle aredirected towards confidentiality, scrupulouscare, safety and prudent management ofproperty including reasonable probability ofincome with proper accounting andappropriate reporting thereon. Practices aredesigned in accordance with the basicstandards for trust, other fiduciary andinvestment management accounts (IMAs) inAppendix Q-48 to promote efficiency inadministration and operation; to adhere andconform to the terms of the instrument orcontract; and to maintain absolute separationof property free from any intrusion of conflictof interest.An institution incorporated or authorized toengage in trust and fiduciary business is underno obligation, either legal or moral, to acceptany such business being offered nor has it theright to accept if the same is contrary to law,rules, regulations, public order and publicpolicy. It shall advertise its services in a dignifiedmanner and enter such business only whendemand for such service is evident, whenspecially equipped to render such service andupon full appreciation of the responsibilitiesinvolved. It shall be ready and willing to givefull disclosure of the services being offered andshall conduct its dealing with transparency.Harmonious relationship shall likewise bepursued with other professions to achieve thecommon goal of mutual service to the publicand protection of its interest.(As amended by Circular Nos. 721 dated 13 May 2011 and 618dated 20 August 2008)Sec. 4402Q Scope of Regulations. Theseregulations shall govern the grant ofauthority to and the management,administration and conduct of trust, otherfiduciary business and investmentmanagement activities (as these terms aredefined in Sec. 4403Q) of NBFIs (e.g.,investment houses (IHs) and trustcorporations) allowed by law to performsuch operations.The regulations are divided into three(3) Sub-Parts where:A. Trust and Other Fiduciary Businessshall apply to institutions authorized toengage in trust and other fiduciary businessincluding investment managementactivities;B. Investment Management Activitiesshall apply to institutions without trustauthority but engaged in investmentmanagement activities; andC. General Provisions shall apply toboth.Sec. 4403Q Definitions. For purposes ofregulating the operations of trust and otherfiduciary business and investmentmanagement activities, unless the contextclearly connotes otherwise, the followingshall have the meaning indicated.a. Trust business shall refer to anyactivity resulting from a trustor-trusteerelationship (trusteeship) involving theappointment of a trustee by a trustor for theadministration, holding, management offunds and/or properties of the trustor by thetrustee for the use, benefit or advantage ofthe trustor or of others called beneficiaries.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart IV - Page 1

§§ 4403Q08.12.31b. Other fiduciary business shall referto any activity of trust-licensed institutionsresulting from a contract or agreementwhereby the institution binds itself torender services or to act in a representativecapacity such as in an agency,guardianship, administratorship of wills,properties and estates, executorship,receivership and other similar serviceswhich do not create or result in atrusteeship. It shall exclude collecting orpaying agency arrangements and similarfiduciary services which are inherent in theuse of the facilities of the other operatingdepartments of such institution. Investmentmanagement activities, which areconsidered as among other fiduciarybusiness, shall be separately defined in thesucceeding item to highlight its being amajor source of fiduciary business.c. Investment management activityshall refer to any activity resulting from acontract or agreement primarily forfinancial return whereby the institution (theinvestment manager) binds itself to handleor manage investible funds or anyinvestment portfolio in a representativecapacity as financial or managing agent,adviser, consultant or administrator offinancial or investment management,advisory, consultancy or any similararrangement which does not create or resultin a trusteeship.d. Trust is a relationship or anarrangement whereby a person called atrustee is appointed by a person called atrustor to administer, hold and managefunds and/or property of the trustor for thebenefit of a beneficiary.e. Trust agreement is an instrument inwriting covering the terms and conditionsof the trust.f. Trustee is any person who holdslegal title to the funds and/or property of atrust.g. Trustor is any person who creates atrust.h. Beneficiary is any person for whosebenefit a trust is created.i. Fiduciary shall refer to any personor entity engaged in any of the otherfiduciary business as herein defined whereno trustor-trustee relation exists.j. Agency shall refer to a contractwhereby a person binds himself to rendersome service or to do something inrepresentation or on behalf of another, withthe consent or authority of the latter.k. Principal shall refer to the personwho grants authority to another personcalled an agent, under a contract to enterinto transactions in his behalf.l. Agent shall refer to a person whoacts in representation or on behalf ofanother person with the latter's authority.m. Trust Department shall refer to thedepartment, office, unit, group, division orany aggrupation which carries out the trustand other fiduciary business of aninstitution.n. Trust Officer shall refer to thedesignated head or officer-in-charge of thetrust department.o. Trust account shall refer to anaccount where transactions arising from atrusteeship are kept and recorded.p. Common Trust Fund (CTF) shall referto a fund maintained by an institutionauthorized to perform trust functions undera written and formally established plan,exclusively for the collective investmentand reinvestment of certain moneyrepresenting participations in the planreceived by it in its capacity as the trustee.q. Fiduciary account shall refer to anaccount where transactions arising fromany of the other fiduciary businesses arekept and recorded.r. Investment Manager shall refer toany person or entity engaged in investmentmanagement activities as herein defined.s. Investment Management Departmentshall refer to the department, unit,group, division or any aggrupationQ RegulationsPart IV - Page 2Manual of Regulations for Non-Bank Financial Institutions

§§ 4403Q - 4404Q.308.12.31which carries out the investmentmanagement activities of an institution thatdoes not have an authority to engage intrust and other fiduciary business.t. Investment Management Officershall refer to the designated head orofficer-in-charge of the investmentmanagement department of an institutionwhich does not have the authority toengage in trust and other fiduciarybusiness.u. Investment management accountshall refer to an account wheretransactions arising from investmentmanagement activities are kept andrecorded.A. TRUST AND OTHER FIDUCIARYBUSINESSSec. 4404Q Authority to Perform Trustand Other Fiduciary Business. With priorapproval of the Monetary Board, trustcorporations and IHs may engage in trustand other fiduciary business under ChapterIX of R.A. No. 8791, as amended andSection 7 of P.D. No. 129, as amended.Entities whose articles of incorporation 1or any amendments thereto, include thepurpose or power to engage in trust andother fiduciary business, shall secure theprior favorable recommendation of theMonetary Board pursuant to Section 17 ofthe Corporation Code.If an entity is found to be engaged inunauthorized trust and other fiduciarybusiness and/or investment managementactivities, whether as its primary,secondary or incidental business, theMonetary Board may imposeadministrative sanctions against suchentity or its principal officers and/ormajority stockholders or proceed againstthem in accordance with law.The Monetary Board may take suchaction as it may deem proper such as, butmay not be limited to, requiring thetransfer or turnover of any trust and otherfiduciary and/or IMA to duly incorporatedand licensed entities of the choice of thetrustor, beneficiary or client, as the casemay be.No entity shall advertise or representitself as being engaged in trust and otherfiduciary business or in investmentmanagement activities or represent itselfas trustee or investment manager or usewords of similar import and/or use inconnection with its business title, the wordstrust, trust corporation, trust company, trustplan or words of similar import, withouthaving obtained the required authority todo so.Starting year 2001, IHs authorized toengage in trust and other fiduciary businessshall renew their existing licenses yearly,subject to the implementing guidelines tobe issued thereon.(As amended by CL-2008-078 dated 15 December 2008,CL-2008-053 dated 21 August 2008 and CL-2008-007 dated21 January 2008)§§ 4404Q.1 - 4404Q.2 (Reserved)§ 4404Q.3 Prerequisites for engagingin trust and other fiduciary business. Aninstitution, before it may engage in trustand other fiduciary business, shall complywith the following requirements:a. The applicant has combined capitalaccounts of not less than P250 million orsuch amount as may be required by theMonetary Board or other regulatoryagency. For this purpose, combined capitalaccounts shall have the same meaning asin Sec. 4111Q;b. The applicant has been dulylicensed or incorporated as an FI by theappropriate government agency or createdby special law or charter;c. The articles of incorporation orcharter of the institution shall includeamong its powers or purposes, acting astrustee or administering any trust or holding1SEC Memorandum Circular Nos. 5 dated 17 July 2008, 3 dated 16 February 2006 and 14 dated 24 October 2000.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 3

§ 4404Q.305.12.31property in trust or on deposit for the use,or in behalf of others;d. The by-laws of the institution shallinclude, among other things, provisions onthe following:(1) The organization plan or structureof the department, office, or unit whichshall conduct the trust and other fiduciarybusiness;(2) The creation of a trust committee, theappointment of a trust officer and subordinateofficers of the trust department; and(3) A clear definition of the duties andresponsibilities as well as the line and stafffunctional relationships of the various units,officers and staff within the organization.e. Where the applicant is authorizedto engage in quasi-banking functions, itshall also meet the following additionalrequirements:(1) Its operations during the yearimmediately preceding the filing of theapplication have been profitable, i.e., itsrate of return on equity is at least tenpercent (10%);(2) It has continuously complied withits net worth-to-risk assets ratio, liquidityfloor and ceilings on DOSRI loans duringthe last six (6) months immediatelypreceding the date of application;(3) It has not incurred net weeklyreserve deficiency against depositsubstitutes during the last six (6) monthsimmediately preceding the date ofapplication;(4) The ratio of its total NPLs to itsgross loan portfolio as of the date of filingof application does not exceed the industryaverage as of the end of the quarterimmediately preceding the date ofapplication;(5) It does not have any past dueobligation with the BSP or with anygovernment or non-government FI;(6) It has not engaged in unsafe andunsound practice/s during the yearimmediately preceding the date of application;(7) It has corrected as of the date ofapplication the violations noted in its latestexamination related to the single borrower’sloan limit and all other ceilings prescribedby the BSP;(8) It does not have float itemsoutstanding for more than sixty (60)calendar days in the “Due From/To HeadOffice/Branches” accounts and the “Duefrom Bangko Sentral” account exceedingone percent (1%) of its total resources asof the end of the month immediatelypreceding the date of application; and(9) It has shown substantialcompliance with other pertinent laws,rules and regulations, policies andinstructions of the BSP and it has not beencited for serious violations or exceptionsaffecting its solvency, liquidity andprofitability.Where the applicant is not authorizedto engage in quasi-banking functions:(i) The adoption of a formula orcriteria for QBs in the determination ofcompliance with the capital-to-riskassets ratio and ceilings on loans toDOSRI; and(ii) The substitution of the reserve andliquidity floor requirements with the cashratio, as follows:(a) Primary reserves to Bills Payable;and(b) Primary and secondary reserves toBills Payable; where primary reservesconsist of cash on hand, cash in vault,COCIs, due from the BSP and due frombanks; and where secondary reservesconsist of BSP supported governmentsecurities, T-Bills and other governmentsecurities.Compliance with the foregoing, as wellas with other requirements under existingregulations, shall be maintained up to thetime the trust license is granted. Anapplicant that fails in this respect shall berequired to show compliance for anothertest period of the same duration.Q RegulationsPart IV - Page 4Manual of Regulations for Non-Bank Financial Institutions

§§ 4404Q.4 - 4405Q.208.12.31§ 4404Q.4 (2008 - 4404Q.2) Pre-operatingrequirements. An institution authorized toengage in trust and other fiduciary businessshall, before engaging in actual operations,submit to the BSP the following:a. Government securities acceptableto the BSP amounting to P500,000 asminimum basic security deposit for thefaithful performance of trust and otherfiduciary duties required under Subsec.4405Q.1;b. Organization chart of the trustdepartment which shall carry out the trustand other fiduciary business of theinstitution; andc. Names and positions of individualsdesignated as chairman and members ofthe trust committee, trust officer and othersubordinate officers of the trust departmentwith their respective bio-data andstatement of duties and responsibilities.Sec. 4405Q Security for the FaithfulPerformance of Trust and OtherFiduciary Business§ 4405Q.1 Basic security deposit. Aninstitution authorized to engage in trust andother fiduciary business shall deposit withthe BSP eligible government securities assecurity for the faithful performance of itstrust and other fiduciary duties equivalentto at least one percent (1%) of the bookvalue of the total volume of trust, otherfiduciary and investment managementassets: Provided, That at no time shall suchdeposit be less than P500,000.Scripless securities under Registry ofScripless Securities (RoSS) system of theBureau of Treasury (BTr) may be used asbasic security deposit for trust duties usingthe guidelines in Appendix Q-21.§ 4405Q.2 Eligible securitiesGovernment securities which shall bedeposited in compliance with the abovebasic security deposit shall consist of:a. Evidences of indebtedness of theRepublic of the Philippines and of the BSPand any other evidences of indebtednessor obligations the servicing and repaymentof which are fully guaranteed by theRepublic of the Philippines; and such otherkinds of securities which may be declaredeligible by the Monetary Board: Provided,That such securities shall be free,unencumbered, and not utilized for anyother purpose: Provided, further, That suchsecurities shall have remaining maturitiesof not more than three (3) years from thedate of deposit with the BSP;b. NDC Agri-Agra ERAP Bonds,regardless of remaining maturities;c. Five (5) - and Ten (10) - year SpecialPurpose Treasury Bonds (SPTBs) providedsuch bonds shall not be hypothecated inany way or earmarked for any otherpurpose and they meet the three (3)-yearremaining maturity requirement to ensurethat such bonds are liquid;d. Securities backed by theunreleased Internal Revenue Allotments(IRA) of LGUs (issued by a Special PurposeTrust administered by the DBP under theIRA Monetization Program of the Union ofLocal Authorities of the Philippines) therelease of which IRA on scheduled date ofpayment has been certified by the DBMas not being subject to any conditionalities:Provided, That such securities shall beeligible only to the extent of the presentvalue of the bond computed using theoriginal yield to maturity (as of auction/issue date): Provided, further, That forreserve for trust and other fiduciary duties,the remaining maturities of the securitiesshall not exceed three (3) years; ande. Zero Coupon Bond Issue by theHGC of up to P7.0 billion five (5)-yearregular series and up to P3.0 billion seven(7)-year special series to finance its guarantyservicing of socialized and low-costhousing projects: Provided, That they meetthe three (3)-year remaining maturityManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 5

§§ 4405Q.2 - 4405Q.408.12.31requirement to ensure that such bonds areliquid: Provided, further, That such bondsshall qualify as eligible reserve for trust andother fiduciary duties only to the extent ofthe present value of the bond computedusing the original yield to maturity (as ofauction/issue date).f. Tobacco Excise Tax ReceivableMonetization Program InvestmentCertificates (TEXTR Certificates) backed byreceivables representing the unreleasedportion of the obligation of the NationalGovernment to its LGUs for their share ofthe Tobacco Excise Taxes under R.A. No.7171 amounting to P1.85 billion andcovering the years 2001 and 2002:Provided, That such securities shall be eligibleonly to the extent of the present value of thesecurities computed using the original yieldto maturity as of auction/issue date.g. Securities received, pursuant to theDomestic Debt Exchange Offer of theRepublic of the Philippines, in exchangefor securities that are eligible reserves fortrust duties.(As amended by Circular No. 509 dated 01 February 2006)§ 4405Q.3 Valuation of securities andbasis of computation of the basic securitydeposit requirement. For purposes ofdetermining compliance with the basicsecurity deposit under this Section, theamount of securities so deposited shall bebased on their book value, that is, cost asincreased or decreased by thecorresponding discount or premiumamortization.The base amount for the basic securitydeposit shall be the average of themonth-end balances of total trust,investment management and otherfiduciary assets of the immediatelypreceding calendar quarter.§ 4405Q.4 Compliance period;sanctions. The trustee or fiduciary shallhave thirty (30) calendar days after the endof every calendar quarter within which todeposit with the BSP the securitiesrequired under this Section.The following sanctions shall beimposed for any deficiency in the basicsecurity deposit for the faithful performanceof trust and other fiduciary duties:a. On the QB:i. Monetary penalty/ies:Penalty per Calendar DayOffenseThird andTrust First Second subsequentAsset Sizeoffense(s)Up toP500 P600.00 P700.00 P800.00millionAboveP500million P1,000.00 P1,250.00 P1,500.00but notexceedingP1 billionAboveP1 billionbut not P2,000.00 P3,000.00 P4,000.00exceedingP10 billionAboveP10 billionbut not P5,000.00 P6,000.00 P7,000.00exceedingP50 billionAboveP50 billion P8,000.00 P9,000.00 P10,000.00QBs with Full Trust Authority and with Trust Assets ofii. Non-monetary penalty beginningwith the third offense (all QBs) - Prohibitionagainst the acceptance of new trust andother fiduciary accounts, and from renewingexpiring trust and other fiduciary contractsup to the time the violation is corrected.b. On the trust officer and/or otherofficer(s) responsible for the deficiency/non-compliance:(1) First offense - warning thatsubsequent violations shall be dealt withmore severely;Q RegulationsPart IV - Page 6Manual of Regulations for Non-Bank Financial Institutions

§§ 4405Q.4 - 4405Q.508.12.31(2) Second offense - written reprimandwith a stern warning that subsequentviolations shall be subject to suspension;(3) Third offense - thirty (30) calendarday-suspension without pay; and(4) Subsequent offense(s) - sixty (60)calendar day-suspension without pay.For purposes of determining thefrequency of the violation, the QB'scompliance profile for the immediatelypreceding three (3) years or twelve (12)quarters will be reviewed: Provided, Thatfor purposes of determining appropriatepenalty on the trust officer and/or otherresponsible officer(s), any offensecommitted outside the preceding three (3)year or twelve (12) quarter-period shall beconsidered as the first offense: Provided,further, That in the case of trust officer, alloffenses committed by him in the past astrust officer of other institution(s) shall alsobe considered: Provided, finally, That if theoffense cannot be attributed to any otherofficer of the QB, the trust officer shall beautomatically held responsible since theultimate responsibility for ensuringcompliance with the regulation rests uponhim, as evidence may warrant.(As amended by Circular Nos. 617 dated 30 July 2008 and 585dated 15 October 2007)§ 4405Q.5 Reserves against pesodenominatedCommon Trust Funds (CTFs)and Trust and Other Fiduciary Accounts(TOFA) - Othersa. Reserves against peso-denominatedCTFs. In addition to the basic securitydeposit, an institution authorized to engagein trust and other fiduciary business shallmaintain reserves on -(1) peso-denominated CTF; and(2) such other managed peso fundswhich partake the nature of collectiveinvestment of a peso-denominated CTF asmay be indicated by the presence of thefollowing features:(a) The funds are composed ofcontributions from two (2) or more investors;(b) The funds are managed/administeredas a vehicle for collective investment andreinvestment;(c) The trustee/administrator/agent hasthe exclusive management and controlover the funds and the sole right at any timeto sell, convert, invest, exchange, transferor otherwise change or dispose of theassets comprising the funds; and(d) Investments/contributions to, orwithdrawals from, the funds are beingallowed at anytime or as of a fixed date inthe future, and/or the income, net of allexpenses incurred in the management ofthe fund plus the fee of the trustee/administrator/agent, are being distributedamong the participants of the funds,without the need to liquidate all assets ofthe funds.The reserves to be maintained shall beas follows:(i) Regular reserves 10% 1(ii) Liquidity reserves 11% 2The liquidity reserve shall bemaintained in the RDA with the BSP, ormay be in the form of the following:Provided, That it complies with theguidelines shown in Appendix Q-41.(i) Short-term market-yieldinggovernment securities purchased directlyfrom the BSP-Treasury Department (TD);(ii) NDC Agri-Agra ERAP Bonds,regardless of maturity. The requirement thatthe securities used shall have a term ofnot more than one (1) year shall not apply;and(iii) Poverty Eradication and AlleviationCertificates (PEACe) bonds only to theextent of the original gross issue proceedsdetermined at the time of the auction, pluscapitalized interest on the underlyingzero-coupon Treasury Notes as and whenthe corresponding interest is earned overthe life of the bonds.1From 6% to 9% regular reserve effective the reserve week starting 7 January 2005 under MAB dated 29 December 2004and from 9% to 10% regular reserve effective the reserve week starting 15 July 2005 under Circular 491 dated 12 July 20052From 10 % to 11% under Circular 491 dated 12 July 2005, effective the reserve week starting 15 July 2005.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 7

§§ 4405Q.5 - 4405Q.608.12.31Any defiency in the liquidity reservesshall continue to be in the forms or modesprescribed under existing regulations for thecomposition of required reserves.The reserves on peso-denominatedCTFs and such other managed peso fundsshall be provided out of said funds.b. Reserves against TOFA-Others. Inaddition to the basic security deposit, aninstitution authorized to engage in trust andother fiduciary business shall maintainreserves on TOFA-Others, except accountsheld under (1) Administratorship; (2) BondIssues/Other Obligations Under Deed ofTrust or Mortgage; (3) Custodianship andSafekeeping; (4) Depository andReorganization; (5) Employee BenefitPlans Under Trust; (6) Escrow; (7) PersonalTrust (testementary and living trust);(8) Executorship; (9) Guardianship; (10) LifeInsurance Trust; and (11) Pre-need Plans(institutional/individual).The reserves to be maintained shall beas follows:(i) Regular reserves 6% 1(ii) Liquidity reserves 11% 2The liquidity reserves shall bemaintained in the RDA with the BSP, ormay be in the form of the following:Provided, That it complies with theguidelines shown in Appendix Q-41.(i) Short-term market-yieldinggovernment securities purchased directlyfrom the BSP-TD.(ii) NDC Agri-Agra ERAP Bonds,regardless of maturity; and(iii) PEACe bonds only to the extent ofthe original gross issue proceedsdetermined at the time of the auction, pluscapitalized interest on the underlyingzero-coupon Treasury Notes as and whenthe corresponding interest is earned overthe life of the bonds.Any deficiency in the liquidity reservesshall continue to be in the forms or modesprescribed under existing regulations forthe composition of required reserves.The reserves on TOFA-Others shall beprovided by the institution out of said funds.(As amended by Circular Nos. 551 dated 17 November 2006and 539 dated 09 August 2006)§ 4405Q.6 Composition of reservesa. The provisions of Section 4254Qshall govern the composition of reservesagainst peso-denominated CTFs and suchother managed peso funds as well asTOFA-Others of institutions authorized toengage in trust and other fiduciary business.For purposes of this Subsection, aspecial deposit account shall be maintainedby the institutions with the BSP exclusivelyfor trust reserves which deposits up to fortypercent (40%) of the required reservesagainst peso-denominated CTFs and suchother managed peso funds (less thepercentage allowed to be maintained inthe form of short-term market-yieldinggovernment securities), as well as therequired reserves against TOFA-Others(less the percentage allowed to bemaintained in the form of short-termmarket-yielding government securities),shall be paid interest at four percent (4%)per annum, based on the average dailybalance of said deposits to be creditedquarterly.Likewise, institutions may alsomaintain a special demand depositaccount with local banks exclusively fortrust duties.Effective 1 July 2003, publishedinterest rates that will be applied on BSP’sSpecial Deposit Accounts of QBs shall beinclusive of the ten percent (10%) VAT.b. The portion of reserves that maybe maintained in the form of short-termmarket-yielding government securitiesrefers to government securities shall bepurchased directly from the BSP Treasury1From 6% to 9% regular reserve effective the reserve week starting 7 January 2005 under MAB dated 29 December 2004and from 9% to 10% regular reserve effective the reserve week starting 15 July 2005 under Circular 491 dated 12 July 20052From 10 % to 11% under Circular 491 dated 12 July 2005, effective the reserve week starting 15 July 2005.Q RegulationsPart IV - Page 8Manual of Regulations for Non-Bank Financial Institutions

§§ 4405Q.6 - 4406Q.108.12.31Department at one-half percent (1/2%)below the prevailing market rate for anequivalent term and volume and subject toBSP’s firm commitment to buy back at anytime at prevailing market rates. Suchreserves in the form of short-term marketyieldinggovernment securities shall be inaddition to other forms of eligible reservessuch as cash in vault or on deposit withthe BSP.All purchases of said governmentsecurities shall be under the RoSS systemof the BTr. Transactions covering saidsecurities shall be recorded in accordancewith the guidelines in Appendix Q-21.§ 4405Q.7 Computation of reserveposition. An institution authorized toengage in trust and other fiduciary businessshall calculate daily the required andavailable reserves on the value per booksof its peso-denominated CTFs and suchother managed peso funds, as well as onTOFA-Others, based on the seven-dayweek, starting Friday and ending Thursdayincluding Saturdays, Sundays, holidays,non-business days and days when there isno clearing: Provided, That with referenceto holidays, non-business days and dayswhere there is no clearing, the reserveposition at the close of business dayimmediately preceding such holidays,non-business days and days where thereis no clearing, shall apply thereon. For thepurpose of computing reserve position, theprincipal office in the Philippines and allbranches and agencies located therein shallbe treated as a single unit.The required reserves in the currentperiod (reference reserve week) shall becomputed based on the correspondinglevels of peso-denominated CTFs and suchother managed peso funds, as well asTOFA-Others of the prior week.For purposes of computing therequired and available statutory andliquidity reserves for peso-denominatedCTFs and such other managed peso funds,as well as TOFA-Others, the term valueper books shall refer to the total volume ofCTFs, other managed peso funds, as wellas TOFA-Others less booked “Allowancefor Probable Losses”.(As amended by Circular No. 535 dated 04 July 2006)§ 4405Q.8 Reserve deficiencies;sanctions. The provisions of Section 4257Qshall govern the computation of reservedeficiencies for peso-denominated CTFs andsuch other managed peso funds, as well asfor TOFA-Others, of institutions authorizedto engage in trust and other fiduciarybusiness, including the sanctions providedin said Subsection.§ 4405Q.9 Report of complianceEvery institution shall make a weeklyreport to the BSP of its daily required andavailable reserves on peso-denominatedCTFs and such other managed pesofunds, as well as on TOFA-Others, to besubmitted not later than the close of thethird business day following thereference week.Sec. 4406Q Organization andManagement§ 4406Q.1 Organization. An institutionauthorized to engage in trust and otherfiduciary business shall, pursuant to Subsec.4404Q.1, include in its by-laws, provisionson the organization plan or structure of thedepartment, office or unit which shallconduct such business. The by-laws shallalso include provisions on the creation of atrust committee, the appointment of a trustofficer and other subordinate officers and aclear definition of their duties andresponsibilities as well as their line and stafffunctional relationships within theorganization which shall be in accordancewith the following guidelines:a. Trust and other fiduciary businessof an institution shall be carried out througha trust department which shall beManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 9

§§ 4406Q.1 - 4406Q.208.12.31organizationally, operationally, administrativelyand functionally separate and distinct fromthe other departments and/or businesses ofthe institution.An institution which is also engaged ininvestment management activities shallconduct the same only through its trustdepartment and the responsibilities of theboard of directors, trust committee and trustofficer shall be construed to include theproper administration and management ofinvestment management activities.No institution shall undertake any ofthe trust and other fiduciary business and,whenever applicable, investmentmanagement activities outside the directcontrol, authority and management of thetrust department or through anydepartment or office which is involved inthe other businesses of the institution, suchas the Treasury, Funds Management or anysimilar department; otherwise, any suchbusiness shall be considered part of theinstitution’s real liabilities.The institution proper and the trustdepartment may share the followingactivities: (1) electronic data processing; (2)credit investigation; (3) collateral appraisal;and (4) messengerial, janitorial and securityservices.b. The trust department, trust officerand other subordinate officers of the trustdepartment shall only be directlyresponsible to the institution’s trustcommittee which shall, in turn, be onlydirectly responsible to the institution’sboard of directors.No director, officer or employee takingpart in the management of trust and otherfiduciary accounts shall perform duties inother departments or the audit committeeof the institution and vice versa. However,branch managers duly authorized by theboard of directors may, for or on behalf ofthe officer, sign predrawn trust instrumentssuch as CTFs.c. The organization structure anddefinition of duties and responsibilities ofthe trust committee, officers and employeesof the trust department shall reflectadherence to the minimum internal controlstandards prescribed by the BSP.d. Provisions shall be made by theinstitution to have legal assistance readilyavailable in the review of proposed and/orexisting trust and fiduciary agreements anddocuments and in the handling of legal andtax matters related thereto.§ 4406Q.2 Composition of trustcommittee. The trust committee shall becomposed of at least five (5) membersincluding the president, the trust officer anddirectors who are appointed by the boardof directors on a regular rotation basis andwho are not officers of the institutionproper. No member of the auditcommittee, if the institution has any, shallbe concurrently designated as a memberof the trust committee: Provided, That inthe case of a trust committee composed ofmore than five (5) members, theappointment therein of an operating officermay be allowed only if the requiredbalance in the membership of at least three(3) members of the board for everyoperating officer shall be maintained.For purposes of this Subsection, theterm officer shall include the president,executive vice-president, generalmanager, corporate secretary, treasurer andothers mentioned as officers of theinstitution, or those whose duties as suchare defined in the by-laws, or are generallyknown to be officers of the institution (orany of its branches and offices other thanthe Head Office) either throughannouncement, representation, publicationor any kind of communication made by theinstitution.The board of directors shall duly note inthe minutes the committee members andQ RegulationsPart IV - Page 10Manual of Regulations for Non-Bank Financial Institutions

§§ 4406Q.2 - 4406Q.409.12.31designate the chairman who shall be oneof the directors referred to above.§ 4406Q.3 Qualifications of committeemembers, officers and staff. Theinstitution’s trust department shall be staffedby persons of competence, integrity andhonesty. Directors, committee members andofficers charged with the administration oftrust and other fiduciary activities shall, inaddition to meeting the qualificationstandards prescribed for directors andofficers of FIs, possess the necessarytechnical expertise in such business:Provided, That trust officers who shall beappointed shall have at least five (5) yearsof actual experience in trust operations, orat least three (3) years of actual experiencein trust operations and completed at leastone (1) year training program in trustoperations acceptable to the BSP, or at leastfive (5) years of actual experience as officerof a bank, NBFI or related activities andcompleted at least one (1) year trainingprogram in trust operations acceptable tothe BSP.(As amended by Circular No. 665 dated 04 September 2009)§ 4406Q.4 Responsibilities ofadministrationa. Board of Directors. The board ofdirectors is responsible for the properadministration and management of trust andother fiduciary business. Funds andproperties held in trust or in any fiduciarycapacity shall be administered with the skill,care, prudence and diligence necessaryunder the circumstances then prevailing thata prudent man, acting in like capacity andfamiliar with such matters, would exercisein the conduct of an enterprise of likecharacter and with similar aims.The responsibilities of the board ofdirectors shall include, but need not belimited to the following:(1) It shall determine and formulategeneral policies and guidelines on the:(a) acceptance, termination, or closure oftrust and other fiduciary accounts; (b)proper administration and management ofeach trust and other fiduciary accounts; and(c) investment, reinvestment and dispositionof funds or property held in its capacity astrustee or fiduciary;(2) It shall direct and review the actionsof the trust committee and all officers andemployees designated to manage the trustand other fiduciary accounts, especiallyaccounts without specific agreements oninvestments or discretionary accounts;(3) It shall approve or confirm theacceptance, termination or closure of alltrust and other fiduciary accounts and shallrecord such in its minutes;(4) Upon the acceptance of an account,it shall immediately review all non-cashassets received for management. Likewise,it shall make a review of the trust and/orfiduciary assets at least once every twelve(12) months to determine the advisabilityof retaining or disposing of such assets;(5) It shall be responsible for takingappropriate action on the examinationreports of supervisory agencies, internaland/or external auditors on the institution’strust and other fiduciary business andrecording such actions thereon in theminutes;(6) It shall designate the members of thetrust committee, the trust officer andsubordinate officers of the trust departmentand shall be responsible for requiringreports from said committee and officersand recording its actions thereon in theminutes; and(7) It shall establish an appropriatestaffing pattern and adopt operating budgetsthat shall enable the trust department toeffectively carry out its functions. It shalllikewise be responsible for providing theofficers and staff of the institution withappropriate training programs in theadministration and operation of all phasesof trust and other fiduciary business.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 11

§§ 4406Q.4 - 4407Q11.12.31The board of directors may, by actionduly entered in the minutes, delegate itsauthority for the acceptance, termination,closure or management of trust and otherfiduciary accounts to the trust committee orto the trust officer, subject to certainguidelines approved by the board.b. Trust Committee. The trustcommittee duly constituted and authorizedby the board of directors shall act withinthe sphere of authority which may beprovided in the by-laws and/or as may bedelegated by the board, such as, but notlimited to, the following:(1) The acceptance and closing of trustand other fiduciary accounts;(2) The initial review of assets placedunder the trustee’s or fiduciary’s custody;(3) The investment, reinvestment anddisposition of funds or property;(4) The review and approval oftransactions between trust and/or fiduciaryaccounts; and(5) The review of trust and otherfiduciary accounts at least once everytwelve (12) months to determine theadvisability of retaining or disposing of thetrust or fiduciary assets, and/or whether theaccount is being managed in accordancewith the instrument creating the trust orother fiduciary relationship.For this purpose, the trust committeeshall meet whenever necessary and keepminutes of its actions and make periodicreports thereon to the board.c. Trust Officer. The trust officerdesignated by the board of directors as headof the Trust Department shall act andrepresent the institution in all trust and otherfiduciary matters within the sphere of hisauthority as may be provided in the by-lawsor as may be delegated by the board. Hisresponsibilities shall include, but need notbe limited to, the following:(1) The administration of trust and otherfiduciary accounts;(2) The implementation of policies andinstructions of the board of directors and the trustcommittee;(3) The submission of reports on matterswhich require the attention of the trust committeeand the board of directors;(4) The maintenance of adequate books,records and files for each trust or other fiduciaryaccount; and(5) The maintenance of necessary controls andmeasures to protect assets under his custody andheld in trust or other fiduciary capacity.§ 4406Q.5 - 4406Q.8 (Reserved)§ 4406Q.9 Outsourcing services in trustdepartments. Trust departments of QBsperforming trust and other fiduciary business andinvestment management activities are coveredby the requirement of prior BSP approval foroutsourcing services under Appendix Q-37.(M-2007-009 dated 22 March 2007)§ 4406Q.10 Approval of the appointment/designation of trust officers. Regardless of rank,the appointment/designation of trust officersshall require prior approval of the MonetaryBoard. The bio-data of the proposed trust officersshall be submitted to the appropriate departmentof the SES.The appointment/designation of allincumbent trust officers not previouslyapproved/confirmed by the Monetary Boardshall be submitted, within six (6) months from24 September 2009, to the BSP, through theappropriate department of the SES, for approval.The documentary requirements on theapproval of the appointment of trust officers ofNBQBs are listed in Appendix Q-57.(CL-2011-045 dated 01 July 2011 and Circular No. 665 dated 04September 2009)Sec. 4407Q Non-Trust, Non-Fiduciary and/orNon-Investment Management Activities. Thebasic characteristic of trust, otherfiduciary and investment managementrelationship is the absolute non-existenceQ RegulationsPart IV - Page 12Manual of Regulations for Non-Bank Financial Institutions

§§ 4407Q - 4408Q09.12.31of a debtor-creditor relationship, thus, thereis no obligation on the part of the trustee,fiduciary or investment manager toguarantee returns on the funds or propertiesregardless of the results of the investment.The trustee, fiduciary or investment manageris entitled to fees/commissions which shallbe stipulated and fixed in the contract orindenture and the trustor or principal isentitled to all the funds or properties andearnings less fees/commissions, losses andother charges. Any agreement/arrangementthat does not conform to these shall not beconsidered as trust, other fiduciary orinvestment management relationship.The following shall not constitute a trust,other fiduciary and/or investmentmanagement relationship:a. When there is a preponderance ofpurpose or of intent that the arrangementcreates or establishes a relationship otherthan a trust, fiduciary and/or investmentmanagement;b. When the agreement or contract isitself used as a certificate of indebtednessin exchange for money placement fromclients and/or as the medium for confirmingplacements and investment thereof;c. When the agreement or contract ofan account is accepted under thesignature(s) of those other than the trustofficer or subordinate officer of the trustdepartment or those authorized by the boardof directors to represent the trust officer;d. Where there is a fixed rate orguaranty of interest, income or return in favorof its client or beneficiary: Provided,however, That where funds are placed infixed income-generating investments, aquotation of income expectation or liketerms, shall neither be considered asarrangements with a fixed rate nor aguaranty of interest, income or return whenthe agreement or indenture categoricallystates in bold letters that the quoted incomeexpectation or like terms is neither assurednor guaranteed by the trustee or fiduciaryand it does not, therefore, entitle the clientto a fixed interest or return on hisinvestments: Provided, further, That any ofthe following practices or practices similarand/or tantamount thereto shall beconstrued as fixing or guaranteeing the rateof interest, income or return:(1) Issuance of certificates, sideagreements, letters of undertaking, or othersimilar documents providing for fixed ratesor guaranteeing interest, income or return;(2) Paying trust earnings based onindicated or expected yield regardless of theactual investment results;(3) Increasing or reducing fees in orderto meet a quoted or expected yield; and(4) Entering into any arrangement,scheme or practice which results in thepayment of fixed rates or yield on trustinvestments or in the payment of theindicated or expected yield regardless of theactual investment results; ande. Where the risk or responsibility isexclusively with the trustee, fiduciary orinvestment manager in case of loss in theinvestment of trust, fiduciary or investmentmanagement funds, when such loss is notdue to the failure of the trustee or fiduciaryto exercise the skill, care, prudence anddiligence required by law.Trust, other fiduciary and investmentmanagement activities involving any of theforegoing which are accepted, renewed orextended after 16 October 1990 shall bereported as deposit substitutes and shallbe subject to the reserve requirement fordeposit substitutes from the time ofinception, without prejudice to theimposition of the applicable sanctionsprovided for in Sections 36 and 37 ofR.A. No. 7653, and Sections 12 and 16 ofP.D. No. 129, as amended.Sec. 4408Q Unsafe and UnsoundPractices. Whether a particular activity maybe considered as conducting business in anunsafe or unsound manner, all relevant factsManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 13

§§ 4408Q - 4408Q.909.12.31must be considered. An analysis of theimpact thereof on the QB’s/trust entity’soperations and financial conditions must beundertaken, including evaluation of capitalposition, asset condition, management,earnings posture and liquidity position.In determining whether a particular actor omission, which is not otherwiseprohibited by any law, rule or regulationaffecting QBs/trust entities, may be deemedas conducting business in an unsafe orunsound manner, the Monetary Board, uponreport of the head of the SES based onfindings in an examination or a complaint,shall consider any of the followingcircumstances:a. The act or omission has resulted ormay result in material loss or damage, orabnormal risk or danger to the safety,stability, liquidity or solvency of theinstitution;b. The act or omission has resulted ormay result in material loss or damage orabnormal risk to the institution’s depositors,creditors, investors, stockholders, or to theBSP, or to the public in general;c. The act or omission has caused anyundue injury, or has given unwarrantedbenefits, advantage or preference to the QB/trust entity or any party in the discharge bythe director or officer of his duties andresponsibilities through manifest partiality,evident bad faith or gross inexcusablenegligence; ord. The act or omission involves enteringinto any contract or transaction manifestlyand grossly disadvantageous to the QB/trustentity, whether or not the director or officerprofited or will profit thereby.The list of activities which may beconsidered unsafe and unsound is shownin Appendix Q-24.In line with the statement of principlesgoverning trust and other fiduciary businessunder Sec. 4401Q, the trustee, fiduciary orinvestment manager shall desist from thefollowing unsound practices:a. Entering in an arrangement wherebythe client is at the same time the borrowerof his own fund placement, or whereby thetrustor or principal is a borrower of othertrust, fiduciary or investment managementfunds belonging to the same family orbusiness group of such trustor or principal;b. Granting loans or accommodationsto any trust committee member, officer andemployee of the trust department exceptwhere such loans are obtained by saidpersons as members of an employee benefitfund of the trustee’s own institution;c. Borrowing from, or selling trust,other fiduciary and/or investmentmanagement assets to, the trust corporationor IH proper to cover portfolio lossesand/or to guarantee the return of principalor income;d. Granting new loans to any borrowerwho has a past due and/or classified loanaccount with the institution itself or its trustdepartment; ande. Requiring clients to sign documentsin blank.(As amended by Circular No. 640 dated 16 January 2009)§§ 4408Q.1 - 4408Q.8 (Reserved)§ 4408Q.9 Sanctions. The MonetaryBoard may, at its discretion and based onthe seriousness and materiality of the actsor omissions, impose any or all of thefollowing sanctions provided under Section37 of R.A. No. 7653 and Section 56 ofR.A. No. 8791, whenever a QB/trust entityconducts business in an unsafe and unsoundmanner:a. Issue an order requiring the QB/trustentity to cease and desist from conductingbusiness in an unsafe and unsound mannerand may further order that immediate actionbe taken to correct the conditions resultingfrom such unsafe or unsound practice;b. Fines in amounts as may bedetermined by the Monetary Board to beappropriate, but in no case to exceedQ RegulationsPart IV - Page 14Manual of Regulations for Non-Bank Financial Institutions

§ 4408Q.908.12.31P30,000 a day on a per transaction basistaking into consideration the attendantcircumstances, such as the gravity of theact or omission and the size of the QB/trust entity, to be imposed on the QB/trustentity, their directors and/or responsibleofficers;c. Suspension of lending or foreignexchange operations or authority to acceptnew deposit substitutes and/or new trustaccounts or to make new investments;d. Suspension of responsible directorsand/or officers;e. Revocation of quasi-banking licenseand/or trust authority; and/orf. Receivership and liquidation underSection 30 of R.A. No. 7653.All other provisions of Sections 30 and37 of R.A. No. 7653, whenever appropriate,shall also be applicable on the conduct ofbusiness in an unsafe or unsound manner.The imposition of the above sanctionsis without prejudice to the filing ofappropriate criminal charges againstculpable persons as provided in Sections 34,35 and 36 of R.A. No. 7653.(Next page is Part IV- Page 15)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 14a

§§ 4409Q - 4409Q.208.12.31Sec. 4409Q Trust and Other FiduciaryBusiness. The conduct of trust and otherfiduciary business shall be subject to thefollowing regulations.§ 4409Q.1 Minimum documentaryrequirements. Each trust or fiduciaryaccount shall be covered by a writtendocument establishing such account, asfollows:a. In the case of accounts created byan order of the court or other competentauthority, the written order of said court orauthority.b. In the case of accounts created bycorporations, business firms, organizationsor institutions, the voluntary writtenagreement or indenture entered into bythe parties, accompanied by a copy of theboard resolution or other evidenceauthorizing the establishment of, anddesignating the signatories to, the trust orother fiduciary account.c. In the case of accounts created byindividuals, the voluntary writtenagreement or indenture entered into by theparties.The voluntary written agreement orindenture shall include the followingminimum provisions:(1) Title or nature of contractualagreement in noticeable print;(2) Legal capacities, in noticeableprint, of parties sought to be covered;(3) Purposes and objectives;(4) Funds and/or properties subject ofthe arrangement;(5) Distribution of the funds and/orproperties;(6) Duties and powers of trustee orfiduciary;(7) Liabilities of the trustee orfiduciary;(8) Reports to the client;(9) Termination of contractualarrangement and, in appropriate cases,provision for successor-trustee or fiduciary;(10) The amount or rate of thecompensation of trustee or fiduciary;(11) A statement in noticeable print tothe effect that trust and other fiduciarybusiness are not covered by the PDIC andthat losses, if any, shall be for the accountof the client; and(12) Disclosure requirements fortransactions requiring prior authorityand/or specific written investment directivefrom the client, court of competentjurisdiction or other competent authority.§ 4409Q.2 Lending and investmentdisposition. Assets received in trust or in otherfiduciary capacity shall be administered inaccordance with the terms of the instrumentcreating the trust or other fiduciary relationship.When a trustee or fiduciary is granteddiscretionary powers in the investmentdisposition of trust or other fiduciary funds andunless otherwise specifically enumerated inthe agreement or indenture and directed inwriting by the client, court of competentjurisdiction or other competent authority,loans and investments of the fund shall belimited to:a. Evidences of indebtedness of theRepublic of the Philippines and of the BSP,and any other evidences of indebtedness orobligations the servicing and repayment ofwhich are fully guaranteed by the Republicof the Philippines or loans against suchgovernment securities;b. Loans fully guaranteed by theRepublic of the Philippines as to thepayment of principal and interest;c. Loans fully secured by a hold-out on,assignment or pledge of deposit substitutesof the institution or deposits with otherbanks, or mortgage and chattel mortgagebonds issued by the trustee or fiduciary;d. Loans fully secured by real estate orchattels in accordance with Section 78 ofR.A. No. 337, as amended, and subject tothe requirements of Sections 75, 76 and 77of R.A. No. 337, as amended; andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 15

§§ 4409Q.2 - 4409Q.408.12.31e. Investment in the BSP specialdeposit account (SDA) facility made inaccordance with the guidelines in AppendixQ-46.The specific directives required underthis Subsection shall consist of the followinginformation:(1) The transaction to be entered into;(2) The borrower’s name;(3) Amount involved; and(4) Collateral security(ies), if any.(As amended by M-2007-038 dated 29 November 2007 andM-2007-011 dated 08 May 2007)§ 4409Q.3 Transactions requiringprior authority. A trustee or fiduciary shallnot undertake any of the followingtransactions for the account of a client,unless prior to its execution, suchtransaction has been fully disclosed andspecifically authorized in writing by theclient, beneficiary, other party-in-interest,court of competent jurisdiction or othercompetent authority:a. Lend, sell, transfer or assign moneyor property to any of the departments,directors, officers, stockholders oremployees of the trustee or fiduciary, orrelatives within the first degree ofconsanguinity or affinity, or the relatedinterests of such directors, officers andstockholders; or to any corporation wherethe trustee or fiduciary owns at least fiftypercent (50%) of the subscribed capital orvoting stock in its own right and not astrustee nor in a representative capacity;b. Purchase or acquire property ordebt instruments from any of thedepartments, directors, officers,stockholders, or employees of the trusteeor fiduciary, or relatives within the firstdegree of consanguinity or affinity, or therelated interest of such directors, officersand stockholders; or from any corporationwhere the trustee or fiduciary owns atleast fifty percent (50%) of the subscribedcapital or voting stock in its own right andnot as trustee nor in a representativecapacity;c. Invest in equities of, or in securitiesunderwritten by, the trustee or fiduciary ora corporation in which the trustee orfiduciary owns at least fifty percent (50%)of the subscribed capital or voting stock inits own right and not as trustee nor in arepresentative capacity; andd. Sell, transfer, assign, or lend moneyor property from one trust or fiduciaryaccount to another trust or fiduciary accountexcept where the investment is in any ofthose enumerated in Items "a" to "d" ofSubsec. 4409Q.2.Directors, officers, stockholders, andtheir related interest covered by thisSubsection shall be those considered assuch under existing regulations on loansto DOSRI in Part III-E of this Manual. Theprocedural and reportorial requirements insaid regulations shall also apply.The disclosure required under thisSubsection shall consist of the followingminimum information:(1) The transactions to be entered into;(2) Identities of the parties involvedin the transactions and their relationships(shall not apply to Item "d" of thisSubsection);(3) Amount involved; and(4) Collateral security(ies), if any.The above information shall be madeknown to clients in a separate instrumentor in the very instrument creating the trustor fiduciary relationship.§ 4409Q.4 Ceilings on loans. Loansfunded by trust accounts shall be subjectto the single borrower’s loan limit andDOSRI ceilings imposed on QBs underPart III - A and - E of this Manual. Forpurposes of determining compliance withsaid ceilings, the total amount of said loansgranted by the institution and its trustdepartment to the same person, firm orcorporation shall be combined.Q RegulationsPart IV - Page 16Manual of Regulations for Non-Bank Financial Institutions

§§ 4409Q.5 - 4409Q.609.12.31§ 4409Q.5 Funds awaiting investmentor distribution. Funds held by the trusteeor fiduciary awaiting investment ordistribution shall not be held uninvestedor undistributed any longer than isreasonable for the proper management ofthe account.§ 4409Q.6 Other applicableregulations on loans and investments - trustand other fiduciary accounts. The loans andinvestments of trust and other fiduciaryaccounts shall be subject to pertinent laws,rules and regulations for QBs that shallinclude, but need not be limited to, thefollowing:a. Requirements of Sections 39 and 40of R.A. No. 8791 (The General BankingLaw of 2000);b. Provisions of Section 4(e) of the NewRules on Registration of Short-TermCommercial Papers and Section 7(f) of theNew Rules on the Registration of Long-TermCommercial Papers issued by the SEC(Appendices Q-7 and Q-8).c. Criteria for past due accounts; andd. Qualitative appraisal of loans,investments and other assets that mayrequire provisions for probable losseswhich shall be booked in accordance withthe Financial Reporting Package for TrustInstitutions (FRPTI);e. Requirements of Sections 3 and 8of the Securities and Regulation Code(SRC); andf. Provisions of Section 44 –Investments by Philippine residents – ofthe BSP Manual of Regulations on ForeignExchange Transactions (FX Manual), suchthat the cross-currency investments of pesotrust and other fiduciary accounts,including peso unit investment trust (UIT)funds, shall be subject to the followingconditions:(1) All cash flows of the trustee orfiduciary shall only be in pesos. In casethe foreign exchange acquired or receivedby the trustee or fiduciary as dividends/earnings or divestment proceeds on suchinvestment are intended for reinvestmentabroad, the same proceeds are not requiredto be inwardly remitted and sold for pesosthrough authorized agent banks: Provided,That such proceeds are reinvested abroadwithin two (2) banking days from receipt ofthe funds abroad;(2) The trustee or fiduciary shallpurchase, invest, reinvest, sell, transfer ordispose foreign currency-denominatedfinancial instruments, including securities asdefined in Section 3 of the SRC, through adistributor or underwriter duly authorizedor licensed by the government of the issuerof such instruments, or a counterparty FI(seller or buyer) accredited by the trustee orfiduciary: Provided, That, the conduct,documentation, and settlement of any ofthese transactions shall be outsidePhilippine jurisdiction;(3) The trustee of fiduciary shall recordcross-currency investment transactions inthe peso regular books at their foreigncurrency amounts and their local currencyequivalent using the Philippine DealingSystem peso/US dollar closing rate and theNew York US dollar/third currencies closingrate; and(4) The trustee or fiduciary shall complywith the reportorial requirements that maybe prescribed by the BSP, which shallinclude as a minimum, the foreign currencyamount and the local currency equivalentof the total cross currency investments withdetails on: (a) type of investments; and(b) amount of cash flow converted.For purposes of this Subsection,“resident”, as defined under Section 1 of theFX Manual, shall refer to the (a) trustee orfiduciary that administers the assets receivedin trust or in other fiduciary capacity; or(b) principal that engages the services of theinvestment manager under an investmentmanagement agreement.(As amended by Circular No. 676 dated 29 December 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 17

§§ 4409Q.7 - 4409Q.909.12.31§ 4409Q.7 Operating and accountingmethodology. Trust and other fiduciaryaccounts shall be operated and accountedfor in accordance with the following:a. The trustee or fiduciary shalladminister, hold or manage the fund orproperty in accordance with the instrumentcreating the trust or other fiduciaryrelationship; andb. Funds or property of each clientshall be accounted separately and distinctlyfrom those of other clients herein referredto as individual account accounting.§ 4409Q.8 Tax-exempt individual trustaccounts. The following shall be the features/requirements of individual trust accountswhich may be exempted from the twentypercent (20%) final tax under Section24(B)(1) of R.A. No. 8424 (The Tax ReformAct of 1997):a. The tax exemption shall apply totrust indentures/agreements contracted onor after 03 January 2000;b. The trust indenture/agreement shallonly be between individuals who are Filipinocitizens or resident aliens and QBs acting astrustee. The trust indenture/agreement shall benon-negotiable and non-transferable;c. The trust indenture/agreement shallindicate that pursuant to Section 24(B)(1) ofR.A. No. 8424, interest income of the trustfund derived from investments in interestbearinginstruments (e.g., time deposits,government securities, loans and other debtinstruments) which are otherwise subject tothe twenty percent (20%) final tax shall beexempt from said final tax provided the fundwas held by the trustee-QB for at least five(5) years. If said fund was held for a periodless than five (5) years interest income shallbe subject to a final tax based on thefollowing schedule –Holding PeriodRate of TaxFour (4) years to less than five (5) years 5%Three (3) years to less than four (4) years 12%Less than three (3) years 20%Necessarily, the trust indenture/agreement shall clearly indicate the datewhen the trustee-bank actually received thetrust funds which shall serve as basis fordetermining the holding period of the funds.d. A trustee may accept additionalfunds for inclusion in trust accounts whichhave been established as tax-exempt underR.A. No. 8424. However, the receipt ofadditional funds shall be properlydocumented by indicating that they are partof existing tax-exempt trust accounts andthat the interest income of the additionalfunds derived from investments in interestbearinginstruments shall be exempt fromthe twenty percent (20%) final tax under thesame conditions mentioned in the precedingitem. The document shall also indicate thedate when the funds were received by thetrustee-bank to serve as basis for determiningthe minimum five (5) - year holding periodfor tax exemption purposes of the additionalfunds; ande. Tax-exempt individual trustaccounts established under this Subsec.shall be subject to the provisions of Subsecs.4409Q.1(c) and 4409Q.2 up to 4409Q.7.§ 4409Q.9 Living trust accountsThe guidelines on living trust accounts areas follows:a. Definition. Living Trust is definedunder the Manual of Accounts for Trust, asa personal trust created by agreement.It becomes operational during the lifetimeof the trustor as soon as the agreement isaccomplished.Under a living trust, the trustor (alsoknown as settlor) conveys property or a sumof money to be managed by the trustee, asthe agreement dictates, for the benefit of thetrustor and third person(s) or third person(s)only. However, the trustor/s cannot createa trust with himself/ themselves as the solebeneficiary/(ies). The functions andauthorities of the trustee as defined in theagreement shall include:Q RegulationsPart IV - Page 18Manual of Regulations for Non-Bank Financial Institutions

§ 4409Q.909.12.31(1) the purpose or intention of the trust;(2) the nature and value of the propertyor sum of money that comprise the trust;(3) the trustee’s investment powers;(4) the name(s) of the beneficiaries; and(5) the terms and conditions underwhich the income and/or principal of thetrust is to be paid or to be disposed of duringthe lifetime and ultimately, upon the deathof the trustor or upon the occurrence of aspecified event(s).A living trust may either be revocableor irrevocable.b. Minimum criteria. In line with suchdefinition, transactions considered as livingtrust accounts should meet the followingminimum criteria:(1) Minimum entry amount andmaintaining balance shall at least beP100,000: Provided, That living trustaccounts with balances of up to P500,000shall only be invested in deposits andgovernment securities;(2) Living trust accounts shall bemaintained for a minimum period of six (6)months. The termination of the living trustagreement, for any cause, within theminimum holding period shall render thetrustor ineligible from opening a new livingtrust account within a period of one (1) yearfrom termination date;(3) Reversion of any part of the principalto the trustor, except in cases providedunder the dispositive portion, shall beallowed only upon termination of the livingtrust agreement: Provided, That in no casecan there be a complete or substantialreversion of the principal pursuant to thedispositive portion within the minimumholding period nor can the principal fallbelow P100,000;(4) Any living trust account that does notmeet the requirement on the minimum entryand minimum maintaining balance or is notinvested in qualified outlets shall be consideredas other fiduciary accounts subject toapplicable reserve and other requirements;(5) Pre-printed living trust agreementsmay be allowed for expediency: ProvidedThat the sections for the trust purpose andthe dispositive provision are left blank andshall only be filled-up upon the client’ssigning thereof. The purpose shallcategorically state the real intention of thetrustor, which may include, but need notbe limited to:(a) providing his/her and beneficiary/(ies) present and/or future financial support;(b) protecting his/her beneficiary/(ies)against his/her inexperience in businessmatters;(c) preventing him/her from makingimprudent expenditures;(d) prevent the beneficiary/(ies) fromliving beyond their means in case of outrightdisposition of assets in their favor;(e) protecting the beneficiary/(ies)against unforeseen contingencies such asincompetency, incapacity, physicaldisability or similar misfortune; and(f) setting aside and segregatingparticular assets, proceeds or payments foradministration and distribution pursuant toa court decree or by agreement.The dispositive provision should clearlyand specifically define the terms andconditions under which the principaland/or income shall be distributed in orderto accomplish such purpose/(s), by takinginto consideration the frequency ofredemption; the respective interests of eachbeneficiary; and to whom the proceeds shallbe payable. Redemption of funds shallstrictly be in accordance with the said termsand conditions; and(6) A living trust account may beopened jointly under one (1) living trustagreement by related individuals up to thesecond degree of consanguinity or affinity:Provided, That the requirements under Item“5” above are fully complied with. Unrelatedindividuals or those beyond the seconddegree of consanguinity or affinity maylikewise open a joint living trust accountManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 18a

§ 4409Q.909.12.31under one (1) living trust agreement:Provided, That the minimum contributionof each individual is at least P100,000:Provided further, That the trust is for acommon purpose and: Provided, finally,That the requirements under Item “5” arefully complied with.c. Marketing. Officers and personnelof the institution proper, including branchmanagers, shall not be allowed to marketliving trust products and sign pre-printedliving trust agreements. However, branchmanagers/officers may be allowed to referclients to the Trust Department and giveshort introduction on the living trustproducts to prospective clients.d. Transitory Provision. Outstandingliving trust accounts that do not meet theforegoing additional requirements shall begiven twelve (12) 1 months from 11 April2006 to comply with the aforestatedrequirements; otherwise, such accounts shallbe considered as Other Fiduciary Accountssubject to applicable reserve requirements.(Next page is Part IV - Page 19)1Original 6 months transitory period under Circular No. 521 extended by another 6 months under Circular No. 553.Q RegulationsPart IV - Page 18bManual of Regulations for Non-Bank Financial Institutions

§§ 4409Q.09 - 4409Q.1608.12.31e. Sanctions. Any violation of theprovisions of this Subsection shall besubject to the sanctions provided underSection 37 of R.A. No. 7653 (The NewCentral Bank Act).(Circular Nos. 553 dated 22 December 2006 and 521 dated21 March 2006)§§ 4409Q.10 - 4409Q.15 (Reserved)§ 4409Q.16 Qualification andaccreditation of quasi-banks acting as trusteeon any mortgage or bond issuance by anymunicipality, government-owned orcontrolled corporation, or any body politica. Applicability. QBs duly accreditedby the BSP may act as trustee on anymortgage or bond issued by anymunicipality, GOCC, or any body politic.b. Application for accreditation. A QBdesiring to act as trustee on any mortgageor bond issued by any municipality,GOCC, or any body politic shall file anapplication for accreditation with theappropriate department of the SES. Theapplication shall be signed by the presidentor officer of equivalent rank of the QB andshall be accompanied by the followingdocuments:(1) certified true copy of the resolutionof the institution’s board of directorsauthorizing the application;(2) a certification signed by thepresident or officer of equivalent rank thatthe institution has complied with all thequalification requirements for accreditation.c. Qualification requirements. A QBapplying for accreditation to act as trusteeon any mortgage or bond issued by anymunicipality, GOCC, or any body politicmust comply with the requirements inAppendix Q-31.d. Independence of the trustee. A QBis prohibited from acting as trustee of amortgage or bond issuance if any electiveor appointive official of the LGU, GOCC,or body politic which issued said mortgageor bond and/or his related interests ownsuch number of shares of the QB that willallow him or his related interests to elect atleast one (1) member of the board ofdirectors of such QB or is directly orindirectly the registered or beneficial ownerof more than ten percent (10%) of any classof its equity security.e. Investment and management of thefunds. A domestic QB designated as trusteeof a mortgage or bond issuance may holdand manage, in accordance with theprovisions of the trust indenture oragreement, the proceeds of the mortgageor bond issuance and such assets and fundsof the issuing municipality, corporation, orbody politic as may be required to bedelivered to the trustee under the Trustindenture/agreement, subject to thefollowing conditions/restrictions:(1) Pending the utilization of suchfunds pursuant to the provisions of the trustindenture/agreement, the same shall onlybe (i) deposited in a bank authorized toaccept deposits from the Government orgovernment entities: Provided, That thedepository bank is not a subsidiary oraffiliate of the trustee QB, or (ii) investedin peso-denominated treasury billsacquired/purchased from any securitiesdealer/entity, other than the trustee or anyof its unit/department, its subsidiary oraffiliate.(2) Investments of funds constitutingor forming part of the sinking fund createdas the primary source for the payment ofthe principal and interests due themortgage or bonds shall also be limitedto deposits in any bank authorized toaccept deposits from the Government orgovernment entities and investments ingovernment securities that are consistentwith such purpose which must beacquired/purchased from any securitiesdealer/entity, other than the trustee or anyof its unit/department, its subsidiary oraffiliate.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 19

§§ 4409Q.16 - 4409Q.1708.12.31f. Waiver of confidentiality. A QBdesignated as trustee of any mortgage orbond issued by any municipality, GOCC,or any body politic shall submit to theappropriate department of the SES a waiverof the confidentiality of information underSections 2 and 3 of R.A. No. 1405, asamended, duly executed by the issuer of themortgage or bond in favor of the BSP.g. Reportorial requirements. A QBauthorized by the BSP to act as trustee ofthe proceeds of mortgage or bond issuanceof a municipality, GOCC, or body politicshall comply with reportorial requirementsthat may be prescribed by the BSP.h. Applicability of the rules andregulations on Trust, Other FiduciaryBusiness and Investment ManagementActivities. The provisions of the Rules andRegulations on Trust, Other FiduciaryBusiness and Investment ManagementActivities not inconsistent with theprovisions of this Subsection shall form partof these rules.i. Sanctions. Without prejudice to thepenal and administrative sanctionsprovided for under Sections 36 and 37,respectively, of the R.A. No. 7653,violation of any provision of this Subsectionshall be subject to the following sanctions/penalties depending on the gravity of theoffense:(1) First offense –(a) Fine of up to P10,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed upto the date it was corrected; and(b) Reprimand for the directors/officersresponsible for the violation.(2) Second offense –(a) Fine of up to P20,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed upto the date it was corrected;(b) Suspension for ninety (90) dayswithout pay for directors/officersresponsible for the violation; and(c) Revocation of the authority to act astrustees on any mortgage or bond issuanceby any municipality, GOCCs, or bodypolitic.(3) Subsequent offense –(a) Fine of up to P30,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected;(b) Suspension or revocation of the trustlicense;(c) Suspension for 120 days withoutpay of the directors/officers responsible forthe violation.§ 4409Q.17 Trust fund of pre-needcompanies. The following rules andregulations shall govern the acceptance,management and administration of the trustfunds of pre-need companies by entitiesauthorized to perform trust and otherfiduciary functions.a. Administration of trust fund. In linewith the policy of providing greaterprotection to pre-need planholders,prudential measures are hereby laid out inthe administration of trust funds of pre-needcompanies. The trust fund, inclusive ofearnings, shall be administered andmanaged by the trustee with the skill, care,prudence and diligence necessary underthe circumstances then prevailing that aprudent man, acting in the same capacityand familiar with such matters, wouldexercise in the conduct of an enterprise ofa like character and similar aims.The trustee shall have exclusivemanagement and control over the trustfund and the right at any time to sell,convert, invest, change, transfer orotherwise dispose of the assets comprisingthe funds.b. Trustee. No trust entity shall act asa trustee or administer or hold a trust fundestablished by a pre-need company, whichis a subsidiary or affiliate, as defined underexisting BSP regulations, of such trust entity.Q RegulationsPart IV - Page 20Manual of Regulations for Non-Bank Financial Institutions

§ 4409Q.1708.12.31Trust entities currently holding oradministering trust funds of an affiliatepre-need company may continue to act astrustee of such funds after the transitionperiod provided under Item “g” only uponprior approval of the Monetary Board on thebasis of a clear showing that no potentialconflict of interest will arise. An absence ofany exception or finding on conflicts ofinterest during an examination of the trustentity shall be deemed as prima facieevidence that no potential conflict of interestwill arise.c. Investment of the trust fund. Unlessotherwise allowed under existing laws orregulations issued by the agency havingjurisdiction and supervision over pre-needcompanies, or with prior written approvalby said agency, loans and investments ofthe trust funds shall be limited to:(1) Evidences of indebtedness of theRepublic of the Philippines and of the BSP,and any other evidences of indebtedness orobligations wherein the servicing andrepayment of which are fully guaranteed bythe Republic of the Philippines or loansagainst such government securities;(2) Commercial papers duly registeredwith the SEC with a credit rating of one (1)for short term and “AAA” for long-term ortheir equivalent;(3) Loans fully guaranteed by theRepublic of the Philippines, as to thepayment of principal and interest;(4) Loans fully secured by a hold-outon, assignment or pledge of depositsmaintained with banks, and/or of depositsubstitutes or of mortgage and chattelmortgage bonds issued by the trustee/fiduciary or by banks;(5) Loans fully secured by real estate inaccordance with Section 37 and subject tothe requirements of Sections 39 and 40 ofR.A. No. 8791 and their implementingregulations; and(6) Loans fully secured byunconditional payment guarantees (such asstandby letters of credit and letter ofindemnity) issued by banks/multilateral FIs.d. Transactions with DOSRI. Thetrustee shall not, for the account of thetrustor or the beneficiary of the trust,purchase or acquire property from, or sell,transfer, assign or lend money or propertyto, or purchase debt instruments of, any ofthe departments, directors, officers,stockholders, employees, subsidiaries andaffiliates of the trustee and/or the trustor,and relatives within the first degree ofconsanguinity or affinity, or the relatedinterests, of such directors, officers andstockholders, without prejudice to any rulethat may be issued by the agency havingjurisdiction and supervision over suchpre-need company allowing suchtransaction with the prior written approvalof such agency. Such written approvalshall clearly specify the amount of the loanand/or investment including the name ofthe concerned director, officer, stockholderand their related interests.e. Applicability of the Rules andRegulations on Trust, Other FiduciaryBusiness and Investment ManagementActivities (Trust Rules). The provisions ofthe Trust Rules consistent with theprovisions of this Subsection shallsupplementarily apply to trust funds ofpre-need companies.f. Penalties and sanctions. Anyviolation of the provisions of this Subsectionshall be a ground for prohibiting theconcerned entity from accepting, managingand administering trust funds of pre-needcompanies without prejudice to theimposition of the applicable sanctionsprescribed or allowed under the Trust Rules.g. Transitory provisions. Institutionsperforming trust and other fiduciarybusiness which are presently administeringManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 21

§§ 4409Q.17 - 4410Q.508.12.31and managing trust funds of pre-needcompanies are hereby given a period of one(1) year from 25 April 2006 to comply withthe requirements hereof.(Memorandum to All Banks and NBFIs dated 28 March 2006)Sec. 4410Q Unit Investment Trust Funds/Common Trust Funds 1 . The following rulesand regulations shall govern the creation,administration and investment/s of UnitInvestment Trust (UIT) Funds.The rules and regulations on CommonTrust Funds (CTFs) are in Appendix Q-32.§ 4410Q.1 Definitiona. Unit Investment Trust Funds. UnitInvestment Trust Funds are open-endedpooled trust funds denominated in pesos orany acceptable currency, which are operatedand administered by a trust entity and madeavailable by participation. The term UnitInvestment Trust Fund is synonymous toCTFs. As an open-ended fund, participationor redemption is allowed as often as statedin its plan rules.UIT Funds shall not include long termfunds designed for the primary purpose ofavailing the tax incentives/exemption underSection 24(B)(1) of R.A. No. 8424 (The TaxReform Act of 1997).b. Trust entity. Any bank, IH or a stockcorporation duly authorized by the MonetaryBoard to engage in trust, investmentmanagement and fiduciary business.c. Board of directors. For this purpose,the term shall include a trust entity’s dulyconstituted board of directors or itsfunctional oversight equivalent which shallinclude the country head in the case offoreign institutions.§ 4410Q.2 Establishment of a UnitInvestment Trust Fund. Any trust entityauthorized to perform trust functions mayestablish, administer and maintain one (1)or more UIT Funds subject to applicableprovisions under this Section.§ 4410Q.3 Administration of a UnitInvestment Trust Fund. The trustee shallhave exclusive management and controlof each UIT Fund under its administration,and the sole right at any time to sell,convert, reinvest, exchange, transfer orotherwise change or dispose of the assetscomprising the fund: Provided, That noparticipant in a UIT Fund shall have or bedeemed to have any ownership or interestin any particular account or investment inthe UIT Fund but shall have only itsproportionate beneficial interest in the fundas a whole.§ 4410Q.4 Relationship of trustee withUnit Investment Trust Fund. A trusteeadministering a UIT Fund shall not haveany other relationship with such fund otherthan its capacity as trustee of the UIT Fund:Provided, however, That a trustee whichsimultaneously administers other trust,fiduciary or investment management fundsmay invest such funds in the trustee’s UITFund, if allowed under a policy approvedby the board of directors.§ 4410Q.5 Operating and accountingmethodology. A UIT Fund shall beoperated and accounted for in accordancewith the following:a. The total assets and accountabilitiesof each fund shall be accounted for as asingle account referred to as pooled-fundaccounting method.b. Contributions to each fund by clientsshall always be through participation in unitsof the fund and each unit shall have uniformrights or privileges, as any other unit.c. All such participations shall bepooled and invested as one (1) account(referred to as collective investments).d. The beneficial interest of eachparticipation unit shall be determined undera unitized net asset value per unit (NAVPu)valuation methodology defined in thewritten plan of the UIT Fund, and no1The regulations on common trust funds (CTFs) were relocated to Appendix Q-32. UIT Funds regulations took effect on 01October 2004 (effectivity of Circular 447 dated 03 September 2004).Q RegulationsManual of Regulations for Non-Bank Financial InstitutionsPart IV - Page 22

§§ 4410Q.5 - 4410Q.608.12.31participation shall be admitted to, orredeemed from, the fund except on the basisof such valuation. To arrive at a fund’sNAVPu, the fund’s total Net Assets isdivided by the total outstanding units. TotalNet Assets is a summation of the marketvalue of each investment less fees, taxes, andother qualified expenses, as defined underthe plan rules.§ 4410Q.6 Plan rules. Each UIT Fundshall be established, administered andmaintained in accordance with a writtentrust agreement drawn by the trustee,referred to as the “Plan” which shall beapproved by the board of directors of thetrustee and a copy of which shall besubmitted to the BSP for processing andapproval prior to its implementation. Eachnew UIT Fund Plan filed for approval shallbe charged a processing fee of P10,000.00.The Plan shall contain the followingminimum elements:a. Title of the Plan. This shallcorrespond to the product/brand name bywhich the UIT Fund is proposed to beknown and made available to its clients.The Plan rules shall state the classificationof the UIT Fund (e. g., money market fund,bond fund, balanced fund and equity fund).b. Manner by which the fund is to beoperated. A statement of the fund’sinvestment objectives and policiesincluding limitations, if any.c. Risk disclosure. The Plan rules shallstate both the general risks and risksspecific to the type of fund.d. Investment powers of the trusteewith respect to the fund, including thecharacter and kind of investments, whichmay be purchased, by the fund. There mustbe an unequivocal statement of the fulldiscretionary powers of the trustee as faras the fund’s investments are concerned.These powers shall be limited only by theduly stated investment objective andpolicies of the fund.e. The unitized NAVPu valuationmethodology as prescribed under Subsec.4410Q.5.d shall be employed.f. Terms and conditions governing theadmission or redemption of units ofparticipation in the fund. The Plan rules shallstate that the trustee, prior to admission of aclient’s initial participation in the UIT Fund,shall conduct a client suitability assessmentto profile the risk-return orientation andsuitability of the client to the specific typeof fund. If the frequency of admission orredemption is other than daily; that is, anybusiness day, the same should be explicitlystated in the Plan rules: Provided, That theadmission and redemption shall be basedon the end of day NAVPu of the fundcomputed after the cut-off time for fundparticipation and redemption for thatreference day, in accordance with existingBSP regulations on mark to market valuationof investment securities.g. Aside from the regular auditrequirement applicable to all trustaccounts, an external audit of each UITFund shall be conducted annually by anindependent auditor acceptable to the BSPand the results thereof made available toparticipants. The external audit shall beconducted by the same external auditorengaged for the audit of the trust entity.h. Basis upon which the fund may beterminated. The Plan rules shall state therights of participants in case of terminationof the fund. Termination of the fund shallbe duly approved by the trustee’s board ofdirectors and a copy of the resolutionsubmitted to the appropriate departmentof the BSP.i. Liability clause of the trustee. Theremust be a clear and prominent statementadjacent to where a client is required tosign the participating trust agreement that(1) the UIT Fund is a trust product and nota deposit account or an obligation of, orguaranteed, or insured by the trust entityor its affiliates or subsidiaries; (2) the UITManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 23

§§ 4410Q.6 - 4410Q.708.12.31Fund is not insured or governed by thePDIC; (3) due to the nature of theinvestment, yields and potential yieldscannot be guaranteed; (4) any loss/incomearising from market fluctuations and pricevolatility of the securities held by the UITFund, even if invested in governmentsecurities, is for the account of the client/participant; (5) as such, the units ofparticipation of the investor in the UIT Fund,when redeemed, may be worth more orbe worth less than his/her initial investmentcontributions; (6) historical performance,when presented, is purely for referencepurposes and is not a guarantee of similarfuture result; and (7) the trustee is not liablefor losses unless upon willful default, badfaith or gross negligence.j. Amount of fees/commission andother charges to be deducted from the fundThe amount of fees that shall be charged to afund shall cover the fund’s fair and equitableshare of the routine administrative expensesof the trustee such as salaries and wages,stationery and supplies, credit investigation,collateral appraisal, security, messengerialand janitorial services, EDP expenses, BSPsupervision fees and internal audit fees.However, the trustee may charge a UITFund for special expenses in case suchexpenses are (1) necessary to preserve orenhance the value of the fund, (2) payableto a third party covered by a separatecontract, and (3) disclosed to participants.The trustee shall secure prior BSP approvalfor outsourcing services provided underexisting regulations. No other fees shall becharged to the fund.Marketing or other promotional relatedexpenses shall be for the account of thetrustee and shall be presumed covered bythe trust fee.k. Such other matters as may benecessary or proper to define clearly therights of participants in the UIT Fund. Theprovisions of the Plan shall governparticipation in the fund including the rightsand benefits of persons having interest insuch participation, as beneficiaries orotherwise. The Plan may be amended bya resolution of the board of directors of thetrustee: Provided, however, Thatparticipants in the fund shall beimmediately notified of such amendmentsand shall be allowed to withdraw theirparticipations within a reasonable time butin no case less than thirty (30) calendar daysafter the amendments are approved, if theyare not in conformity with the amendmentsmade thereto: Provided further, Thatamendments to the Plan shall be submittedto the BSP within ten (10) business daysfrom approval of the amendments by theboard of directors. For purposes of imposingmonetary penalties provided under Subsec.4192Q.2 for delayed submission of reports,the amendments to the Plan shall beconsidered as “Category A-3” report. Theamendments shall be deemed approvedafter thirty (30) business days from date ofcompletion of requirements.A copy of the Plan shall be available atthe principal office of the trustee duringregular office hours, for inspection by anyperson having an interest in the fund or byhis authorized representative. Uponrequest, a copy of the Plan shall befurnished such interested person.(As amended by Circular No. 593 dated 08 January 2008)§ 4410Q.7 Minimum disclosurerequirementsa. Disclosure of UIT Fundinvestments. A list of prospective andoutstanding investment outlets shall bemade available by the trustee for thereview of all UIT Fund clients. Suchdisclosure shall be substantially in the formas shown in Appendix Q-34. The list ofinvestment outlets shall be updatedquarterly.b. Distribution of investment units Thetrustee may issue such conditions or rules,as may affect the distribution of investmentQ RegulationsPart IV - Page 24Manual of Regulations for Non-Bank Financial Institutions

§ 4410Q.708.12.31units subject to the minimum conditionsenumerated hereunder.(1) Marketing materials. All printedmarketing materials related to the sale of aUIT Fund shall clearly state:(a) The designated name andclassification of the fund and the fund’strustee.(b) Minimum information regarding:(i) The general investment policy andapplicable risk profile. There shall be aclear description/explanation of thegeneral risks attendant with investing in aUIT Fund, including risk specific to a typeof fund. Technical terms should likewisebe defined in laymen’s terms 1 .(ii) Particulars or administrative andmarketing details like pricing and cut-offtime.(iii) All charges made/to be madeagainst the fund, including trust fees, otherrelated charges.(iv) The availability of the Plan rulesgoverning the fund, upon the client’srequest.(v) Client and Product SuitabilityStandards. Prior to admission, the trusteeshall perform a client profiling process forall UIT Fund participants under the generalprinciples on client suitability assessmentto guide the client in choosing investmentoutlets that are best suited to his objectives,risk tolerance, preferences andexperience. The profiling process shall, atthe minimum, require the trustee to obtainclient information through the ClientSuitability Assessment (CSA) form, classifythe client according to his financialsophistication and communicate the CSAresults to the subject client. The generalprinciples on CSA shall also require thetrustee to adopt a notice mechanismwhereby clients are advised and/orreminded of the explicit requirement tonotify the trustee or its UIT Fundmarketing personnel of any change intheir characteristics, preferences orcircumstances to enable the trustee to updateclient’s profile at least every three (3) years.(c) The participation is not a “depositaccount” but a trust product; and that anyloss/income is for the account of theparticipant; that the trustee is not liable forlosses unless upon willful default, bad faithor gross negligence.(d) A balanced assessment of thepossible gains and losses of the UIT Fundand that the participation does not carry anyguaranteed rate of return, and is not insuredby the PDIC.(e) An advisory that the investor mustread the complete details of the fund in thePlan Rules, make his/her own riskassessment, and when necessary, he/shemust seek independent/professionalopinion, before making an investment.(2) Evidence of participation. EveryUIT Fund participant shall be given -(a) A participating trust agreement.Such agreement shall clearly indicate that(1) the UIT Fund is a trust product and not adeposit account or an obligation of, orguaranteed, or insured by the trust entityor its affiliates or subsidiaries; (2) the UITFund is not insured or governed by thePDIC; (3) due to the nature of theinvestment, yields and potential yieldscannot be guaranteed; (4) any loss/incomearising from market fluctuations and pricevolatility of the securities held by the UITFund, even if invested in governmentsecurities, is for the account of the client/participant; (5) as such, the units ofparticipation of the investor in the UITFund, when redeemed, may be worthmore or be worth less than his/her initialinvestment/contributions; (6) historicalperformance, when presented, is purely forreference purposes and is not a guaranteeof similar future result; and (7) the trusteeis not liable for losses unless upon willfuldefault, bad faith or gross negligence.1Example: “Fixed income securities” does not really mean a guarantee of fixed earnings on the investor’s participation;“Risk-free” government securities which may be sovereign “risk-free” but not interest rate “risk-free”.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 25

§§ 4410Q.7 - 4410Q.808.12.31In addition to the agreement, every UITFund participant shall be provided with –(1) CSA form to be accomplishedduring the profiling process required underthe general principles on CSA. This isdesigned to ensure that based on relevantinformation about the client, his investmentprofile is matched against the investmentparameters of the UIT Fund. At theminimum, client information shall includepersonal or institutional data, investmentobjective, investment horizon, investmentexperience, and risk tolerance; and(2) Risk disclosure statement, which inreference to Subsec. 4410Q.6c, shalldescribe the attendant general and specificrisks that may arise from investing in theUIT Fund. Such statement shall besubstantially similar to the form in AnnexA of Appendix Q-34a.Both documents shall be signed by theclient/participant and the UIT marketingpersonnel who assessed and explained tothe concerned client his/her ability to bearthe risks and potential losses.(b) A confirmation of participation andredemption made to/from the fund thatshall contain the following information:(i) NAVPu of the fund on day ofpurchase /redemption;(ii) Number of units purchased/redeemed; and(iii) Absolute peso or foreign currencyvalue.No indicative rates of return shall beprovided in the trust participatingagreement. Marketing materials maypresent relevant historical performancepurely for reference and with clearindication that past results do not guaranteesimilar future results.(3) A participating trust agreement orconfirmation of contribution/redemptionneed not be manually signed by the trusteeor his authorized representative if thesame is in the form of an electronicdocument that conforms with theimplementing rules and regulations of R.A.No. 8792, otherwise known as theE-Commerce Act.c. Regular publication/computation/availability of the fund’s NAVPu. Trustentities managing a UIT Fund shall causeat least the weekly publication of theNAVPu of such fund in one (1) or morenewspaper of national circulation:Provided, That a pooled weekly publicationof such NAVPu shall be considered assubstantial compliance with thisrequirement. The said publication, at theminimum, shall clearly state the name ofthe fund, its general classification, the fund’sNAVPu and the moving return oninvestment (ROI) of the fund on a year-todate(YTD) and year-on-year (YOY) basis.NAVPu shall be computed daily andshall be made available to participants andprospective participants upon request.d. Marketing personnel. To ensurethe competence and integrity of all dulydesignated UIT marketing personnel, allpersonnel involved in the sales of thesefunds shall be required to undergostandardized training program inaccordance with the guidelines of thisSubsection. This training program may beconducted by their respective trust entitiesin accordance with the minimum trainingprogram guidelines provided by the TrustOfficers Association of the Philippines(TOAP). Such training program shallhowever be regularly validated by TOAP.(As amended by Circular No. 593 dated 08 January 2008)§ 4410Q.8 Exposure limit to singleperson/entity. The combined exposure ofthe UIT Fund to any entity and its relatedparties shall not exceed fifteen percent(15%) of the market value of the UIT Fund:Provided, That, a UIT Fund invested,partially or substantially, in exchangetraded equity securities shall be subject tothe fifteen percent (15%) exposure limitto a single entity/issuer: Provided, further,Q RegulationsPart IV - Page 26Manual of Regulations for Non-Bank Financial Institutions

§§ 4410Q.8 - 4410Q.1010.12.31That, in the case of an exchange tradedequity security which is included in an indexand tracked by the UIT Fund, the exposureof the UIT Fund to a single entity shall bethe actual benchmark weighting of the issueror fifteen percent (15%), whichever ishigher.This limitation shall not apply tonon-risk assets as defined by the BSP.In case the limit is breached due to themarking-to-market of certain investment/s orany extraordinary circumstances, e.g.,abnormal redemptions which are beyondthe control of the trustee, the trustee shallbe given thirty (30) days from the time thelimit is breached to correct the same.(As amended by Circular No. 577 dated 17 August 2007)§ 4410Q.9 Allowable investments andvaluation. UITF investments shall be limitedto bank deposits and the following financialinstruments:(a) Securities issued by or guaranteedby the Philippine government, or the BSP;(b) Tradable securities issued by thegovernment of a foreign country, anypolitical subdivision of a foreign country orany supranational entity;(c) Exchange-listed securities;(d) Marketable instruments that aretraded in an organized exchange;(e) Loans traded in an organizedmarket;(f) Loans arising from repo agreementswhich are transacted through an exchangerecognized by the SEC, subject to thecondition that the repo contracts may bepre-terminated lawfully by the trust entityadministering the UITF and acting as lender,with due notice to its counterparty and themarket operator; and(g) Such other tradable investmentsoutlets/categories as the BSP may allow.Provided, That the investment of thepeso UITF in tradable foreign currencydenominatedfinancial instruments shallbe subject to Items “e” and “f” of Subsec.4409Q.6.Provided further, That a financialinstrument is regarded as tradable ifquoted two-way prices are readily andregularly available from an exchange,dealer, broker, industry group, pricingservice or regulatory agency, and thoseprices represent actual and regularlyoccurring market transactions on an arm’slength basis.The UITF may avail itself of financialderivatives instruments solely for thepurpose of hedging risk exposures of theexisting investments of the Fund, providedthese are accounted for in accordancewith existing BSP hedging guidelines aswell as the trust entity’s risk managementand hedging policies duly approved by theTrust Committee and disclosed toparticipants.The use of hedging instruments shallalso be disclosed in the “Plan” as providedin Item “c” of Subsec. 4410Q.6 andspecified in the quarterly “list of investmentoutlets” as provided in Item “a” of Subsec.4410Q.7.(As amended by M-2010-033 dated 04 October 2010,Circular Nos. 676 dated 29 December 2009 and 675 dated22 December 2009)§ 4410Q.10 Other related guidelineson valuation of allowable investmentsa. In pricing debt securities,interpolated yields shall be used forsecurities with odd or off-the-run tenorsusing the straight-line basis and generallyaccepted market convention.b. In case outstanding UIT Fundinvestments may deteriorate in quality, i.e.,no longer tradable as defined under Subsec.4410Q.9, the trustee shall immediatelyprovision to reflect fair value in accordancewith generally accepted accountingprinciples or as may be prescribed by theBSP. If no fair value is available, theinstrument shall be assumed to be of nomarket value.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 27

§§ 4410Q.11 - 4411Q.108.12.31§ 4410Q.11 Unit investment trust fundadministration supporta. Backroom operations. Administrativerules on backroom under Sec. 4421Q shallbe applicable to UIT Fund. Adequatesystems to support the daily marking-tomarketof the fund’s financial instrumentsshall be in place at all times. In this respect,a daily reconcilement of the fund’s resultantmarked-to-market value with the unrealizedmarket losses and gains (respective contraasset balance) versus the book value of thefund for investments in financial instrumentsshall be done and all differences resolvedwithin the day.b. Custody of securities. Investments insecurities of a UIT Fund shall be held forsafekeeping by BSP accredited third partycustodians which shall perform independentmarking-to-market of such securities.§ 4410Q.12 Counterpartiesa. Dealings with related interests/QBproper/holding company/subsidiaries/affiliates and related companies. A trusteeof a UIT Fund shall be transparent at alltimes and maintain an audit trail for alltransactions with related parties or entities.The trustee shall observe the principle ofbest execution and no purchase/sale shallbe made with related counterpartieswithout considering at least two (2)competitive quotes from other sources.b. Accreditation of counterpartiesThe Fund shall only invest with approvedcounterparties qualified in accordance withthe policy duly approved by the TrustCommittee. Counterparties shall be subjectto appropriate limits in accordance withsound risk management principles.§ 4410Q.13 Foreign currencydenominatedunit investment trust fundsUIT Fund denominated in any acceptableforeign currency provided under existingBSP rules and regulations may beestablished. Such fund may only be investedin allowable investments denominated inpesos or any acceptable foreign currencyas expressly allowed under the fund’s Planrules and properly disclosed to fundparticipants.§ 4410Q.14 Exemptions from statutoryand liquidity reserves, single borrowerslimit, directors, officers, stockholders andtheir related interest. The provisions onreserves, single borrower’s limit and DOSRIceilings under Secs. 4330Q and 4331Q,respectively, applicable to trust funds ingeneral shall not be made applicable to UITFunds.Sec. 4411Q Investment ManagementActivities. The conduct of investmentmanagement activities shall be subject tothe following regulations.§ 4411Q.1 Minimum documentaryrequirements. An investment managementaccount (IMA) shall be covered by a writtendocument establishing such account, asfollows:a. In the case of accounts created bycorporations, business firms, organizationsor institutions, the voluntary writtenagreement or indenture entered into by theparties, accompanied by a copy of the boardresolution or other evidence authorizing theestablishment of, and designating thesignatories, to the investment managementaccount.b. In the case of accounts created byindividuals, the voluntary written agreementor indenture entered into by the parties.The voluntary written agreement orcontract shall include the followingminimum provisions:(1) Prenumbered contractual agreementform;(2) Title or nature of contractualagreement in noticeable print;(3) Legal capacities, in noticeable print,of parties sought to be covered;Q RegulationsPart IV - Page 28Manual of Regulations for Non-Bank Financial Institutions

§§ 4411Q.1 - 4411Q.408.12.31(4) Purposes and objectives;(5) The initial amount of funds and/orvalue of securities subject of thearrangement delivered to the investmentmanager;(6) Statement in underlined noticeableprint that:(a) The agreement is an agency and nota trust agreement. As such, the client shallat all times retain legal title to funds andproperties subject of the arrangement;(b) The arrangement does not guarantya yield, return or income by the investmentmanager. As such, past performance of theaccount is not a guaranty of futureperformance and the income of investmentscan fall as well as rise depending onprevailing market conditions; and(c) The investment managementagreement is not covered by the PDIC andthat losses, if any, shall be for the accountof the client;(7) Duties and powers of theinvestment manager;(8) Liabilities of the investmentmanager;(9) Reports to the client;(10) The amount or rate of thecompensation of the investment manager;(11) Terms and conditions governingwithdrawals from the account;(12) Termination of contractualarrangement; and(13) Disclosure requirements fortransactions requiring prior authorityand/or specific written investment directivesfrom the client.A sample investment managementagreement which conforms to theforegoing requirements is shown asAppendix Q-14.§ 4411Q.2 Minimum size of eachinvestment management account. No IMAshall be accepted or maintained for anamount less than P1.0 million. An IMAreduced to less than P1.0 million due toinvestment losses shall be exempt from thisrequirement.§ 4411Q.3 Commingling of fundsTwo (2) or more individual IMAs shall notbe commingled except for the purpose ofinvesting in government securities or in dulyregistered commercial papers: Provided,That the participation of each of theaforementioned accounts in the commingledaccount shall not be less than P1 million:Provided, further, That such comminglinghas been fully disclosed and specificallyagreed in writing by the clients.§ 4411Q.4 Lending and investmentdisposition. Assets received in investmentmanagement capacity shall be administeredin accordance with the terms of theinstrument creating the investmentmanagement relationship.When an investment manager isgranted discretionary powers in theinvestment disposition of investmentmanagement funds and unless otherwisespecifically enumerated in the agreementor indenture and directed in writing by theclient, loans and investments of the fundshall be limited to:a. Evidences of indebtedness of theRepublic of the Philippines and of the BSP,and any other evidences of indebtedness orobligations the servicing and repayment ofwhich are fully guaranteed by the Republicof the Philippines or loans against suchgovernment securities;b. Loans fully guaranteed by theRepublic of the Philippines as to the paymentof principal and interest;c. Loans fully secured by a hold-outon, assignment or pledge of depositsubstitutes maintained with the institutionor deposits with banks, or mortgage andchattel mortgage bonds issued by theinvestment manager; andd. Loans fully secured by real estate orchattels in accordance with Section 78 ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 29

§§ 4411Q.4 - 4411Q.708.12.31R.A. No. 337, as amended, and subject tothe requirements of Sections 75, 76 and 77of R.A. No. 337, as amended.The specific directives required underthis Subsection shall consist of the followinginformation:(1) The transaction to be entered into;(2) Borrower’s name;(3) Amount involved; and(4) Collateral security(ies), if any.§ 4411Q.5 Transactions requiring priorauthority. An investment manager shall notundertake any of the following transactionsfor the account of a client, unless prior toits execution, such transaction has been fullydisclosed and specifically authorized inwriting by the client:a. Lend, sell, transfer or assign moneyor property to any of the departments,directors, officers, stockholders, oremployees of the investment manager, orrelatives within the first degree ofconsanguinity or affinity, or the relatedinterests of such directors, officers andstockholders; or to any corporation wherethe investment manager owns at least fiftypercent (50%) of the subscribed capital orvoting stock in its own right and not astrustee nor in a representative capacity;b. Purchase or acquire property or debtinstruments from any of the departments,directors, officers, stockholders, oremployees of the investment manager, orrelatives within the first degree ofconsanguinity or affinity, or the relatedinterests of such directors, officers andstockholders; or from any corporation wherethe investment manager owns at least fiftypercent (50%) of the subscribed capital orvoting stock in its own right and not astrustee nor in a representative capacity;c. Invest in equities of or in securitiesunderwritten by the investment manager ora corporation in which the investmentmanager owns at least fifty percent (50%)of the subscribed capital or voting stock inits own right and not as trustee, nor in arepresentative capacity; andd. Sell, transfer, assign or lend moneyor property from one trust fiduciary or IMAto another trust, fiduciary or IMA exceptwhere the investment is in any of thoseenumerated in Items "a" to "d" of Subsec.4411Q.4.Directors, officers, stockholders andtheir related interest covered by this Subsectionshall be those considered as suchunder existing regulations on loans toDOSRI under Part III - E of this Manual. Theprocedural and reportorial requirements insaid regulations shall also apply.The disclosure required under thisSubsec. shall consist of the followingminimum information:(1) The transactions to be entered into;(2) Identities of the parties involved inthe transaction and their relationships (shallnot apply to Item “d” of this Subsec.);(3) Amount involved; and(4) Collateral security(ies), if any.The above information shall be madeknown to clients in a separate instrumentor in the very instrument creating theinvestment management relationship.§ 4411Q.6 Title to securities and otherproperties. Securities such as promissorynotes, shares of stocks, bonds and otherproperties of the portfolio shall be issuedor registered in the name of the principal orof the investment manager: Provided, Thatin case of the latter, the instrument shallindicate that the investment manager isacting in a representative capacity and thatthe principal’s name is disclosed thereat.§ 4411Q.7 Ceilings on loans. Loansfunded by IMAs shall be subject to theDOSRI ceilings imposed on QBs in PartIII - E of this Manual. For purposes ofdetermining compliance with said ceilings,the total amount of said loans granted bythe institution and its trust department toQ RegulationsPart IV - Page 30Manual of Regulations for Non-Bank Financial Institutions

§§ 4411Q.7 - 4411Q.909.12.31the same person, firm or corporation shallbe combined.§ 4411Q.8 Other applicable regulationson loans and investments - investmentmanagement account. The loans andinvestments of IMAs shall be subject topertinent laws, rules and regulations forQBs that shall include, but need not belimited to, the following:a. Requirements of Sections 39 and 40of R.A. No. 8791 (The General BankingLaw of 2000);b. Provisions of Section 4(e) of theNew Rules on Registration of Short-TermCommercial Papers and Section 7(f) of theNew Rules on Registration of Long-TermCommercial Papers issued by the SEC(Appendices 13 and 14);c. Criteria for past due accounts;d. Qualitative appraisal of loans,investments and other assets that mayrequire provision for probable losses whichshall be booked in accordance with theFRPTIs;e. Requirements of Sections 3 and 8of the SRC; andf. Provisions of Section 44 –Investments by Philippine Residents – ofthe FX Manual, such that the crosscurrencyinvestments of peso IMAs, shallbe subject to the following conditions:(1) All cash flows of the investmentmanager shall only be in pesos. In case theforeign exchange acquired or received bythe principal as dividends/earnings ordivestment proceeds on such investment areintended for reinvestment abroad, the sameproceeds are not required to be inwardlyremitted and sold for pesos throughauthorized agent banks: Provided, That suchproceeds are reinvested abroad within two(2) banking days from receipt of the fundsabroad;(2) The investment manager shallpurchase, invest, reinvest, sell, transfer ordispose foreign currency-denominatedfinancial instruments, including securities asdefined in Section 3 of the SRC, through adistributor or underwriter duly authorizedor licensed by the government of the issuerof such instruments, or a counterparty FI(seller or buyer) authorized in writing by theprincipal and/or accredited by theinvestment manager: Provided, That, theconduct, documentation, and settlement ofany of these transactions shall be outsidePhilippine jurisdiction;(3) The investment manager shallrecord cross-currency investmenttransactions in the peso regular books attheir foreign currency amounts and theirlocal currency equivalent using thePhilippine Dealing System peso/US dollarclosing rate and the New York US dollar/third currencies closing rate; and(4) The investment manager shallcomply with the reportorial requirementsthat may be prescribed by the BSP, whichshall include as a minimum, the foreigncurrency amount and the local currencyequivalent of the total cross currencyinvestments with details on: (a) type ofinvestments; and (b) amount of cash flowconverted.For purposes of this Subsection,“resident”, as defined under Section 1 of theFX Manual, shall refer to the principal thatengages the services of the investmentmanager under an investment managementagreement.(Circular No. 676 dated 29 December 2009)§ 4411Q.9 Operating and accountingmethodology. IMAs shall be operated andaccounted for in accordance with thefollowing:a. The investment manager shalladminister, hold or manage the fund orproperty in accordance with the instrumentcreating the investment managementrelationship; andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 31

§§ 4411Q.9 - 4413Q09.12.31b. Funds or property of each clientshall be accounted separately and distinctlyfrom those of other clients herein referredto as individual account accounting.(As amended by Circular No. 676 dated 29 December 2009)§ 4411Q.10 Tax-exempt individualinvestment management accounts. Thefollowing shall be the features/requirementsof IMAs of individuals which may beexempted from the twenty percent (20%)final tax under Section 24(B)(1) of R.A. No.8424 (The Tax Reform Act of 1997):a. The tax exemption shall apply toinvestment management agreementscontracted on or after 03 January 2000;b. The investment managementagreement shall only be between individualswho are Filipino citizens or resident aliensand investment manager banks. Theagreement shall be non-negotiable and nontransferable;c. The minimum amount of investmentfor an IMA shall be P1.0 million;d. The investment managementagreement shall indicate that pursuant toSection 24(B)(1) of R.A. No. 8424, interestincome of the investment management fundsderived from investments in interest-bearinginstruments (e.g., time deposits, governmentsecurities, loans and other debt instruments)which are otherwise subject to the twentypercent (20%) final tax, shall be exempt fromsaid final tax provided the funds are heldunder investment management by theinvestment manager for at least five (5) years.If said funds are held by the investmentmanager for a period less than five (5) years,interest income shall be subject to a finaltax which shall be deducted and withheldfrom the proceeds of the IMA based on thefollowing schedule–Holding PeriodRate of TaxFour (4) years to less than five (5) years 5%Three (3) years to less than four (4) years 12%Less than three (3) years 20%Necessarily, the investment managementagreement shall clearly indicate the datewhen the investment manager actuallyreceived the funds which shall serve as basisfor determining the holding period of thefunds;e. The investment manager may acceptadditional funds for inclusion in IMAswhich have been established as tax-exemptunder R.A. No. 8424. However, the receiptof additional funds shall be properlydocumented by indicating that they are partof existing tax-exempt IMAs and that theinterest income of the additional fundsderived from investments in interest bearinginstruments shall be exempt from the twentypercent (20%) final tax under the sameconditions mentioned in the preceding item.The document shall also indicate the datewhen the additional funds were receivedby the investment manager bank to serve asbasis for determining the minimum five (5)-year holding period for tax exemptionpurposes of the additional funds; andf. Tax-exempt individual IMAsestablished under this Subsection shall besubject to the provisions of Subsecs.4411Q.1(b) and 4411Q.2 up to 4411Q.8.Sec. 4412Q (Reserved)Sec. 4413Q Required Retained EarningsAppropriation. An institution authorized toengage in trust and other fiduciary businessshall, before the declaration of dividends,carry to retained earnings appropriated fortrust business at least ten percent (10%) ofits net profits realized out of its trust,investment management and other fiduciarybusiness since the last preceding dividenddeclaration until the retained earnings shallamount to twenty percent (20%) of itsauthorized capital stock and no part of suchretained earnings shall at any time be paidout in dividends but losses accruing in thecourse of its business may be chargedagainst surplus.Q RegulationsPart IV - Page 32Manual of Regulations for Non-Bank Financial Institutions

§§ 4414Q - 4414Q.108.12.31B. INVESTMENT MANAGEMENTACTIVITIESSec. 4414Q Authority to PerformInvestment Management. An IH may actas financial consultant, investment adviseror portfolio manager under Section 7 of P.D.No. 129, as amended. However, this shallnot be construed as authority to engage intrust and other fiduciary business. Entitieswhose articles of incorporation 1 or anyamendments thereto, include the purposeor power to act as financial consultant,investment adviser or portfolio managershall secure the prior favorablerecommendation of the Monetary Boardbefore the filing of said articles ofincorporation or amendments thereto withthe SEC.If an entity is found to be engaged inunauthorized investment managementactivities, whether as its primary, secondaryor incidental business, the Monetary Boardmay impose administrative sanctions againstsuch entity or its principal officers and/ormajority stockholders or proceed againstthem in accordance with law.The Monetary Board may take suchaction as it may deem proper such as, butmay not be limited to, requiring the transferor turnover of any IMA to duly incorporatedand licensed entities of the choice of theclient.An entity not authorized to engage ininvestment management activities shall notadvertise or represent itself as being engagedin investment management activities orrepresent itself as investment manager or usewords of similar import.Starting year 2001, IHs authorized toengage in investment management activitiesshall renew their existing licenses yearly,subject to the implementing guidelines tobe issued thereon.(As amended by CL-2008-078 dated 15 December 2008,CL-2008-053 dated 21 August 2008 and CL-2008-007 dated21 January 2008)§ 4414Q.1 Prerequisites for engagingin investment management activities. Anentity before it may engage in investmentmanagement activities shall comply with thefollowing requirements:a. It has been duly licensed by theappropriate government agency or createdby special law or charter.b. The articles of incorporation orcharter of the institution shall includeamong its powers or purposes the authorityto engage in investment managementactivities.c. The by-laws of the institution shallinclude, among other things:(1) The organization plan or structureof the department, office or unit which shallconduct the investment managementactivities of the institution;(2) The creation of an investmentmanagement committee, the appointment ofan investment management officer andsubordinate officers of the investmentmanagement department; and(3) A clear definition of the duties andresponsibilities, as well as the line and stafffunctional relationships, of the various units,officers and staff within the organization.d. Where the applicant is authorizedto engage in quasi-banking functions, theapplicant shall also meet the followingadditional requirements:(1) It has continuously complied withthe capital-to-risk assets ratio, reserverequirements against deposit substitutes,liquidity floor, and ceilings on DOSRI loansfor the last sixty (60) days immediatelypreceding the date of application;(2) It has not incurred net weeklyreserve deficiencies against depositsubstitutes during the last eight (8) weeksimmediately preceding the date ofapplication; and(3) It has shown substantialcompliance with other pertinent laws, rulesand regulations, policies and instructions ofthe BSP and has not been cited for serious/1SEC Memorandum Circular Nos. 5 dated 17 July 2008, 3 dated 16 February 2006 and 14 dated 24 October 2000.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 33

§§ 4414Q.1 - 4415Q.308.12.31major violations or exceptions affecting itssolvency, liquidity and profitability.Where the applicant is not authorizedto engage in quasi-banking functions:(a) The adoption of a formula/criteriafor QBs in the determination of compliancewith the capital-to-risk assets ratio andceilings on loans to DOSRI; and(b) The substitution of the reserve andliquidity floor requirements with the cashratio, as follows:(i) Primary reserves to Bills Payable;and(ii) Primary and secondary reserve toBills Payable:where primary reserves consist of cash onhand, cash in vault, checks and other cashitems, due from the BSP and due frombanks; and where secondary reservesconsist of BSP-supported governmentsecurities, T- Bills and other governmentsecurities.Compliance with the foregoing, as wellas with other requirements under existingregulations, shall be maintained up to thetime the authority is granted. An applicantthat fails in this respect shall be required toshow compliance for another test period ofthe same duration.§ 4414Q.2 Pre-operating requirementsAn institution authorized to engage ininvestment management activities shall,before engaging in actual operations, submitto the BSP the following:a. Government securities acceptableto the BSP amounting to P500,000 asminimum basic security deposit for thefaithful performance of investmentmanagement duties required under Subsec.4415Q.1;b. Organization chart of the investmentmanagement department which shall carryout the investment management activities ofthe institution; andc. Names and positions of individualsdesignated as chairman and members ofthe investment management committee,investment management officer and othersubordinate officers of the investmentmanagement department.Sec. 4415Q Security for the FaithfulPerformance of Investment ManagementActivities§ 4415Q.1 Basic security depositAn institution authorized to engage ininvestment management activities shalldeposit with the BSP eligible governmentsecurities as security for the faithfulperformance of its investment managementactivities equivalent to at least one percent(1%) of the book value of the total volumeof investment management assets: Provided,That at no time shall such deposit be lessthan P500,000.Scripless securities under the RoSSsystem of the BTr may be used as basicsecurity deposit for the faithful performanceof investment management activities usingthe guidelines in Appendix Q-21.§ 4415Q.2 Eligible securities. Securitiesenumerated in Subsec. 4405Q.2 shall beeligible as security deposit for faithfulperformance of investment managementactivities.§ 4415Q.3 Valuation of securities andbasis of computation of the basic securitydeposit requirement. For purposes ofdetermining compliance with the basicsecurity deposit under this Section, theamount of securities so deposited shall bebased on their book value, that is, cost asincreased or decreased by thecorresponding discount or premiumamortization.The base amount for the basic securitydeposit shall be the average of themonth-end balances of the total assets ofinvestment management funds of theimmediately preceding calendar quarter.Q RegulationsPart IV - Page 34Manual of Regulations for Non-Bank Financial Institutions

§§ 4415Q.4 - 4416Q08.12.31§ 4415Q.4 Compliance period;sanctions. The investment manager shallhave thirty (30) calendar days after the endof every calendar quarter within which todeposit with the BSP securities requiredunder this Section.The following sanctions shall beimposed for any deficiency in the basicsecurity deposit for the faithfulperformance of investment managementactivity:a. On the QB:i. Monetary penalty/ies:Penalty per Calendar DayOffenseThird andTrust First Second subsequentAsset Sizeoffense(s)Up toP500 P600.00 P700.00 P800.00millionAboveP500million P1,000.00 P1,250.00 P1,500.00but notexceedingP1 billionAboveP1 billionbut not P2,000.00 P3,000.00 P4,000.00exceedingP10 billionAboveP10 billionbut not P5,000.00 P6,000.00 P7,000.00exceedingP50 billionAboveP50 billion P8,000.00 P9,000.00 P10,000.00QBs with Full Trust Authority and with Trust Assets ofii. Non-monetary penalty beginningwith the third offense (all QBs) - Prohibitionagainst the acceptance of new IMAs, andfrom renewing expiring investmentmanagement contracts up to the time theviolation is corrected.b. On the Head of the InvestmentManagement Department and/or otherofficer(s) responsible for the deficiency/non-compliance:(1) First offense - warning thatsubsequent violations shall be dealt withmore severely;(2) Second offense - written reprimandwith a stern warning that subsequentviolations shall be subject to suspension;(3) Third offense - thirty (30) calendarday-suspension without pay; and(4) Subsequent offense(s) - sixty (60)calendar day-suspension without pay.For purpose of determining thefrequency of the violation the QB’scompliance profile for the immediatelypreceding three (3) years or twelve (12)quarters will be reviewed: Provided, Thatfor purposes of determining appropriatepenalty on the head of the InvestmentManagement Department and/or otherresponsible officer(s), any offense committedoutside the preceding three (3) year ortwelve (12) quarter-period shall beconsidered as the first offense: Provided,further, That in the case of the head of theInvestment Management Department, alloffenses committed by him in the past asthe head of the Investment ManagementDepartment of other institution(s) shall alsobe considered: Provided, finally, That if theoffense cannot be attributed to any otherofficer of the QB, the head of the InvestmentManagement Department shall beautomatically held responsible since theultimate responsibility for ensuringcompliance with the regulation rests uponhim, as evidence may warrant.(As amended by Circular Nos. 617 dated 30 July 2008 and585 dated 15 October 2007)Sec. 4416Q Organization and ManagementThe provisions under Sec. 4406Q up toSubsec. 4406Q.9 shall govern theorganization and management of institutionswithout trust license which are engaged ininvestment management activities only. Thefollowing terms shall, however, be used:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 35

§§ 4416Q - 4421Q09.12.31a. Investment management activities inlieu of trust and other fiduciary business;b. IMAs in lieu of trust and otherfiduciary accounts;c. Investment management committeein lieu of trust committee;d. Investment management officer inlieu of trust officer; ande. Investment management departmentin lieu of trust department.(As amended by M-2007-009 dated 22 March 2007)Sec. 4417Q Non-Investment ManagementActivities. The provisions of Sec. 4407Qshall apply in determining non-investmentmanagement activities except that the termstrust, other fiduciary, trustee and fiduciaryshall be disregarded.Sec. 4418Q Unsound Practices. Theprovisions of Sec. 4408Q shall govern theunsound practices for IMAs.Sec. 4419Q Conduct of InvestmentManagement Activities. The provisions ofSec. 4411Q shall govern the conduct ofinvestment management activities of aninstitution without trust license that isengaged in investment managementactivities.Sec. 4420Q Required Retained EarningsAppropriation. An institution authorized toengage in investment managementactivities shall, before the declaration ofdividends, carry to retained earningsappropriated for trust business at least tenpercent (10%) of its net profits realizedout of its investment managementactivities since the last preceding dividenddeclaration until the retained earningsshall amount to twenty percent (20%) ofits authorized capital stock and no part ofsuch retained earnings shall at any timebe paid out in dividends, but lossesaccruing in the course of its business maybe charged against retained earnings.C. GENERAL PROVISIONSSec. 4421Q Books and Records. Theinstitution’s trust department orinvestment management department shallkeep books and records on trust, otherfiduciary and IMAs separate and distinctfrom the books and records of its otherbusinesses and shall follow the FRPTIprescribed by the BSP.Each trust, other fiduciary or IMA shallhave a record separate from all otheraccounts except only in the case of CTFswhere the trustee can maintain commonrecords utilizing pooled fund accountingmethod for each fund: Provided, That thetrustee shall clearly indicate in the recordsthe trustors owning participation in theCTF and the extent of the interest of suchtrustors.Books and records shall contain fullinformation relative to each trust, otherfiduciary or IMA and shall be supported byduplicate signed copies of relateddocuments. Said records and duplicatesigned copies or related documents shallbe compiled and kept as to allow inspectionby BSP examiners and submission ofinformation or reports as may be requiredby competent authorities.The QB's trust department orinvestment management department shallmaintain separate general ledger accountsand other relevant sub-accounts fortax-exempt individual trust accounts,CTFs and individual managementaccounts established under Section24(B)(1) of R.A. No. 8424 and Subsecs.4409.8, 4411.9, and Item “8” of AppendixQ-32. The bank’s trust department orinvestment management department shallalso adopt appropriate systems, internalcontrol procedures and audit trailmechanisms to ensure that the correctamount of final tax is withheld orexempted from such accounts.(As amended by Circular No. 653 dated 05 May 2009)Q RegulationsPart IV - Page 36Manual of Regulations for Non-Bank Financial Institutions

§§ 4422Q - 4424Q08.12.31Sec. 4422Q Custody of Assets. All monies,properties or securities received by aninstitution in its capacity as trustee,fiduciary, or investment manager shall bekept physically separate and distinct fromthe assets of its other businesses and shallbe under the joint custody of at least two(2) persons, one of whom shall be an officerof the trust or investment managementdepartment, designated for that purpose bythe board of directors.The investment of each trust, otherfiduciary or IMA shall be kept physicallyseparated from those of other trust, otherfiduciary or IMAs, and adequately identifiedas the assets or property of the relevantaccount.Sec. 4423Q Fees and Commissions. Aninstitution acting as trustee, fiduciary orinvestment manager shall be entitled toreasonable fees and commissions whichshall be determined on the basis of the costof services rendered and the responsibilitiesassumed: Provided, That where the trustee,fiduciary or investment manager is actingas such under appointment by a court, thecompensation shall be that allowed orapproved by the court: Provided, further,That in the case of CTFs, the fee which atrustee may charge each participant shallbe fully disclosed by the trustee in the CTFplan, prospectus, flyers, posters and allforms of advertising materials to market thefund and in the documents given to clientsas proof of participation in the fund. In nocase shall such fees and commissions bebased on the excess of the income of thetrust, other fiduciary or investmentmanagement funds over a certain amountor percentage.No trustee, fiduciary or investmentmanager shall solicit or receive rebates oncommissions, fees and other payments forthe services rendered to the trust, otherfiduciary or IMA or beneficiaries of the trust,other fiduciary or IMA by stockbrokers, realestate brokers, insurance agents and similarpersons or entities unless the rebates, feesand other payments shall accrue to thebenefit of the trust, other fiduciary or IMAor the beneficiaries thereof.Officers and employees of the trustdepartment or investment managementdepartment of institutions, while serving assuch, shall be prohibited from retaining anycompensation for acting as co-trustee orfiduciary in the administration of a trust,other fiduciary or IMA.No institution shall collect, for its ownaccount, referral and/or arrangement fees,or any other fees that take the nature ofpayment to the institution from whateversource, in connection with loans sourcedfrom trust funds managed by its trustdepartment: Provided, That if such fees arecollected, the same shall be properlydisclosed to the trustor, and shall accrue tothe benefit of the trust, in accordance withthe provisions of Secs. 4401Q and 4407Q.(As amended by Circular No. 541 dated 30 August 2006)Sec. 4424Q Taxes. The terms and conditionsof trust, other fiduciary or investmentmanagement agreements, including CTFplans, shall contain provisions regarding theapplicability of regulations governingtaxation on the income of trust, otherfiduciary or investment managementaccounts. For this purpose, the trustee,fiduciary or investment manager shallmaintain adequate records and shall includeinformation such as the amount of finalincome tax withheld at source and theamount withheld by the trustee, fiduciaryor investment manager in the periodicreports submitted to trustors, beneficiaries,principals and other parties in interest.With respect to tax-exempt CTFs,individual trust and investment managementaccounts established under Section 24(B)(1)of R.A. No. 8424, the bank’s trustdepartment or investment managementdepartment shall be responsible forManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 37

§§ 4424Q - 4425Q.309.12.31obtaining the tax-exemption certificationswhich may be required by the BIR for theinterest-bearing instruments where the CTFs,individual trust funds and investmentmanagement funds will be invested.Likewise, the banks shall ensure that thecorrect amount of final tax on the interestincome on the interest-bearing instrumentsis withheld/deducted from the proceedsfrom the CTF participation, trust orinvestment management account andremitted to the BIR in the event said taxbecomes due such as when funds arewithdrawn before the required five (5)-yearholding period or when corporationshappen to invest in the tax-exempt trustinstruments created within the purview ofR.A. No. 8424.Sec. 4425Q Reports Required§ 4425Q.1 To trustor, beneficiary,principal. Every institution acting as trustee,fiduciary or investment manager shall renderreports on the trust, other fiduciary or IMAsto the trustor, beneficiary, principal or otherparty in interest or the court concerned orany party duly designated by the court order,as the case may be, under the followingguidelines:a. The reports shall be in such formsas to apprise the party concerned of thesignificant developments in theadministration of the account and shallconsist of:(1) A balance sheet;(2) An income statement;(3) A schedule of earning assets of theaccount; and(4) An investment activity report;b. Items (3) and (4) above shall includeat least the following:(1) Name of issuer or borrower;(2) Type of instrument;(3) Collateral, if any;(4) Amount invested;(5) Earning rate or yield;(6) Amount of earnings;(7) Transaction date; and(8) Maturity date;c. The reports shall be prepared insuch frequency as required under theagreement but shall not in any case be longerthan once every quarter; andd. The reports shall be made availableto clients not later than twenty (20) calendardays from the end of the reference date/period in Item “c” above.§ 4425Q.2 To the Bangko SentralAn institution acting as trustee, fiduciary orinvestment manager shall submit periodicreports prescribed by the appropriatedepartment of the SES on the institution’strust and other fiduciary business andinvestment management activities withinthe deadline indicated in Appendix Q-3.§ 4425Q.3 Audited financial statementsThe trust/investment managementdepartment of an institution shall adopt theprovisions of the Philippine FinancialReporting Standards (PFRS)/PhilippineAccounting Standards (PAS) in all respect,for purposes of preparing the AFS of its trustand other fiduciary and investmentmanagement activities. The followingguidelines shall likewise be observed in thepreparation of the AFS:(a) The provisions of PFRS/PAS shall beadopted effective the annual financialstatements beginning 01 January 2008;(b) A complete set of financialstatements shall comprise of the following:(1) Balance sheet as of the end of theperiod;(2) Income statement for the period;(3) Statement of changes inaccountabilities, which shall show areconciliation of the net carrying amount atthe beginning and end of the period of thefollowing accounts:(i) principal;(ii) accumulated income; andQ RegulationsPart IV - Page 38Manual of Regulations for Non-Bank Financial Institutions

§§ 4425Q.3 - 4426Q.109.12.31(iii) net unrealized gains/(losses) onavailable for sale financial assets, separatelydisclosing the changes in each of theforegoing accounts;(4) Notes, which shall comprise of asummary of significant accounting policiesand other disclosure requirements providedunder PFRS/PAS: Provided, That forpurposes of complying with the disclosureof the nature and extent of risks arising fromfinancial instruments as required underPFRS 7, disclosure statements may be madebased on the general categories ofcontractual relationships (i.e., UITF-trust,institutional-trust, and individual-trust; otherfiduciary; institutional-agency, andindividual-agency; and special purpose trust)of the trust/investment managementdepartment of a bank with its clients; and(5) Balance sheet as at the beginningof the earliest comparative period when atrust/investment management departmentapplies an accounting policy retrospectivelyor when it makes a retrospectiverestatement of items in the financialstatements, or when it reclassifies items inthe financial statements.(c) The balance sheet, incomestatement and statement of changes inaccountabilities shall be presented for eachof the general categories of contractualrelationships (i.e., UITF-trust, institutionaltrust,and individual-trust; other fiduciary;institutional-agency, and individual-agency;and special purpose trust) of the trust/investment management department of aninstitution with its clients;(d) Comparative information forperiods before 01 January 2008 need notbe presented in the AFS for the financialreporting period beginning 01 January 2008:Provided, That disclosure statements on theend-2007 balances of total assets of thegeneral categories of contractualrelationships of the trust/investmentmanagement department of an institutionwith its clients prepared based on theGenerally Accepted Accounting Principles(GAAP) previously applied, shall bepresented in the notes to financialstatements: Provided, further, Thatcomparative periods shall be presented inthe AFS for the financial reporting periodbeginning 01 January 2009 and thereafter.(e) The following transitory rules andregulations shall govern the accountingtreatment of specific items for purposes ofpreparing the AFS for the financial reportingperiod beginning 01 January 2008:(1) The provisions of PFRS/PAS shallonly be applied to accounts outstanding asof end-December 2008;(2) Reclassification of previouslyrecognized financial instruments shall nolonger be allowed except as allowed underexisting regulations; and(3) The fair value of ROPA andInvestment Properties as of the date oftransition to PFRS/PAS may be used as thedeemed cost of said properties as of thatdate: Provided, That said ROPA andInvestment Properties shall be subsequentlyaccounted for in accordance with theprovisions of the FRPTI.(Circular No. 653 dated 05 May 2009)Sec. 4426Q Audits§ 4426Q.1 Internal audit. Theinstitution’s internal auditor shall includeamong his functions, the conduct ofperiodic audits of the trust department orinvestment management department atleast once every twelve (12) months. Theboard of directors, in a resolution enteredin its minutes, may also require theinternal auditor to adopt a suitablecontinuous audit system to supplementand/or to replace the periodic audit. In anycase, the audit shall ascertain whether theinstitution’s trust and other fiduciarybusiness and investment managementManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 39

§§ 4426Q.1 - 4428Q09.12.31activities have been administered inaccordance with laws, BSP rules andregulations, and sound trust or fiduciaryprinciples.§ 4426Q.2 External audit. The trust andother fiduciary business and investmentmanagement activities of an institution shallbe included in the annual financial audit byindependent external auditors requiredunder Sec. 4190Q.The audit of the assets andaccountabilities of the trust department/investment management department of anNBFI authorized to engage in trust and otherfiduciary business/investment managementactivities, which shall cover at the minimuma review of the trust/investment managementoperations, practices and policies, includingaudit and internal control system, shall besubject to auditing standards to the extentnecessary to express an opinion on thefinancial statements.The audit of the trust/investmentmanagement department of an institutionauthorized to engage in trust and otherfiduciary business/investment managementactivities shall be covered by a separatesupplemental audit report to be submittedto the institution’s board of directors and tothe BSP within the prescribed periodcontaining, among other things, thecomplete set of financial statements of thetrust/investment management department ofan institution prepared in accordance withthe provisions of Subsec. 4426Q togetherwith the other information required by theBSP to be submitted under Sec. 4190Q:Provided, That a reconciliation statement ofthe balance sheet in the AFS and the FRPTIshall be prepared for each of the generalcategories of contractual relationships (i.e.,UITF-trust, institutional-trust, and individualtrust; other fiduciary; institutional-agency,and individual-agency; and specialpurpose trust) of the trust/investmentmanagement department of an institutionwith its clients following the format inAppendix Q-50.(As amended by Circular No. 653 dated 05 May 2009)§ 4426Q.3 Board action. A report of theforegoing audits, together with the actionsthereon, shall be noted in the minutes of theboard of directors of the institution.Sec. 4427Q Authority Resulting fromMerger or Consolidation. In merger of FIs,the authority to engage in trust and otherfiduciary business and in investmentmanagement activities shall continue to bein effect if the surviving institution has suchauthority and the same has not beenwithdrawn by the BSP. In case the survivinginstitution does not have previous authoritybut desires to engage in trust and otherfiduciary business and in investmentmanagement activities, it shall secure theprior approval of the Monetary Board toengage in such business as part of itsapplication for merger to enable it toincorporate such among its powers orpurpose clause in its articles ofincorporation, articles of merger, by-lawsand such other pertinent documents.In the consolidation of FIs where theresulting entity is an entirely new one, itshall secure from the Monetary Board anauthority to engage in trust and otherfiduciary business or in investmentmanagement activities before it may engagein such business.Sec. 4428Q Receivership. Whenever areceiver is appointed by the Monetary Boardfor an institution that is authorized to engagein trust and other fiduciary business or ininvestment management activities, thereceiver shall, pursuant to the instructionsof the Monetary Board, proceed to close theQ RegulationsPart IV - Page 40Manual of Regulations for Non-Bank Financial Institutions

§§ 4428Q - 4441Q.311.12.31trust, other fiduciary and IMAs promptlyand/or transfer all other accounts tosubstitute trustees, fiduciaries or investmentmanagers acceptable to the trustors,beneficiaries, principals or other parties ininterest: Provided, That where the trustee,fiduciary or investment manager is actingas such under appointment by a court, thereceiver shall proceed pursuant to theinstructions of said court.The guidelines on Receivership andliquidation proceedings of NBQBs areprovided in Appendix Q - 58 .(Circular No. 719 dated 06 May 2011)Sec. 4429Q Surrender of Trust orInvestment Management License. Any NBFIwhich has been authorized to engage in trustand other fiduciary business or in investmentmanagement activities and which intendsto surrender said authority shall file withthe BSP a certified copy of the resolution ofits board of directors manifesting suchintention. The appropriate department of theSES shall then conduct an examination ofthe institution’s trust, other fiduciarybusiness and investment managementactivities. If the institution is found to havesatisfactorily discharged its duties andresponsibilities as trustee, fiduciary orinvestment manager, and has provided forthe orderly closure or transfer of its trust,fiduciary or IMAs, the Monetary Board, onthe basis of the recommendation of theexamining department, shall order thewithdrawal of the institution’s authority toengage in trust and other fiduciarymanagement activities.Secs. 4430Q - 4440Q (Reserved)Sec. 4441Q Securities Custodianship andSecurities Registry Operations. Thefollowing rules and regulations shall governsecurities custodianship and securitiesregistry operations of QBs/trust entities.The guidelines to implement the deliveryby the seller of securities to the buyer or tohis designated third party custodian areshown in Appendix Q-38.Violation of any provision of the guidelines inAppendix Q-38 shall be subject to the sanctions/penalties under Subsec. 4441Q.29.(As amended by Circular No. 714 dated 10 March 2011,M-2007-002 dated 23 January 2007, M-2006- 009 dated 06 July2006, M 2006- 002 dated 05 June 2006 and Circular No. 524dated 31 March 2006)§ 4441Q.1 Statement of policy. It is thepolicy of the BSP to promote the protectionof investors in order to gain their confidenceand encourage their participation in thedevelopment of the domestic capital market.Therefore, the following rules andregulations are promulgated to enhancetransparency of securities transactions withthe end in view of protecting investors.§ 4441Q.2 Applicability of thisregulation. This regulation shall governsecurities custodianship and securitiesregistry operations of banks and NBFIs underBSP supervision. It shall cover all theirtransactions in securities as defined inSection 3 of the SRC, whether exempt orrequired to be registered with the SEC, thatare sold, borrowed, purchased, traded, heldunder custody or otherwise transacted in thePhilippines where at least one (1) of theparties is a bank or an NBFI under BSPsupervision. However, this regulation shallnot cover the operations of stock and transferagents duly registered with the SEC pursuantto the provisions of SRC Rule 36-4.1 andwhose only function is maintain the stockand transfer book for shares of stock.§ 4441Q.3 Prior Bangko Sentralapproval. QBs/trust entities may act assecurities custodian and/or registry onlyupon prior Monetary Board approval.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 41

§§ 4441Q.4 - 4441Q.511.12.31§ 4441Q.4 Application for authorityA QB/trust entity desiring to act as securitiescustodian and/or registry shall file anapplication with the appropriate departmentof the SES. The application shall be signedby the highest ranking officer of theinstitution and shall be accompanied by acertified true copy of the resolution of itsboard of directors authorizing the institutionto engage in securities custodianship and/or registry.§ 4441Q.5 P r e - q u a l i f i c a t i o nrequirements for a securities custodian/registrya. The securities custodian must be aQB under BSP supervision that is authorizedto engage in investment management (forIHs with QB authority only) or trustbusiness. The securities registry must be aQB under BSP supervision whether or notauthorized to engage in investmentmanagement (for IHs with QB authority)or trust business;b. It must have complied with theminimum capital accounts required underexisting regulations not lower than anadjusted capital of P300 million or suchamounts as may be required by theMonetary Board in the future;c. It must have a CAMELS compositerating of at least “4” (as rounded off) in thelast regular examination;d. It must have in place acomprehensive risk management systemapproved by its board of directorsappropriate to its operations characterizedby a clear delineation of responsibility forrisk management, adequate riskmeasurement systems, appropriatelystructured risk limits, effective internalcontrol and complete, timely and efficientrisk reporting systems. In this connection, amanual of operations (which includescustody and/or registry operations) and otherrelated documents embodying the riskmanagement system must be submitted tothe appropriate department of the SES at thetime of application for authority and withinthirty (30) days from updates;e. It must have adequate technologicalcapabilities and the necessary technicalexpertise to ensure the protection, safety andintegrity of client assets, such as:(1) It can maintain an electronic registrydedicated to recording of accountabilitiesto its clients; and(2) It has an updated andcomprehensive computer security systemcovering system, network andtelecommunication facilities that will:(a) limit access only to authorizedusers;(b) preserve data integrity; and(c) provide for audit trail oftransactions.f. It has complied, during the periodimmediately preceding the date ofapplication, with the following:(1) ceilings on credit accommodationto DOSRI; and(2) single borrower’s limit.g. It has no reserve deficiencies duringthe eight (8) weeks immediately precedingthe date of application;h. It has set up the prescribedallowances for probable losses, both generaland specific, as of date of application;i. It has not been found engaging inunsafe and unsound practices during the lastsix (6) months preceding the date ofapplication;j. It has generally complied with laws,rules and regulations, orders or instructionsof the Monetary Board and/or BSPManagement;k. It has submitted additionaldocuments/information which may berequested by the appropriate department ofthe SES, such as, but not limited to:Q RegulationsPart IV - Page 42Manual of Regulations for Non-Bank Financial Institutions

§§ 4441Q.5 - 4441Q.711.12.31(1) Standard custody/registry agreementand other standard documents;(2) Organizational structure of thecustody/registry business;(3) Transaction flow; and(4) For those already in the custody orregistry business, a historical backgroundfor the past three (3) years;l. It shall be conducted in a separateunit headed by a qualified person with atleast two (2) years experience in custody/registry operations;m. It can interface with the clearing andsettlement system of any recognizedexchange in the country capable of achievinga real time gross settlement of trades; andn. A securities custodian whichprovides the value-added service ofsecurities lending involving securities thatare sold, offered for sale or distributedwithin the Philippines must be a dulylicensedlending agent registered with theSEC.(As amended by Circular No. 714 dated 10 March 2011)§ 4441Q.6 Functions andresponsibilities of a securities custodianA securities custodian shall have thefollowing basic functions andresponsibilities:a. Safekeeps the securities of the client;b. Holds title to the securities in anominee capacity;c. Executes purchase, sale and otherinstructions;d. Performs at least a monthlyreconciliation to ensure that all positionsare properly recorded and accounted for;e. Confirms tax withheld;f. Represents clients in corporateactions in accordance with the directionprovided by the securities owner;g. Conducts mark-to-market valuationand statement rendition;h. Does earmarking of encumbrancesor liens such as, but not limited to, Deedsof Assignment and court orders;i. Acts as a collecting and paying agentin respect of dividends, interest earnings orproceeds from the sale/redemption/maturityof securities held under custodianship:.Provided, That the custodian shallimmediately make known to the securitiesowner all collections received andpayments made with respect to thesecurities under custody; andj. In addition to the above basicfunctions, it may perform the value-addedservice of securities lending as agent:Provided, That it complies with the prequalificationrequirements under Item “n”of Subsec. 4441Q.5: Provided, further,That the securities lending service shallbe covered by a Securities LendingAuthorization Agreement (SLAA) whichshall be attached to the custody contract.A securities custodian which rendersthe value-added service of securitieslending involving securities that are sold,offered and distributed within thePhilippines shall comply with thepertinent rules and regulations of the SECon securities lending and borrowingoperations.(As amended by Circular No. 714 dated 10 March 2011)§ 4441Q.7 Functions andresponsibilities of a securities registrya. Maintains an electronic registrybook;b. Delivers confirmation oftransactions and other documents withinagreed trading periods;c. Issues registry confirmations fortransfers of ownership as it occurs;d. Prepares regular statement ofsecurities balances at such frequency asmay be required by the owner on recordbut not less frequent than every quarter; ande. Follows appropriate legalManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 43

§§ 4441Q.7 - 4441Q.911.12.31documentation to govern its relationshipwith the Issuer.§ 4441Q.8 Protection of securities ofthe customer. A custodian must incorporatethe following procedures in the dischargeof its functions in order to protect thesecurities of the customer:a. Administration of securitiescustodianship accounts. Securitiescustodianship accounts must beadministered in the entity’s Trust Unit.b. Accounting and recording forsecurities. Custodians must employaccounting and safekeeping procedures thatfully protect customer securities. It isessential that custodians segregate customersecurities from one another and from itsproprietary holdings to protect the samefrom the claims of its general creditors.Securities held under custodianshipshall be recorded in the books of thecustodian at the face value of said securitiesin the other fiduciary sub-account“Custodianship”.c. Documentation. The appropriatedocumentation for custodianship shall bemade and it shall clearly define, among others,the authority, role, responsibilities, fees andprovision for succession in the event thecustodian can no longer discharge itsfunctions. It shall be accepted in writing bythe counterparties.The governing custodianship agreementshall be pre-numbered and this number shallbe referred to in all amendments andsupplements thereto.d. Confirmation of custody. Thecustodian shall issue a custody confirmationto the purchaser or borrower of securitiesto evidence receipt or transfer of securitiesas they occur. It shall contain, as aminimum, the following information on thesecurities under custody:(1) Owner of securities;(2) Issuer;(3) Securities type;(4) Identification or serial numbers;(5) Quantity;(6) Face value; and(7) Other information, which may berequested by the parties.e. Periodic reporting. The custodianshall prepare at least quarterly (or asfrequent as the owner of securities willrequire) securities statements delivered tothe registered owner’s address on record.Said statement shall present detailedinformation such as, but not limited to,inventory of securities, outstandingbalances, and market values.(As amended by Circular No. 714 dated 10 March 2011)§ 4441Q.9 Independence of theregistry and custodian. A BSP-accreditedsecurities registry must be a third partywith no subsidiary/affiliate relationshipwith the issuer of securities while aBSP-accredited custodian must be a thirdparty with no subsidiary/affiliate relationshipwith the issuer or seller of securities. A QBtrust entity accredited by BSP as securitiescustodian may, however, continue holdingsecurities it sold under the following cases:a. where the purchaser is a relatedentity acting in its own behalf and not asagent or representative of another;b. where the purchaser is anon-resident with existing global custodyagreement governed by foreign laws andconventions wherein the institution isdesignated as custodian or sub-custodian;andc. upon approval by the BSP, wherethe purchaser is an insurance companywhose custody arrangement is eithergoverned by a global custody agreementwhere the QB/trust entity is designated ascustodian or sub-custodian or by a directcustody agreement with features at parQ RegulationsPart IV - Page 44Manual of Regulations for Non-Bank Financial Institutions

§§ 4441Q.9 - 4441Q.1311.12.31with the standards set under this Subsectiondrawn or prepared by the parent companyowning more than fifty percent (50%) of thecapital stock of the purchaser and executedby the purchaser itself and its custodian.Purchases by non-residents andinsurance companies that are exemptedfrom the independence requirement of thisSection shall, however, be subject to allother provisions of this Subsection.§ 4441Q.10 Registry of scriplesssecurities of the Bureau of the TreasuryThe Registry of Scripless Securities (RoSS),operated by the Bureau of the Treasury,which is acting as a registry for governmentsecurities is deemed to be automaticallyaccredited for purposes of this Section andis likewise exempted from theindependence requirement under Subsec.4441Q.9. However, securities registeredunder the RoSS shall only be considereddelivered if said securities were transferredby means of book entry to the appropriatesecurities account of the purchaser or hisdesignated custodian. Book entry transferto a sub-account for clients under theprimary account of the seller shall notconstitute delivery for purposes of thisSection and of Subsec. 4235Q.5.§ 4441Q.11 Confidentiality. A BSPaccreditedsecurities custodian/registry shallnot disclose to any unauthorized person anyinformation relative to the securities underits custodianship/registry. The managementshall likewise ensure the confidentiality ofclient accounts of the custody or registryunit from other units within the sameorganization.§ 4441Q.12 Compliance with antimoneylaundering laws/regulations. Forpurposes of compliance with therequirements of R.A. No. 9160,otherwise known as the “Anti-MoneyLaundering Act of 2001,” as amended,particularly the provisions regardingcustomer identification, record keeping andreporting of suspicious transactions,a BSP-accredited custodian may rely onreferral by the seller/issuer of securities:Provided, That it maintains a record of suchreferral together with the minimumidentification, information/documentsrequired under the law and its implementingrules and regulations.A BSP-accredited custodian mustmaintain accounts only in the true and fullname of the owners of the security.However, said securities owners may beidentified by number or code in reports andcorrespondences to keep his identityconfidential.Securities subject of pledge and/or deedof assignment as of 14 October 2004 (dateof Circular 457), may be held by a lendingQB up to the original maturity of the loanor full payment thereof, whichever comesearlier.§ 4441Q.13 Basic security depositSecurities held under custodianship whetherbooked in the Trust Department or carriedin the regular books of the QB/trust entityshall be subject to a security deposit forfaithful performance of duties at the rate of1/25 of one percent (1%) of the total facevalue or 500,000 whichever is higher.However, securities held undercustodianship where the custodian alsoperforms securities lending as agent shallbe subject to a higher basic securitydeposit of one percent (1%) of the totalface value.Compliance shall be in the form ofgovernment securities deposited with theBSP eligible pursuant to existing regulationsgoverning security for the faithfulperformance of trust and other fiduciarybusiness.(As amended by Circular No. 714 dated 10 March 2011)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IV - Page 45

§§ 4441Q.14 - 4499Q08.12.31§ 4441Q.14 Reportorial requirementsAn accredited securities custodian shallcomply with reportorial requirements thatmay be prescribed by the BSP, which shallinclude as a minimum, the face and marketvalue of securities held under custodianship.§§ 4441Q.15 - 4441Q.28 (Reserved)§ 4441Q.29 Sanctions. Withoutprejudice to the penal and administrativesanctions provided for under Sections 36and 37, respectively, of the R.A. No. 7653,violation of any provision of this Sectionshall be subject to the following sanctions/penalties:a. First offense –(1) Fine of up to P10,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected; and(2) Reprimand for the directors/officersresponsible for the violation.b. Second offense -(1) Fine of up to P20,000 a day for theinstitution for each violation reckoned fromthe date the violation was committed up tothe date it was corrected; and(2) Suspension for ninety (90) dayswithout pay of directors/officers responsiblefor the violation.c. Subsequent offenses –(1) Fine of up to P30,000 a day for theinstitution for each violation from the datethe violation was committed up to the dateit was corrected;(2) Suspension or revocation of theauthority to act as securities custodian and/or registry; and(3) Suspension for 120 days withoutpay of the directors/officers responsible forthe violation.Secs. 4442Q - 4498Q (Reserved)Sec. 4499Q Sanctions. Any violation of theprovisions of this Part shall be subject toSections 36 and 37 of R.A. No. 7653,without prejudice to the imposition of othersanctions as the Monetary Board mayconsider warranted under the circumstancesthat may include the suspension orrevocation of an institution’s authority toengage in trust and other fiduciary businessor in investment management activities, andsuch other sanctions as may be providedby law.The guidelines for the imposition ofmonetary penalty for violations/offenseswith sanctions falling under Section 37 ofR. A. No. 7653 on QBs, their directors and/or officers are shown in Appendix Q-39.Q RegulationsPart IV - Page 46Manual of Regulations for Non-Bank Financial Institutions

§§ 4501Q - 4505Q08.12.31PART FIVEFOREIGN EXCHANGE OPERATIONSSection 4501Q Authority; CoverageWith prior approval of the Monetary Board,and subject to the provisions of Article III,Chapter IV of R.A. No. 7653 and Section7(13) of P.D. No. 129, as amended, an IHmay engage in foreign exchange operationswhich shall be limited to the servicing ofproject or program requirements of thefollowing enterprises:a. BSP-certified export-oriented firms;b. Board of Investments-registeredexport-oriented firms; andc. Construction or service firms withoverseas contracts approved by theDepartment of Labor and Employment.Sec. 4502Q Specific Foreign ExchangeActivities. The specific foreign exchangeoperations which IHs may undertake inconnection with the preceding Section are:a. Arranging or contracting of foreignloans for the account of the client firm, orcontracting of foreign loans for the accountof the IH for relending to the client firm,subject to pertinent BSP rules andregulations;b. Providing import- and export-relatedservices to said firms such as letters of creditand other acceptable modes of payment, andthe discounting of export drafts: Provided,That the total amount of foreign exchangetransactions IHs may deal in shall not exceedthe amount of the financing arranged orprovided by the IH which involves theimportation and exportation of related goodsand services: Provided, further, That theamount of letters of credit outstanding of anIH shall not exceed, at any given time, twiceits net worth, except as may otherwise bespecifically authorized by the Monetary Board;c. Holding foreign currency balanceswith foreign correspondents in connectionwith export-related services but in no casefor speculative purposes;d. Entering into forward foreignexchange contracts with the BSP inconnection with the foregoing activities;and/ore. Such other related foreign exchangeactivities as may be approved by theMonetary Board.Sec. 4503Q Separate Department. AnyIH that may be authorized to engage inforeign exchange operations shall set upa separate department/unit to handle suchoperations.Sec. 4504Q Applicability of PertinentBangko Sentral Rules. The foreign exchangeoperations of an IH are subject to allapplicable BSP rules and regulations onforeign exchange operations, includingmodifications thereof, considering thespecial nature of IH operations, and thesanctions in connection therewith.Sec. 4505Q Aggregate Ceiling onIssuance of Guarantees. Total standbyletters of credit, foreign and domestic,including guarantees, the nature of whichrequires the guarantor to assume theliabilities/obligations of third parties incase of their inability to pay, that may beissued by QBs and outstanding at anygiven time, shall not exceed fifty percent(50%) of the QB’s net worth, except thosefully secured by cash, hold-out on deposits/deposit substitutes on governmentsecurities.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart V - Page 1

§§ 4506Q - 4599Q08.12.31Secs. 4506Q - 4598Q (Reserved)Sec. 4599Q General Provision onSanctions. Any violation of the provisionsof this Part shall be subject to Sections 36and 37 of R.A. No. 7653.The guidelines for the imposition ofmonetary penalty for violations/offenseswith sanctions falling under Section 37of R.A. No. 7653 on QBs, theirdirectors and/or officers are shown inAppendix Q-39.Q RegulationsPart V - Page 2Manual of Regulations for Non-Bank Financial Institutions

§§ 4601Q - 4601Q.108.12.31PART SIXTREASURY AND MONEY MARKET OPERATIONSA. OPEN MARKET OPERATIONSSection 4601Q Open Market OperationsThe following rules and regulations shallgovern the buying and selling of governmentsecurities in the open market pursuant toSection 91 of R.A. No. 7653:a. The BSP may buy and sell in theopen market for its own account:(1) Evidences of indebtedness issueddirectly by the Government of the Philippinesor by its political subdivisions; and(2) Evidences of indebtedness issuedby government instrumentalities and fullyguaranteed by the Government.The above evidences of indebtednessmust be freely negotiable and regularlyserviced and must be available to thegeneral public through banks, QBs andaccredited government securities dealers.b. Outright purchases and sales ofgovernment securities shall be effected onthe basis of the lowest price offered or thehighest price bid.c. Repo agreements shall be open tobanks (except RBs), QBs and accreditedgovernment securities dealers and shall bemade under the terms provided for inSec. 4601Q.1 and the following:(1) The repo agreement may be paid atany time before maturity at the option ofthe issuer of the repo agreement;(2) In the event the securities coveredby the repo agreement are not repurchasedby the issuer of such agreement, they maybe sold in the open market or transferred tothe BSP Portfolio; and(3) Should an issuer of a repoagreement become no longer qualified assuch, its outstanding repo agreement shallimmediately become due and payable.If settlement of the amount due is not madewithin three (3) days from the date of itsdisqualification, the BSP shall proceed tocollect said amount in accordance with thepreceding paragraph.d. Reverse repo agreements coveringthe sale of portion of the security holdingsof the BSP portfolio may be made under theterms provided for in Subsec. 4601Q.2.§ 4601Q.1 (2008 - 4602Q) Repurchaseagreements with the Bangko Sentral. Repoagreements may be effected with the BSPsubject to the following terms andconditions:a. Rate. The rates on the repurchasefacility shall be set by the TreasuryDepartment, with the concurrence of theGovernor, taking into account prevailingliquidity/market conditions.b. Term. At the option of the TreasuryDepartment, availments may be for aminimum of one (1) day (overnight) and amaximum of ninety-one (91) days.c. Security. Only obligations ofthe National Government and itsinstrumentalities and political subdivisions,which are fully guaranteed by theGovernment, with a remaining maturityof not more than ten (10) years and whichare freely negotiable and regularlyserviced, shall be eligible as underlyinginstruments for repo agreements, subjectto the collateral requirement prescribed bythe BSP.d. Delivery. Delivery of the underlyinginstruments shall be made to the BSP at theprescribed time. For overnight repoagreements, delivery of the underlyinginstruments shall be made not later than12:00 noon of the date of transaction.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 1

§§ 4601Q.1 - 4601Q.209.12.31Government securities which are heldby the issuer of the repo agreement underthe book-entry system with the BSP may beused as underlying instruments only withthe conformity of the BSP.e. Upon termination of the repoagreement, the issuer of such agreementshall claim and take delivery of theunderlying instruments at the TreasuryDepartment, BSP. Failure to claim and takedelivery of the underlying instrumentsimmediately upon such termination shallrelieve the BSP of any liability orresponsibility for the loss or misplacementof said instruments.§ 4601Q.2 (2008 - 4602Q.1) Reverserepurchase agreements with BangkoSentral. Reverse repo agreements may beeffected with the BSP subject to thefollowing terms and conditions:a. Rate. The rates shall be set by theTreasury Department, with the concurrenceof the Governor, taking into account theprevailing liquidity/market conditions.b. Term. At the option of the TreasuryDepartment, availments may be for aminimum of one (1) day (overnight) and amaximum of 364 days.c. Security. The collateral shall consistof obligations of the National Governmentand other freely negotiable securities in theBSP portfolio valued at 100%.d. Delivery. No delivery of thecollateral shall be made, but a custodyreceipt shall be issued instead.e. Reservation. Prepayment may bemade by the BSP at its option anytimebefore maturity.Effective 01 July 2003, published interestrates that will be applied on BSP’s reverserepo agreements shall be inclusive of ValueAdded Tax (VAT).Reverse repo agreements entered intoby the BSP with any authorized agent bank(AAB) are included in the definition of theterm “deposit substitutes” under Sec. 22 (y)Chapter 1 of the National Internal RevenueCode of 1997.The BSP shall withhold twenty percent(20%) Final Withholding Tax (FWT) on itsovernight reverse repo agreements startingJanuary 01, 2008, under the followingguidelines:(1) All overnight reverse repoagreements with the BSP shall be subject tothe twenty percent (20%) FWT in the samemanner as term reverse repo agreements,which tax is deducted on each maturity dateand remitted to the BIR;(2) With respect to the overnight RRPsfrom 01 January 2008 to 22 August 2008 1 ,the concerned QBs shall reimburse the BSPthe amount equivalent to forty percent (40%)of the twenty percent (20%) FWT duethereon. However, QBs which choose topay the whole twenty percent (20%) FWTshall remit the amount equivalent to the sixtypercent (60%) balance thereof to the BIR,through the BSP as withholding agent. Inboth cases, payment of the FWT to the BSPshall be made on or before 03 April 2009,either in full or in three (3) installments:Provided, That a QB which intends to payin installments shall remit the firstpayment on or before 06 March 2009, thesecond on or before 20 March 2009 andthe last on or before 03 April 2009:Provided, further, That payments due shallbe deducted from the Regular DemandDeposit Account (RDDA) of concernedQBs. The BSP shall issue the certificate offinal withholding tax reflecting theamount of the FWT paid; and(3) Concerned banks shall issue thecorresponding debit authority to the BSPto cover the twenty percent (20%) FWTon their overnight reverse repo agreementswith the BSP mentioned in Item “2”above.(As amended by Circular Nos. 647 dated 03 March 2009,636 dated 17 December 2008 and 619 dated 22 August 2008)1Interest income payments from 01 January 2008 to 26 August 2008.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 2

§§ 4601Q.3 - 4611Q09.12.31§ 4601Q.3 (2008 - 4601Q.1) Settlementprocedures. Purchase and sale ofgovernment securities under repoagreements (GS/repo agreements) betweenand among banks and QBs and BSP inconnection with the latter’s open marketoperations shall be settled in accordancewith the provisions of the agreement for thePhilPaSS executed on 12 December 2002between the BSP and IHAP and anysubsequent amendments thereto.(As superseded by the agreement between the BSP and IHAPdated 12 December 2002)§§ 4601Q.4 - 4601Q.5 (Reserved)§ 4601Q.6 Bangko Sentral tradingwindows and services during public sectorholidays. The guidelines on BSP’s tradingwindows and services during public sectorholidays are shown in Appendix Q-50.(M-2008-025 dated 13 August 2008)Secs. 4602Q - 4610Q (Reserved)B. FINANCIAL INSTRUMENTSSec. 4611Q (2008 - 4603Q) Derivatives. AQB may engage in authorized derivativesactivities: Provided, That a QB:a. Understands, measures, monitorsand controls the risks assumed from itsderivatives activities;b. Adopts effective risks managementpractices whose sophistication arecommensurate to the risks being monitoredand controlled; andc. Maintains capital commensuratewith the risk exposures assumed.Further, a QB may engage in financialderivatives activities in accordance withthese guidelines. The transacting QB shallhave the responsibility to comply with theguidelines set out in this Section, includingthe relevant appendices, and otherapplicable laws, rules and regulationsgoverning derivatives transactions. In caseof derivatives instruments involving foreigncurrencies and/or other foreign currencydenominatedassets, the transacting QB shallobserve the pertinent foreign exchange(“FX”) rules and regulations. For purposesof these guidelines, a QB that transacts(i.e., transacting bank), whether as end-user,broker or dealer, in derivatives instrumentsis considered to be engaging in a derivativesactivity.Derivative is broadly defined as afinancial instrument that primarily derivesits value from the performance of anunderlying variable. For purposes of theseguidelines, a financial derivative is anyfinancial instrument or contract with all ofthe following characteristics:a. Its value changes in response to achange in a specified interest rate,financial instrument price, commodityprice, FX rate, index of prices or rates,credit spread, credit rating or credit indexor other variables not prohibited underexisting laws, rules and regulations (“theunderlying”);b. It requires either no initial netinvestment or an initial net investment thatis smaller than would be required for othertypes of contracts that would be expectedto have a similar response to changes inmarket factors; andc. It is settled at a future date.Financial derivatives activities shallalso include transactions in cashinstruments with embedded derivativesthat reshape the risk-return profile of thehost instrument, such as credit-linkednotes (“CLNs”) and their structuredproducts (“SPs”).A market participant may take any ofthe following roles in a derivativestransaction:a. An end-user is defined as a financialmarket participant that enters, for its ownaccount, in a derivatives transaction forlegitimate economic purposes. Thesepurposes may include, but are not limitedManual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 3

§§ 4611Q - 4611Q.209.12.31to, the following: hedging proprietarytrading, managing capital or funding costs,obtaining indirect exposures to desiredmarket factors, investment, yieldenhancement,and/or altering the riskrewardprofile of a particular item or anentire balance sheet.An end-user may be classifiedaccording to its financial sophistication:(1) Market counterparty - refers to FI,only with respect to the instruments forwhich it is authorized to engage in as adealer;(2) Institutional counterparty - refers toan institution which is not a marketcounterparty and has the level of net worth,knowledge, expertise, and experience todeal with financial derivatives;(3) Sophisticated individual end-user -refers to an individual who hasdemonstrated to the FI as having the levelof net worth, knowledge and experience indealing with financial products, includingfinancial derivatives. An individual mayregister as a sophisticated individual enduserwith the Centralized Applications andLicensing Group of the BSP.(4) Other end-user - this refers to allother institutional or individual clients notcategorized as market counterparty,institutional counterparty or sophisticatedindividual end-user.b. A broker is a financial marketparticipant that facilitates a derivativestransaction between a dealer and its client,for a fee or commission. Thecounterparties to the derivatives contractare the client and an authorized dealer.c. A dealer is defined as a financialmarket participant that engages in aderivatives activity as an originator ofderivatives products or as market-maker inderivatives products. A dealer can distributeits own derivatives products, including thoseof others. A dealer can also act as brokerand/or end-user of derivatives instruments.(As amended by Circular No. 668 dated 02 October 2009)§ 4611Q.1 (2008 - 4603.Q.1) Generallyauthorized derivatives activities. A QB mayenter in any financial derivatives transactionwith BSP-authorized dealers and brokerswithout need of prior BSP approval solelyfor hedging purposes: Provided, That itobserves all the requirements for hedgingtransactions under Philippines AccountingStandards (“PAS”): Provided further, That itobserves the provisions of Appendix Q-15.A trust department of a QB may enter,as an institutional counterparty, into anyfinancial derivatives with the BSP-approvedauthorized dealers and brokers, on behalfof its trustor/principal/s as may beauthorized by such trustor/principals/swithout need of prior BSP approval, solelyfor hedging purposes: Provided, That thetrust department observes all therequirements for hedging transactions underPAS: Provided further, That it observes theprovisions of Appendix Q-15.(As amended by Circular No. 668 dated 02 October 2009)§ 4611Q.2 (2008 - 4603Q.2) Activitiesrequiring additional derivatives authorityQB may apply for prior BSP approval ofadditional derivatives authority to engagein all other financial derivatives activitiesnot expressly allowed in Subsec. 4611Q.1.A QB may apply for two (2) or moreadditional authorities. A QB applying foradditional derivatives authority/ies musthave and maintain a risk managementsystem commensurate to the additionalauthority/ies being applied for, inaccordance with the provisions of AppendixQ-15 and meet other conditions specifiedunder this Subsection.a. Classification of additionalderivatives authority(1) Type 2 - Limited Dealer AuthorityA QB that is also an investment housemay apply for a Type 2 Authority. A QBwith Type 2 Authority may operate as adealer in specific types of derivativesproducts with specific underlying reference,Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 4

§ 4611Q.209.12.31as applied for by the QB: Provided, That aQB with Type 2 Authority shall complywith the sales and marketing guidelinesprescribed in Appendix Q-16. The Type 2Authority also carries authority to transactas broker and end-user of the said specificderivatives instruments.(2) Type 3 - Limited User AuthorityA QB or a trust department of a QB,may apply for a Type 3 Authority. A QB ora trust department of a QB with Type 3Authority may transact, as an end-user, inspecific types of derivatives product, withspecific underlying reference, as appliedfor by the QB, outside of those instrumentsthat meet the conditions under Subsec.4611Q.1. A Type 3 Authority will enablesaid QB or trust department to transact asend-user of derivatives instruments as maybe applied for by the QB or trustdepartment.(3) Type 4 - Special Broker AuthorityA QB that is also an investment housemay likewise apply for a Type 4 Authority.A QB with Type 4 Authority may facilitatea derivatives transaction between a BSPauthorizeddealer and end-user clients:Provided, That the QB, acting as broker,ensures that its client fully understands itslimited responsibility as a broker andobserves the provisions of Appendix Q-16.A QB with additional Type 2 or 4Authorities shall be responsible forcomplying with pertinent securities laws,rules and regulations.For purposes of this Subsection, thetypes of derivatives are classified asfollows: forwards, swaps and options.Underlying reference pertains to thefollowing: interest, foreign currencies/foreign exchange, equity, credit andcommodity.b. Qualification requirements. A QBapplying for additional authority to engagein additional derivatives activities shall:(1) Demonstrate adequate competencein its general operations as evidenced by:(a) CAMELS composite rating of at least“3” with a similar rating for Management,as applicable;(b) No unresolved major safety andsoundness issues that threaten liquidity orsolvency; and(c) Substantial compliance withregulations on anti-money laundering,corporate governance and risk management.(2) Hold capital commensurate to therisks assumed or to be assumed from thederivatives activities. A QB applying for orholding a Type 2 Limited Dealer Authorityor Type 3 Limited User Authorityautomatically agrees to be covered by allregulations prescribing capital for marketrisk, notwithstanding any provision to thecontrary. In addition, the BSP expects a QBapplying for or holding additional derivativesauthority to have adequate capital toaccommodate existing and future risks fromadditional and generally authorizedderivatives activities as well as risks arisingfrom the QB’s other business activities. Forthis purpose, the BSP may require capitalhigher than the minimum required underprudential regulations.(3) Have and maintain a riskmanagement system that conforms to theprinciples and complies with the minimumstandards prescribed in Appendix Q-15.(4) Demonstrate the relevance ofproposed derivatives activities to the QB’smain purpose as an institution. The BSPreserves the right to deny applicationswhose proposed derivatives activities donot reasonably fit the nature of theirbusiness operations.c. Applicability to trust department ofQBs. Trust departments of QBs may applyfor Type 3 Authority, provided they complywith the requirements prescribed andobserve the provisions of Appendix Q-15and Q-16.d. Application procedures. Theapplicant shall submit to the Capital MarketsSpecialist Group, SES of the BSP a writtenManual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 5

§§ 4611Q.2 - 4611Q.309.12.31application for additional derivativesauthority/ies accompanied by;(1) A copy of the board resolutionapproving the application for a specific typeof derivatives authority;(2) A notarized certification signedjointly by the president, treasurer, orequivalent trust officer and complianceofficer of the applicant QB stating that theQB complies with all the requirements forthe authority being applied for specified inSubsec. 4611Q.2; and(3) A list of the types of derivativesand underlying reference the QB intendsto engage in, including the followinginformation for each derivatives class ortype:(a) Target customers for suchderivatives;(b) The capacity in which the QBintends to engage in such derivatives;(c) Description of each type ofderivatives and underlying reference withwhich it will deal;(d) Analysis of the risks involved intransacting in each type of derivatives;(e) Procedures/methodologies that theQB will implement to measure, monitor(including risk management reports) andcontrol the risks inherent in the type ofderivatives;(f) Relevant accounting guidelines,including pro-forma accounting entries;(g) Analysis of any actual or potentiallegal/regulatory restrictions; and(h) Process flow chart, from dealinitiation to risk reporting, indicating thedepartments and personnel involved inidentified processes.(4) The BSP will not accept applicationslacking any of the above-statedrequirements. The BSP, however, mayrequire additional documents to aid itsevaluation of the application. By virtue ofthe application, the applicant automaticallyauthorizes the BSP to conduct an on-siteevaluation of the applicant’s riskmanagement capabilities, if this is deemednecessary.(5) Payment of the following nonrefundableprocessing fee shall be madeupon approval or denial of the QB’sapplication:AmountType 2 Authority P 50,000.00Type 3 Authority 25,000.00Type 4 Authority 25,000.00(6) A QB whose application foradditional derivatives authority/ies or anupgrade thereof (e.g., from Type 3 to Type2 Authority) has been denied cannot submita new application for additional derivativesauthorities until after six (6) months fromreceipt of denial. The same rule applies fora QB whose authorities have been limitedor downgraded.(7) A QB that holds an additionalderivatives authority may apply for additionalderivatives authorities (e.g., currentlyholding Type 3 Authority who wish to applyfor Type 4 Authority) or an upgrade thereofonly after the lapse of six (6) months fromthe grant of the previous additionalderivatives authority.(As amended by Circular No. 668 dated 02 October 2009)§ 4611Q.3 (2008 - 4603Q.3) Intragrouptransactions. All derivativestransactions between a QB and any of itssubsidiaries and affiliates shall comply withminimum risk management standards forrelated-party transactions outlined inAppendix Q-15 as part of the QB’s internalcontrol procedures. The BSP expects QBsto establish internal reporting andmonitoring system for derivatives activitiesfor related-party transactions. Failure tocomply with minimum standards shall be aground for citing non-compliance withprovisions under Subsecs. 4611Q.1 and4611Q.2 without prejudice to other BSPrules and regulations such as those relatedQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 6

§§ 4611Q.3 - 4611Q.609.12.31to corporate governance and unsafe andunsound banking practices.(As amended by Circular No. 668 dated 02 October 2009)§ 4611Q.4 (2008 - 4603Q.5) Accountingguidelines. A QB that engages in derivativesactivities must strictly account for suchtransactions in accordance with relevantPAS.(As amended by Circular No. 668 dated 02 October 2009)§ 4611Q.5 (2008 - 4603Q.6) Reportingrequirements. A QB engaged in anyderivatives transactions shall submit amonthly report on derivatives transactions/outstanding derivatives in accordance withthe format shown in Annex "A" of AppendixQ-16 within fifteen (15) banking days fromend of the reference month. The reports shallbe certified by the treasurer.(As amended by Circular No. 668 dated 02 October 2009)§ 4611Q.6 (2008 - 4603Q.7) Sanctionsa. Unauthorized transactionsSanctions prescribed under Sections36 and 37 of R.A. No. 7653 shall beimposed on any QB (including itsdirectors and officers) found to haveengaged in an unauthorized derivativesactivity.A QB undertaking unauthorizedderivatives activities may be consideredas conducting its business in an unsafeand unsound manner under Section 56 ofR.A. No. 8791.b. Delayed/Erroneous/InaccuratereportingQBs failing to submit the reportsrequired under Subsec. 4611Q.5 within theprescribed deadline shall be subject tomonetary penalties applicable for delayedreporting under existing regulations.Moreover, submission of incomplete,uncertified or improperly certified orotherwise erroneous reports shall beconsidered non-reporting, subject toapplicable penalties for amended/delayedreports. For purposes of imposing monetarypenalties, the reports shall be classifiedas a Category A-1 report. Habitual delayedor erroneous reporting may be a groundfor further sanction, including limitationof generally authorized activities and/oradditional authorities and/or suspensionof authority to engage in such derivativesactivities.c. Non-compliance with the provisionsof this Section, its Subsecsections andAppendices Q-15 and Q-16.Any QB found violating any of theprovision of Sec. 4111Q and its Subsectionsand/or Appendices Q-15 and Q-16 shall besanctioned with the penalties prescribedunder Sections 36 and 37 of R.A. No. 7653in accordance with the gravity/seriousnessof the offense taking into consideration thenumber of times the offense was committed,possible consequent losses on the clients,effect on the financial markets and otherrelevant factors.d. Curtailment of derivatives authorityThe BSP reserves the right to suspend,modify, downgrade, limit or revoke anyQB’s derivatives authority (including anyor all of those generally authorizedactivities) for prudential reasons as maybe evidenced by any or all of thefollowing:i. The QB is assigned a CAMELScomposite rating or componentManagement rating of lower than thatprescribed under Subsec. 4611Q.2 in themost recent regular examination.ii. The QB has not maintainedadequate risk management systems given thelevel and type of derivatives activities it hasengaged in as may be determined by the BSPin any on-site evaluation and confirmed bythe Monetary Board.iii. The Monetary Board has confirmedan SES finding that the QB has conductedbusiness in an unsafe and unsound manner.An erring QB may apply forreinstatement of its derivatives authorityManual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 6a

§§ 4611Q.6 - 4625Q.209.12.31only after six (6) months from lapse of theimplementation of the sanction, providedthe QB has satisfactorily addressed all theBSP concerns.(As amended by Circular No. 668 dated 02 October 2009)Secs. 4612Q - 4624Q (Reserved)Sec. 4625Q (2008 - 4603Q.14) Forwardand Swap TransactionsStatement of policy. It is the policy ofthe BSP to support the deepening of thePhilippine financial markets. In line withthis policy, customers may, thru FXforwards, hedge their market risks arisingfrom FX obligations and/or exposures:Provided, That forward sale of FX(deliverable and non-deliverable) may onlybe used when the underlying transaction iseligible for servicing by the banking systemunder FX Manual, as amended. Customersmay, likewise, cover their fundingrequirements thru FX swaps.QBs may only engage in FXforwards and swap transactions withcustomers if the latter is hedging marketrisk or covering funding requirements.There shall be no double/multiplehedging such that at any given point intime, the total notional amount of theFX derivatives transaction/s shall notexceed the amount of the underlying FXobligation/exposure.The customer shall no longer beallowed to buy FX from the bankingsystem for FX obligations/exposures thatare fully covered by deliverable FXforwards and FX swaps.The following guidelines, as well asminimum documentary requirements,shall cover FX forward and swaptransactions involving the Philippine pesobetween authorized dealer QBs and theircustomers.(As amended by Circular No. 591 dated 27 December 2007)§ 4625Q.1 (Reserved)§ 4625Q.2 (2008 - 4603Q.15) Definitionof termsa. Customers shall refer to:(1) resident banks (other than KBs andUBs) and non-bank BSP-supervised entities(NBBSEs) not authorized to engage in FXforwards and swaps as dealers;(2) resident non-bank entities; and(3) non-residents, both banks andnon-banks.b. Foreign exchange obligation shallrefer to an actual commitment to repatriateor pay to a non-resident or any AAB aspecific amount of foreign currency on apre-agreed date.c. Foreign exchange exposure shallrefer to an FX risk arising from an existingcommitment which will lead to an actualpayment of FX to, or receipt of FX assetsfrom, non-residents or any AAB based onverifiable documents on deal date. FX risksarising from BSP-registered foreigninvestments without specific repatriationdates are considered FX exposures.d. Resident shall refer to -(1) An individual citizen of thePhilippines residing therein; or(2) An individual who is not a citizenof the Philippines but is permanentlyresiding therein; or(3) A corporation or other juridicalperson organized under the laws of thePhilippines; or(4) A branch, subsidiary, affiliate,extension office or any other unit ofcorporations or juridical persons which areorganized under the laws of any countryand operating in the Philippines, exceptoffshore banking units (OBUs).e. Non-resident shall refer to anindividual, a corporation or other juridicalperson not included in the definition ofresident.f. Foreign exchange swap shall referto a transaction involving the actualexchange of two (2) currencies (principalamount only) on a specific date at a rateQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 6b

§§ 4625Q.2 - 4625Q.408.12.31agreed on deal date (the first leg), and areverse exchange of the same two (2)currencies at a date further in the future (thesecond leg) at a rate (different from the rateapplied to the first leg) agreed on deal date.g. Foreign exchange forward shallrefer to a contract to purchase/sell a specifiedamount of currency against another at aspecified exchange rate for delivery at aspecified future date three (3) or morebusiness days after deal date.h. Non-deliverable forward (NDF)shall refer to an FX forward contract whereonly the net difference between thecontracted forward rate and the market rateat maturity (i.e., the fixing rate) shall besettled on the forward date.(As amended by Circular No. 591 dated 27 December 2007)§ 4625Q.3 (2008 - 4603Q.16)Documentation. Minimum documentaryrequirements for FX forward and swaptransactions in Appendix Q-29 shall bepresented on or before deal date to the QBsunless otherwise indicated.FX selling QBs shall stamp thesupporting documents upon presentation bycustomers as follows:a. For hedging transactions: “FXHEDGED/DELIVERABLE” or “FX HEDGED/NON-DELIVERABLE”;b. For funding transactions:“FX SOLD”, indicating the contract date andamount involved, and signed by the QB’sauthorized officer. Copies of all duly markedsupporting documents shall be retained bythe QBs and made available to the BSP forverification. The retained copies shall alsobe marked “DOCUMENTS PRESENTED ASREQUIRED” and signed by the QB’sauthorized officer.(As amended by Circular No. 591 dated 27 December 2007)§ 4625Q.4 (2008 - 4603Q.17) Tenor/maturity and settlementa. Forward sale of FX (whetherdeliverable or non-deliverable). The tenor/maturity of such contracts shall not belonger than: (i) the maturity of theunderlying FX obligation; or (ii) theapproximate due date or settlement of theFX exposure. For deliverable FX forwardcontracts, the tenor/maturity shall beco-terminus with the maturity of theunderlying obligation or the approximatedue date or settlement of the FX exposure.This shall not preclude pre-termination ofthe contract due to prepayment of theunderlying obligation or exposure:Provided, That for foreign currency loans,prior BSP approval has been obtained forthe prepayment and a copy of suchapproval is presented to the QBcounterparty.b. FX Swaps - No restriction ontenor.c. Settlement of NDFs - All NDFcontracts with residents shall be settled inpesos.d. Remittance of FX proceeds ofdeliverable forward and swap contracts.FX proceeds of deliverable forwardand swap contracts shall be delivered bythe QB counterparty directly to thebeneficiaries concerned except for foreigninvestments where said FX proceeds arereconverted to Philippine pesos andre-invested in eligible peso instrumentssuch as those listed in Item “A.2.2” ofAppendix Q-29. For this purpose,beneficiaries shall refer to the FCDU ofa QB or a non-resident entity (e.g.,creditor, supplier, investor) to whom thecustomer is committed to pay/remit FX.(As amended by Circular No. 591 dated 27 December 2007)(Next page is Part VI - Page 7)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 6c

§§ 4625Q.5 - 4625Q.1408.12.31§ 4625Q.5 (Reserved)§ 4625Q.6 (2008 - 4603Q.18)Cancellations, roll overs or non-delivery ofFX forward and swap contracts. Allcancellations, roll-overs or non-delivery of allFX deliverable forward contracts and theforward leg of swap contracts shall be subjectto the following guidelines to determine thevalidity thereof:a. Eligibility test - Contracts must besupported by documents listed in AppendixQ-29 hereof.b. Frequency test - the reasonablenessof the cancellation, roll-over or non-deliveryshall be based on the results of the evaluationof the justification/explanation submitted byQBs as evidenced by appropriate documents.c. Counterparty test – the cancellationor roll-over of contracts must be dulyacknowledged by the counterparty to thecontract as shown in documents submittedby QBs, e.g., there should be conforme ofcounterparty as evidenced by the counterpartysignature on pertinent documents.d. Mark-to-Market test– the booking orrecording in the books of accounts of the profitor loss on contracts and cash flows/settlementto counterparties must be fully supported byappropriate documents such as authenticatedcopy of debit/credit tickets, schedules showingamong others, mark-to-market valuationcomputation, etc.(As amended by Circular No. 591 dated 27 December 2007)§ 4625Q.7 (2008 - 4603Q.19) Nondeliverableforward contracts with nonresidents.Only banks with expandedderivatives license may enter into NDFcontracts to sell FX to non-residents.§ 4625Q.8 (2008 - 4603Q.20)Compliance with Anti-Money Launderingrules. All transactions under Section 4625Q andSubsecs. 4625Q.2 to 4626Q.4 and 4625Q.6 to4625Q.9 shall comply with existing regulationson anti-money laundering under Sec. 4801Q.(As amended by Circular No. 591 dated 27 December 2007)§ 4625Q.9 (2008 - 4603Q.21) Reportingrequirements. QBs duly authorized to engagein derivatives transactions shall continue to becovered by the BSP’s existing reportingrequirements on financial derivatives.Cancellations, roll-overs or non-delivery ofdeliverable FX forward contracts and underthe forward leg of swap contracts shall bereported electronically in excel format to theBSP not later than five (5) business days afterreference month as indicated in Appendix Q-3.Swap contracts with counterpartiesinvolving purchase of FX by QBs at the initialleg shall likewise be reported electronicallyin excel format to the BSP not later thanfive (5) business days after reference monthas indicated in Appendix Q-3.The reports shall be transmitted to theInternational Department at iod@bsp.gov.ph,copy furnished the SDC.(As amended by Circular No. 591 dated 27 December 2007)§§ 4625Q.10 - 4625Q.13 (Reserved)§ 4625Q.14 (2008 - 4603.26) SanctionsViolations of 4625Q and Subsecs. 4625Q.2to 4626Q.4 and 4625Q.6 to 4625Q.9 shallbe subject to the penalty provisions under R.A.No. 7653 (The New Central Bank Act) andother existing banking laws and regulations.a. Monetary PenaltiesPer Calendar MonthDaily Penalty1 st business day P 10,0002 nd business day 20,0003 rd business day ofviolation, and onwards,or if the excess FXposition is 30% or moreof the allowable limits inany business day,regardless of whether aQB is in the first, second,third or more days ofviolation30,000b. In addition, the followingnon-monetary sanctions shall be imposedon the QB committing violationsconsidered as:Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 7

§§ 4625Q.14 - 4651Q.108.12.31(1) chronic, i.e., when the violationcontinues beyond three (3) business dayswithin a calendar month, but the excessposition is less than thirty percent (30%) ofthe allowable limit; and(2) abusive, i.e., when the violationcontinues beyond three (3) business dayswithin a calendar month and excess positionis thirty percent (30%) or more of theallowable limit."Chronic" Suspension of the QB’s cash dividendviolationdeclaration and branching privilegesuntil the violation is corrected but inno case shall such suspension be lessthan thirty (30) calendar days." Abusive" Suspension of the QB's cash dividendviolationdeclaration and branching privilegesuntil the violation is corrected but inno case shall such suspension be lessthan sixty (60) calendar days.c. The Monetary Board may imposeother non-monetary sanctions on a QB forviolations determined by BSP as “chronic”or “abusive” on a case-to-case basis,pursuant to Section 37 of R.A. No. 7653.d. QBs shall be duly advised by theBSP of their violations and thecorresponding sanctions imposed for suchviolations.e. A monetary penalty imposed on aQB shall be paid to the BSP CashDepartment, within three (3) business daysfrom the receipt of advice of said penaltyimposition.For purposes of imposing sanctions fordelayed, erroneous or unsubmittedreports, reports required under Subsec.4625Q.9 are classified as Category Breports and subject to correspondingpenalties.Counterparties that habitually canceldeliverable forwards without properjustification may be subject of a BSPwatchlist.(As amended by Circular No. 591 dated 27 December 2007)Secs. 4626Q - 4650Q (Reserved)Sec. 4651Q (2008 - 4626Q) Asset-BackedSecurities. The following regulations shallgovern the origination, issuance, sale,servicing and administration of assetbackedsecurities (ABS) by any QBincluding its subsidiaries and affiliatesengaged in allied activities, which aredomiciled in the Philippines.§ 4651Q.1 (2008 - 4626Q.1) Definitionof termsa. Assets shall mean loans orreceivables existing in the books of theoriginator prior to securitization. Suchassets are generated in the ordinary courseof business of the originator and mayinclude mortgage loans, consumptionloans, trade receivables, lease receivables,credit card receivables and other similarfinancial assets.b. Asset-backed securities shall refer tothe certificates issued by a special purposetrust (SPT) representing undividedownership interest in the asset pool.c. Asset pool shall mean a group ofidentified, self-amortizing assets that isconveyed to the SPT issuing the ABS andsuch other assets acquired as aconsequence of the securitization.d. Clean-up call shall refer to an optiongranted to the seller to purchase theremaining assets in the asset pool.e. Credit enhancement shall refer toany legally enforceable scheme that isintended to enhance the marketability ofthe ABS and increase the probability thatinvestors receive payment of amounts duethem.f. Guarantor shall refer to an entitythat guarantees the repayment of principaland interests on loans or receivablesincluded in the asset pool in the event ofdefault by the borrower.g. Investible funds shall refer to theproceeds of collection of loans or receivablesincluded in the asset pool which are not yetdue for distribution to investors.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 8

§§ 4651Q.1 - 4651Q.408.12.31h. Issuer shall refer to the SPT thatissues the ABS.i. Originator shall refer to a QB and/or its subsidiary or affiliate engaged in alliedactivities that grants or purchases loans orreceivables and assembles them into a poolfor securitization.j. Residual certificates shall refer tocertificates issued representing claims on theremaining value of the asset pool after allABS holders are paid.k. Seller shall refer to the entity whichconveys to the SPT the assets that constitutethe asset pool.l. Servicer shall refer to the entitydesignated by the issuer primarily tocollect and record payments received onthe assets, to remit such collections to theissuer and perform such other services asmay be specifically required by the issuerexcluding asset management oradministration.m. Special purpose trust shall refer toa trust administered by a trustee and createdsolely for the purpose of issuing andadministering an ABS.n. Trustee shall refer to the entitydesignated to administer the SPT.o. Underwriter shall refer to the entityengaged in the act or process of distributingand selling of the ABS either on guaranteedor best-efforts basis.§ 4651Q.2 (2008 - 4626Q.2) AuthorityAny QB including its subsidiaries andaffiliates engaged in allied activities,may securitize its assets upon priorapproval of the BSP.§ 4651Q.3 (2008 - 4626Q.3) Managementoversight. The originator/seller shall havethe securitization program approved by itsboard of directors. The originator/seller shallintegrate such securitization program intoits corporate strategic plan. The board ofdirectors shall ensure that the securitizationof assets is consistent with such program.§ 4651Q.4 (2008 - 4626Q.4) Minimumdocuments required. The application tosecuritize must be accompanied by thefollowing documents as a minimumrequirement:a. Trust indenture evidencing theconveyance of the assets from the seller tothe issuer or SPT, the features of which shallinclude the following:(1) Title or nature of the contract innoticeable print;(2) The parties involved, indicating innoticeable print, their respective legalcapacities, responsibilities and functions;(3) Features and amount of ABS;(4) Purposes and objectives;(5) Description and amount of assetscomprising the asset pool;(6) Representation and warranties;(7) Credit enhancements;(8) Distribution of funds;(9) Authorized investment ofinvestible funds;(10) Rights of the investor;(11) Reports to investors; and(12) Termination and final settlement.The trust indenture shall include asannexes the servicing agreement betweenthe trustee and the servicer and theunderwriting agreement between the sellerand the underwriter.b. Prospectus. As a minimumrequirement, it shall contain the following:(1) Summary of the contents of theprospectus;(2) Description of each class ofcertificates, including such matters asprobable yields, payment dates and priorityof payments;(3) Description of the assetscomprising the asset pool as well as therepresentations and warranties set forth bythe originator and/or seller;(4) Assumptions underlying the cashflow projections for each class of certificate;(5) Description of any creditenhancement;Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 9

§§ 4651Q.4 - 4651Q.708.12.31(6) Identity of the servicer; and(7) Disclosure statements asrequired under Subsec. 4651Q.6.c. Specimen of application topurchase ABS. It shall include the termsand conditions of the purchase and thedisclosures required under Subsec.4651Q.6.d. Specimen of certificate. It shallindicate the features of the ABS and thedisclosures required under Subsec.4651Q.6.§ 4651Q.5 (2008 - 4626Q.5)Minimum features of asset-backedsecurities. The ABS shall be pre-numberedand printed on security paper. The ABSshall be signed and authenticated by thetrustee. They are transferable byendorsement of the certificate. The transfershall be recorded in the books of thetrustee, indicating the names of the partiesto the transaction, the date of the transferand the number of the certificatetransferred.The minimum denomination of anyABS shall be P10,000.§ 4651Q.6 (2008 - 4626Q.6)Disclosures. The following disclosuresmust be provided in a conspicuousmanner in any document invitinginvestment, application to purchase ABSand in the certificate itself:a. The ABS do not represent depositsubstitutes or liabilities of the originator,servicer or trustee and that they are notinsured with PDIC;b. The investor has investmentrisks;c. The trustee does not guaranteethe capital value of the ABS or thecollectibility of the asset pool; andd. The rights of an investor.The investors shall be required to signan acknowledgment indicating that theyhave read and understood the disclosures.§ 4651Q.7 (2008 - 4626Q.7) Conveyanceof assetsa. The conveyance of the assetscomprising the asset pool shall be donewithin the context of a true sale and, for thispurpose, the seller may not retain in its booksthe ABS, except the residual certificate, ifany.b. The seller shall have no obligationto repurchase or substitute an asset or anypart of the asset pool at any time, except incases of a breach of representation orwarranty, or under a revolving structure, toreplace performing assets which have beenpaid out in part or in full.c. The seller shall be under noobligation to provide additional assets to theSPT to maintain a coverage ratio of collateralto outstanding ABS. A breach of thisrequirement will be considered a creditenhancement and should be charged againstcapital. However, this will not apply to anasset pool conveyed under a revolvingstructure such as the securitization of creditcard receivables.d. Securitized assets shall beconsidered the subject of a true salebetween the seller and the SPT. Soldassets shall be taken off the books of theseller and shall be transferred to the booksof the SPT.For accounting purposes, the transfershall only be considered a true sale if thefollowing three (3) conditions have beensatisfied:(1) the transferred assets have beenisolated and put beyond the reach of theseller and its creditor;(2) the SPT has the right to pledge orexchange its interest in the assets; and(3) the seller does not effectivelymaintain control over the transferred assetsby any concurrent agreement.e. All expenses incidental tounderwriting, conveyance of the asset poolincluding expenses for credit enhancementmay be paid by the originator/seller:Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 10

§§ 4651Q.7 - 4651Q.1208.12.31Provided, That no further expenses shallbe borne by the originator/seller after theasset pool has been conveyed to the SPT.§ 4651Q.8 (2008 - 4626Q.8)Representations and warrantiesa. Standard representations andwarranties refer to an existing state of factsthat the originator, seller or servicer caneither control or verify with reasonable duediligence at the time the assets are sold. Anybreach of representation or warranty maygive rise to legal recourse.b. The representations or warrantiesshall be clear and explicit and, in particular,shall not relate to the future creditworthinessof the assets in the asset pool or theperformance of the SPT or the securitiesissued.c. Any agreement to pay damages as aresult of breach of warranties andrepresentations shall hold only where:(1) there is a well-documentednegotiation of the agreement in good faith;(2) the burden of proof for a breach ofrepresentation or warranty rests with theother party;(3) damages are limited to the lossincurred as a result of the breach; and(4) there is a written notice of claimspecifying the basis for the claim.The BSP shall be notified of any instancewhere a QB or its subsidiaries/affiliates hasagreed to pay damages arising out of anybreach of representation or warranty.§ 4651Q.9 (2008 - 4626Q.9) Thirdparty review. A due diligence review by anindependent entity mutually agreed uponby the seller and the issuer shall be donebefore the assets are sold.§ 4651Q.10 (2008 - 4626Q.10)Originator and sellera. The seller may itself be theoriginator, and may likewise be designatedas the servicer.b. The seller or originator shall deliverto the trustee all original documents orinstruments with respect to each asset sold.§ 4651Q.11 (2008 - 4626Q.11) Trusteeand issuera. The trustee shall be the trustdepartment of a bank licensed to do businessin the Philippines.b. The trustee shall have the right tomanage or administer the asset pool. Thetrustee shall see to it that necessarymeasures are taken to protect the assetpool.c. The trustee shall undertake aperformance review of the asset pool at leastquarterly and shall prepare a report to investorsindicating, among others, collections, fees andother expenses as well as defaults, whichreport shall be made available to the investorsat anytime after thirty (30) days from end ofthe reference quarter.d. The trustee shall initiate all civilactions including foreclosure of mortgagedproperties to effect collection of receivablesin the asset pool. The servicer or any otherparty may be designated by the trustee toperform such function on a case-by-case basis.e. The trustee may invest the investiblefunds only in obligations issued and/or fullyguaranteed by the government of theRepublic of the Philippines or by the BSPand such other high-grade readily marketabledebt securities as the BSP may approve.f. The trustee shall designate areplacement of the servicer if the latter failsto satisfactorily perform its duties andresponsibilities according to the terms andconditions of the servicing agreement.§ 4651Q.12 (2008 - 4626Q.12) Servicera. The servicer shall perform its dutiesaccording to the terms and conditions ofthe servicing agreement and such otherwritten instructions as the trustee may issueon a case-by-case basis. Collections madeby the servicer shall be remitted promptlyManual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 11

§§ 4651Q.12 - 4651Q.1508.12.31to the trustee or as may be agreed upon bythe parties in the servicing agreement, butin no case shall the remittance period belonger than one (1) month.b. The servicer shall prepare periodicreports as may be required by the trustee.c. The servicer shall report to thetrustee within thirty (30) days any borrowerwhich fails to pay its debt at maturity dateor any adverse development that may affectthe collectibility of any loan account orreceivable comprising the asset pool.d. The servicer shall have no authorityto waive penalties and charges except witha written authority from the trustee.§ 4651Q.13 (2008 - 4626Q.13)Underwritera. A UB or IH shall have written policiesand procedures on underwriting of ABS.b. The underwriter shall perform itsfunctions according to the terms andconditions of the underwriting agreement.c. An underwriter may deal in ABS,except those administered by its trustdepartment, the trust departments of itssubsidiaries/affiliates, the trust departmentof its parent bank or the trust department ofits parent bank’s subsidiaries/affiliates.d. A UB/IH may act as underwriter, ona firm basis, of ABS except thoseadministered by its trust department, thetrust departments of its subsidiaries/affiliates,the trust department of its parent bank orthe trust department of its parent bank’ssubsidiaries/affiliates.e. The underwriter may not extendcredit for the purpose of purchasing the ABSwhich such UB/IH underwrites or thatwhich is underwritten by its subsidiaries/affiliates, its parent bank or its parent bank’ssubsidiaries/affiliates.§ 4651Q.14 (2008 - 4626Q.14) Guarantora. Only an entity the regular businessof which includes the issuance of guaranteesor similar undertaking may act as guarantor.b. The guarantor must have thefinancial capacity to perform itsresponsibilities in accordance with the termsand conditions of the guarantee agreement.It shall submit to the trustee at least once inevery six (6) months such financial reportsas the trustee may require.c. The originator or seller may not issuea counter-guarantee in favor of the guarantor.§ 4651Q.15 (2008 - 4626Q.15) Creditenhancement. Credit enhancement may beprovided in any of the following manner:a. Standby letter of credit issued by anUB/KB other than the originator’s/seller’ssubsidiary/affiliate, parent bank or the parentbank’s subsidiary/affiliate, and trustee or itssubsidiary/affiliate.b. Surety bond issued by any insurancecompany other than the originator’s/seller’ssubsidiary or affiliate, the subsidiary oraffiliate of the originator’s seller’s parentbank and the trustee or its subsidiary/affiliate.c. Guarantee issued by any entityother than the originator/seller or itssubsidiary/affiliate, its parent bank or theparent bank’s subsidiary/affiliate, andtrustee or its subsidiary/affiliate.d. Overcollateralization provided bythe originator/seller wherein the assetsconveyed to the SPT exceed the amountof securities to be issued.Losses arising from overcollateralizationshall be recognized by the originator/sellerupfront. Such losses shall be treated ascapital charges.e. Spread account wherein the incomefrom the underlying pool of receivables ismade available to cover any shortfall in therepayment of ABS. The spread account shallbe handled by the trustee which shallaccount for it separately. If not needed, this“spread” generally reverts to the holder ofthe residual certificate.f. Subordinated securities that arelower ranking, or junior to other obligationsQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 12

§§ 4651Q.15 - 4651Q.1908.12.31and are paid after claims to holders of seniorsecurities are satisfied.g. Other credit enhancements as maybe approved by the Monetary Board.To be consistent with the concept of atrue sale, subordinated securities shall besold to third party investors other than theoriginator’s/seller’s parent company or itssubsidiary/affiliate and the trustee or itssubsidiary/affiliate or, if held by the seller,capital charges should be booked upfront.Otherwise, the subordinated securities shallbe treated as deposit substitute subject tolegal reserves.§ 4651Q.16 (2008 - 4626Q.16) Cleanupcall. A clean-up call may be exercisedby the seller once the outstandingprincipal balance of the receivablecomponent of the asset pool falls to tenpercent (10%) or less of the originalprincipal balance of the asset pool. Wherethe asset pool includes foreclosed andother assets, such assets shall be includedin the clean-up call and the considerationthereof shall be at current market value. Sucha clean-up call shall not be consideredrecourse or in violation of Subsec. 4651Q.7on conveyance of assets.§ 4651Q.17 (2008 - 4626Q.17) Prohibitedactivitiesa. The seller may not, under anycircumstance, designate its trust department,the trust department of its subsidiaries/affiliates, the trust department of its parentbank or the trust department of its parentbank’s subsidiaries/affiliates as trustee.b. Any director, officer or employee ofthe originator, seller or servicer may notserve as a member of the board of directorsor trust committee of the trustee or vice versafor the duration of the securitization.c. The trust indenture shall not containany stipulation whereby the seller, itssubsidiaries/affiliates, its parent bank or theparent bank’s subsidiaries/affiliates shallcommit to extend any credit facility to theissuer and/or trustee.d. The ABS shall not be eligible ascollateral for a loan extended by a QB whichoriginated/sold the underlying assets of suchABS.e. The trust department of a bank thathas discretion in the management of anytrust or investment management accountmay not purchase for said trust/investmentmanagement account ABS administered bythe trust department of the same bank, thetrust department of such trustee’ssubsidiaries/affiliates, the trust departmentof such trustee’s parent bank and the trustdepartment of the parent bank’s subsidiaries/affiliates.The trustee may not designate itssubsidiary/affiliate, its parent or the parent’ssubsidiaries/affiliates as servicer or viceversa.§ 4651Q.18 (2008 - 4626Q.18)Amendment. Any amendment to the trustindenture shall require the prior approvalof the BSP.§ 4651Q.19 (2008 - 4626Q.19)Miscellaneous provision. Without priorapproval of the BSP, any entity supervisedby the BSP authorized to engage in trustand fiduciary business may act as trusteeor servicer in a securitization schemeoriginated by an entity not supervised bythe BSP: Provided, That the assets whichare the subject of such securitization areexisting in the books of the entity prior tosecuritization: Provided, further, Thatsuch entity acting as trustee or servicer isnot a subsidiary/affiliate of the originator/seller, its parent bank or the parent bank’ssubsidiaries/affiliates or vice versa:Provided, finally, That such entity actingas trustee may not designate its subsidiaries/affiliates, its parent or the parent’ssubsidiaries/affiliates as servicer or viceversa.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart VI - Page 13

§§ 4651Q.20 - 4699Q08.12.31§ 4651Q.20 (2008 - 4626Q.20) Reportto Bangko Sentral. The trustee shall submit areport of every securitization scheme informats to be prescribed by the BSP. The reportshall be submitted to the appropriatedepartment of the SES, within fifteen (15)business days after the end of every referencequarter. Such report shall be considered aCategory A report for purposes of implementingfines in the submission of required reportspursuant to existing regulations.Secs. 4652Q - 4698Q (Reserved)C. GENERAL PROVISION ONSANCTIONSSec. 4699Q General Provision on SanctionsUnless otherwise provided, any violationof the provisions of this Part shall be subjectto Sections 36 and 37 of R.A. No. 7653.The guidelines for the impositionof monetary penalty for violations/offenseswith sanctions falling under Section 37of R.A. No. 7653 on QBs, theirdirectors and/or officers are shown inAppendix Q-39.Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart VI - Page 14

§§ 4701Q - 4701Q.209.12.31PART SEVENELECTRONIC OPERATIONS AND OTHER SERVICESSection 4701Q Electronic Services. Thefollowing are the guidelines concerningelectronic activities.(Circular No. 649 dated 09 March 2009)§ 4701Q.1 Application. QBs wishingto provide and/or enhance existingelectronic services shall submit to the BSPan application describing the services to beoffered/enhanced and how it fits the QB’soverall strategy. This shall be accompaniedby a certification signed by its president orany officer of equivalent rank and functionto the effect that the QB has complied withthe following minimum pre-conditions:a. An adequate risk managementprocess is in place to assess, control,monitor and respond to potential risksarising from the proposed electronicservices;b. A manual on corporate securitypolicy and procedures exists that shalladdress all security issues affecting itselectronic services, particularly thefollowing:(1) Authentication – establishes theidentity of both the sender and the receiver;uses trusted third parties that verify identitiesin cyberspace;(2) Non-repudiation – ensures thattransactions cannot be repudiated orpresents undeniable proof of participationby both the sender and the receiver in atransaction;(3) Authorization – establishes andenforces the access rights of entities (bothpersons and/or devices) to specifiedcomputing resources and applicationfunctions; also locks out unauthorizedentities from physical and logical access tothe secured systems;(4) Integrity – assures that data have notbeen altered; and(5) Confidentiality – assures that no oneexcept the sender and the receiver of thedata can actually understand the data.c. The system had been tested prior toits implementation and that the test resultsare satisfactory. As a minimum standard,appropriate systems testing and useracceptance testing should have beenconducted; andd. A business continuity planningprocess and manuals have been adoptedwhich should include a section onelectronic services channels and systems.(Circular No. 649 dated 09 March 2009)§ 4701Q.2 Pre-screening of applicantsa. The BSP, thru the Technical WorkingGroup on Electronic Banking, shall pre-screenthe overall financial condition as well as theapplicant-QB’s compliance with BSP rulesand regulations based on the latest availableBank Performance Rating equivalent for QBsand Report of Examination (ROE) includingCAMELS Rating.b. The Working Group shall ensurethat the applicant QB’s overall financialcondition can adequately support itselectronic services that it shall havecomplied with certain comprehensiveprudential requirements such as, but notlimited to, the following:(1) Minimum capital requirement andnet worth to risk assets ratio;(2) Satisfactory solvency, liquidity andprofitability positions;(3) CAMELS composite rating of at least"3", (this rating, however can be flexibledepending on other circumstancesprevailing), and with at least a moderate riskManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VII - Page 1

§§ 4701Q.2 - 4701Q.509.12.31assessment system (RAS) based on the latestregular examination.(4) There are no uncorrected majorfindings/exceptions noted in the latest BSPexamination.(Circular No. 649 dated 09 March 2009)§ 4701Q.3 Approval in principlea. Based on the recommendation ofthe Technical Working Group onElectronic Banking, the Deputy Governor,SES, shall approve in principle theapplication so that QBs may immediatelylaunch and/or enhance their existingelectronic services.b. QBs shall be informed of theconditional approval of the DG, SES andthey shall in turn notify the BSP on the actualdate of its launching/enhancement.(Circular No. 649 dated 09 March 2009)§ 4701Q.4 Documentary requirementsa. Within thirty (30) calendar daysfrom such launching/enhancement, QBsshall submit to the BSP thru the SDC forevaluation, the following documentaryrequirements:(1) A discussion on the services to beoffered/enhanced, the business objectivesfor such services and the correspondingprocedures, both automated and manual,offered through the electronic serviceschannels;(2) A description or diagram of theconfiguration of the QB’s electronic servicessystem and its capabilities showing:(i) how the electronic services systemis linked to other host systems or the networkinfrastructure in the QB;(ii) how transaction and data flowthrough the network;(iii) what types of telecommunicationschannels and remote access capabilities(e.g., direct modem dial-in, internet access,or both) exist; and(iv) what security controls/measures areinstalled;(3) A list of software and hardwarecomponents indicating the purpose of thesoftware and hardware in the electronicservices infrastructure;(4) A description of the security policiesand procedures manual containing:(i) description of the QB’s securityorganization;(ii) definition of responsibilities fordesigning, implementing, and monitoringinformation security measures; and(iii) established procedures forevaluating policy compliance, enforcingdisciplinary measures and reporting securityviolations;(5) A brief description of thecontingency and disaster recovery plans forelectronic facilities and event scenario/problem management plan/program toresolve or address problems, such ascomplaints errors and intrusions and theavailability of back-up facilities;(6) Copy of contract with thecommunications carrier, arrangements forany liability arising from breaches in thesecurity of the system or from unauthorized/fraudulent transactions;(7) Copy of the maintenanceagreements with the software/hardwareprovider/s; and(8) Latest report on the periodic reviewof the system, if applicable.b. If after the evaluation of the submitteddocuments, the Working Group has still someunresolved issues and gray areas, the QBmay be required to make a presentation ofits electronic transactions to BSP.(Circular No. 649 dated 09 March 2009)§ 4701Q.5 Conditions for MonetaryBoard approval. Upon completion ofevaluation, the appropriate recommendationshall be made to the Monetary Board. Thefollowing shall be the standard conditions forapproval:a. Existence at all times of appropriatetop-level risk management oversight;Q RegulationsPart VII - Page 2Manual of Regulations for Non-Bank Financial Institutions

§§ 4701Q.5 - 4701Q.1209.12.31b. Operation of electronic systemoutsourced to a third party service providertaking into consideration the existence ofadequate security controls and theobservance of confidentiality [as requiredin R.A. No. 1405 (Bank Secrecy Law)] ofcustomer information;c. Adoption of measures to properlyeducate customers on safeguarding of userID, PIN and/or password, use of QB’sproducts/services, actual fees/QB chargesthereon and problem/error resolutionprocedures;d. Clear communication with itscustomers in connection with the terms andcondition which would highlight how anylosses from security breaches, systemsfailure or human error will be settledbetween the QB and its customers;e. Customer’s acknowledgement inwriting that they have understood theterms and conditions and thecorresponding risks that entail in availingelectronic service;f. The QB’s oversight process shallensure that business expansion shall notput undue strains on its systems and riskmanagement capability;g. The establishment of procedures forthe regular review of the QB’s securityarrangements to ensure that sucharrangements remain appropriate havingregard to the continuing developments insecurity technology;h. Strict adherence to BSP regulationson fund transfers in cases where clientsuse the electronic services to transferfunds;i. The electronic service shall not beused for money laundering or other illegalactivities that will undermine the confidenceof the public; andj. The BSP shall be notified in writingthirty (30) days in advance of anyenhancements that may be made to theonline electronic service.(Circular No. 649 dated 09 March 2009)§ 4701Q.6 Requirements for quasibankswith pending applications. The sameprocedure and requirements stated in theforegoing shall apply to all QBs withpending applications with the BSP, excepton the submission of the documentsenumerated in Subsec. 4701Q.4. QBswhich have already submitted all therequired information/documents need notcomply with this requirement.(Circular No. 649 dated 09 March 2009)§ 4701Q.7 Exemption. Electronicservices that are purely informational innature are exempted from these regulations:Provided, however, That should suchservices be upgraded to transactionalservice, then prior BSP approval shall berequired.(Circular No. 649 dated 09 March 2009)§ 4701Q.8 Transitory provision. QBswith existing electronic services but do notqualify as a result of the pre-screeningprocess mentioned in Subsec. 4701Q.2,shall be given three (3) months from21 December 2000, within which toshow proof of improved overall financialcondition and/or substantial compliancewith BSP’s prudential requirements,otherwise, their electronic activities willbe temporarily suspended until suchtime that the same have been compliedwith.(Circular No. 649 dated 09 March 2009)§§ 4701Q.9 - 4701Q.11 (Reserved)§ 4701Q.12 Sanctions. For failure toseek BSP approval before launching/enhancing/implementing electronicservices, and/or submit within theprescribed deadline the requiredinformation/documents, the followingmonetary penalties and/or suspension ofelectronic activities or both, shall beimposed on erring QBs and/or its officers:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VII - Page 3

§§ 4701Q.12 - 4780Q.409.12.31Monetary Penalties Amounta. For responsible officer/s P200,000and/or director/s - for (one-timefailure to seek prior BSP penalty)approval and/or fornon-submission/delayedsubmission of requiredinformation/documentsb. On the QB - for failure P30,000 per dayto seek prior BSP starting from theaproval and/or for day the offensenon-submission/delayed was committedsubmission of required up to the timeinformation documents the same wascorrected(Circular No. 649 dated 09 March 2009)§ 4701Q.13 Outsourcing of internet andmobile electronic services. Outsourcing ofinternet and mobile electronic services shallbe governed by Item "c" of Appendix Q-37.(Circular No. 649 dated 09 March 2009)Secs. 4702Q - 4779Q (Reserved)Sec. 4780Q Issuance and Operations ofElectronic Money. The following guidelinesshall govern the issuance of electronicmoney (e-money) and the operations ofelectronic money issuers (EMIs).(Circular No. 649 dated 09 March 2009)§ 4780Q.1 Declaration of policy. It isthe policy of the BSP to foster thedevelopment of efficient and convenientretail payment and fund transfer mechanismin the Philippines. The availability andacceptance of e-money as a retail paymentmedium will be promoted by providing thenecessary safeguards and controls tomitigate the risks associated in an e-moneybusiness.(Circular No. 649 dated 09 March 2009)§ 4780Q.2 DefinitionsE-money shall mean monetary value asrepresented by a claim on its issuer, that is -a. electronically stored in aninstrument or device;b. issued against receipt of funds of anamount not lesser in value than themonetary value issued;c. accepted as a means of payment bypersons or entities other than the issuer;d. withdrawable in cash or cashequivalent; ande. issued in accordance with thisSection.Electronic money issuer (EMI) shall beclassified as follows:a. Banks (hereinafter called EMI-Bank);b. NBFI supervised by the BSP(hereinafter called EMI-NBFI); andc. Non-bank institutions registeredwith the BSP as a money transfer agentunder Sec. 4511N of the MORNBFI(hereinafter called EMI-Others).For purposes of this Section:a. Electronic instruments or devicesshall mean cash cards, e-wallets accessiblevia mobile phones or other access device,stored value cards, and other similarproducts.b. E-money issued by QBs shall not beconsidered as deposits.(Circular No. 649 dated 09 March 2009)§ 4780Q.3 Prior Bangko Sentralapproval. QBs planning to be an EMI-NBFIshall comply with the requirements ofSec. 4701Q and Sec. 4162Q, whenapplicable.(Circular No. 649 dated 09 March 2009)§ 4780Q.4 Common provisions. Thefollowing provisions are applicable to allEMIs:a. E-money instrument issued shallbe subject to aggregate monthly load limitof P100,000 unless a higher amount hasbeen approved by BSP. In case an EMIissues several e-money instruments to aperson (e-money holder), the total amountloaded in all the e-money instrumentsQ RegulationsPart VII - Page 4Manual of Regulations for Non-Bank Financial Institutions

§ 4780Q.409.12.31shall be consolidated in determiningcompliance with the aggregate monthlyload limit;b. EMIs shall put in place a systemto maintain accurate and complete recordof e-money instruments issued, theidentity of e-money holders, and theindividual and consolidated balancesthereof. The system must have thecapability to monitor the movement ofe-money transactions and link e-moneyinstruments issued to common e-moneyholders. The susceptibility of a system tointentional or unintentional misreportingof transactions and balances shall besufficient ground for imposition by theBSP of sanctions, as may be applicable.c. E-money may only be redeemed atface value. It shall not earn interest norrewards and other similar incentivesconvertible to cash, nor be purchased ata discount. E-money is not considered adeposit, hence, it is not insured with thePDIC.d. EMIs shall ensure that e-moneyinstruments clearly identify the issuer whois ultimately responsible to the e-moneyholders. This shall be communicated tothe client who shall acknowledge thesame in writing.e. It is the responsibility of EMIs toensure that their distributors/e-moneyagents comply with all applicablerequirements of the Anti-MoneyLaundering laws, rules and regulations.f. EMIs shall provide an acceptableredress mechanism to address thecomplaints of its customers.g. EMIs shall disclose in writing andits customers shall signify agreement tothe information embodied in Item “c”above upon their participation in thee-money system. In addition, it shallprovide clear guidance in English andFilipino on consumers’ right ofredemption, including conditions and feesfor redemption, if any. Information onavailable redress procedures forcomplaints together with the address andcontact information of the issuer shall alsobe provided.h. Prior to the issuance of e-money,EMIs should ensure that the followingminimum systems and controls are in place:(1) Sound and prudent management,administrative and accounting proceduresand adequate internal controlmechanisms;(2) Properly-designed computersystems which are thoroughly tested priorto implementation;(3) Appropriate security policies andmeasures intended to safeguard theintegrity, authenticity and confidentialityof data and operating processes;(4) Adequate business continuity anddisaster recovery plan; and(5) Effective audit function to provideperiodic review of the security controlenvironment and critical systems.i. EMIs shall provide the SDCquarterly statements containing, amongothers, information on investments,volume of transactions, total outstandinge-money balances, and liquid assets insuch forms as may be prescribed later on.j. EMIs shall notify BSP in writing ofany change or enhancement in thee-money facility thirty (30) days prior toimplementation. If said change orenhancement requires prior BSP approval,the same shall be evaluated accordingly.Any change or enhancement that shallexpand the scope or change the nature ofthe e-money instrument shall be subjectto prior approval of the Deputy Governor,SES. These changes or enhancements mayinclude the following:(1) Additional capabilities of thee-money instrument/s, like access to newManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VII - Page 5

§§ 4780Q.4 - 4780Q.1110.12.31channels (e.g. inclusion of internetchannel in addition to merchant Point ofSale terminals);(2) Change in technology serviceproviders and other major partners in thee-money business (excluding partnermerchants), if any; and(3) Other changes or enhancements.(Circular No. 649 dated 09 March 2009)§ 4780Q.5 Quasi-bank licenserequirement. EMI-NBFIs and EMI-Othersthat engage in lending activities must securea quasi-banking license from the BSP.(Circular No. 649 dated 09 March 2009)§ 4780Q.6 Sanctions. Monetarypenalties and other sanctions for thefollowing violations committed by EMI-NBFIs shall be imposed:Nature of Violation/ Sanction/PenaltiesException1. Issuing e-money Applicable penaltieswithout prior BSP under Sections 36 &approval 37 of R.A. No. 7653;Watchlisting ofowners/partners/principal officers2. Violation of any Applicable penaltiesof the provisions of prescribed under theR.A. No. 9160 (Anti- ActMoney LaunderingLaw of 2001 asamended by R.A.No.9194) and itsimplementing rulesand regulations3. Violation/s of Penalties and sanctionsthis Sectionunder theabovementioned lawsand other applicablelaws rules andregulationsIn addition, the susceptibility of a system tointentional or unintentional misreporting oftransactions and balances shall be sufficientground for appropriate BSP action orimposition of sanctions, whenever applicable.(Circular No. 649 dated 09 March 2009)§ 4780Q.7 Transitory provisionsEMI-NBFIs granted an authority to issuee-money prior to 26 March 2009 maycontinue to exercise such authority:Provided, That it shall submit to the BSP,within one (1) month from 26 March 2009a certification signed by the President orOfficer with equivalent rank and functionthat it is in compliance with all theapplicable requirements of this Section.Otherwise, they are required to submitwithin the same period the measures theywill undertake, with the correspondingtimelines, to conform to the provisions thatthey have not complied with, subject toBSP approval.(Circular No. 649 dated 09 March 2009)§§ 4780Q.8 - 4780Q.10 (Reserved)§ 4780Q.11 Outsourcing of servicesby Electronic Money Issuers (EMIs) toElectronic Money Network ServiceProviders (EMNSP). The guidelines onoutsourcing of services by ElectronicMoney Issuers (EMIs) to Electronic MoneyNetwork Service Providers (EMNSP) areshown in Appendix Q-54.Sanctions. Violations committed byEMIs pertaining to outsourcing activities toEMNSP shall be subject to monetarypenalties as graduated under AppendixQ-39 and/or other non-monetary sanctionsunder Section 37 of RA No. 7653.Transitory provisions. EMIs that weregranted an authority to outsource theirE-money activities to an EMNSP maycontinue to exercise such authorityprovided that they have to conform to theprovisions of Appendix Q-54 within a sixmonthperiod from 20 January 2011.(Circular 704 dated 22 December 2010)Q RegulationsPart VII - Page 6Manual of Regulations for Non-Bank Financial Institutions

§§ 4781Q - 4799Q09.12.31Secs. 4781Q - 4798Q (Reserved)Sec. 4799Q General Provision onSanctions. Any violation of the provisionsof this Part shall be subject to Sections 36and 37 of R.A. No. 7653.The guidelines for the imposition ofmonetary penalty for violations/offenseswith sanctions falling under Section 37 ofR.A. No. 7653 on QBs, their directors and/or officers are shown in Appendix Q-39.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VII - Page 7

§§ 4801Q - 4803Q11.12.31PART EIGHTANTI-MONEY LAUNDERING REGULATIONSSec. 4801Q Declaration of PolicyThe BSP adopts the policy of the State toprotect the integrity and confidentiality ofbank accounts and to ensure that thePhilippines in general and the coveredinstitutions herein described in particularshall not be used respectively as a moneylaundering site and conduit for the proceedsof an unlawful activity as hereto defined.(As amended by Circular Nos. 706 dated 05 January 2011, 612dated 13 June 2008, 564 dated 03 April 2007 and CL-2007-010dated 28 February 2007)Sec. 4802Q Scope of Regulations. Theseregulations shall apply to all coveredinstitutions supervised and regulated bythe BSP. The term “covered institution”shall refer to banks, OBUs, QBs, trustentities, NSSLAs, pawnshops, FX dealers,money changers, remittance agents,electronic money issuers and other FIswhich under special laws are subject toBSP supervision and/or regulation,including their subsidiaries and affiliatesas herein defined wherever they may belocated:a. A subsidiary means an entity morethan fifty percent (50%) of the outstandingvoting stock of which is owned by a bank,QB, trust entity or any other institutionsupervised and/or regulated by the BSP.b. An affiliate means an entity thevoting stock of which, to the extent of fiftypercent (50%) or less, is owned by a bank,QB, trust entity, or any other institutionsupervised and/or regulated by the BSP.Pursuant to Section 20 of the GeneralBanking Law of 2000, a bank authorizedby BSP to establish branches or otheroffices within or outside the Philippinesshall be responsible for all businessconducted in such branches and officesto the same extent and in the same manneras though such business had all beenconducted in the head office. A bank andits branches and offices shall be treated asone (1) unit.Whenever local applicable laws andregulations of a branch, office, subsidiaryor affiliate based outside the Philippinesprohibit the implementation of these Rulesor any of the provisions of the AMLA, asamended, its RIRR, and the supervisingauthority in that foreign country issues adirective forbidding said branch, office,subsidiary or affiliate, the coveredinstitution shall notify the BSP of thissituation and furnish a copy of thesupervising authority’s directive.(Circular No. 706 dated 05 January 2011)Sec. 4803Q Definitions of Terms. Exceptas otherwise defined herein, all terms usedshall have the same meaning as those termsthat are defined in the AMLA, as amended,and its RIRR.(A) Money laundering - is a crimewhereby the proceeds of an unlawfulactivity as herein defined are transacted;thereby making them appear to haveoriginated from legitimate sources. It iscommitted by the following.(1) Any person knowing that anymonetary instrument or property represents,involves, or relates to, the proceeds of anyunlawful activity, transacts or attempts totransact said monetary instrument orproperty;(2) Any person knowing that anymonetary instrument or property involvesthe proceeds of any unlawful activity,performs or fails to perform any act as aManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 1

§ 4803Q11.12.31result of which he facilitates the offense ofmoney laundering referred to in paragraph“(1)” above; and(3) Any person knowing that anymonetary instrument or property is requiredunder the act to be disclosed and filed withthe Anti-Money Laundering Council, fails todo so.(B) Covered transaction (CT) - is atransaction in cash or other equivalentmonetary instrument involving a totalamount in excess of P500,000 within one(1) banking day.(C) Suspicious transactions (ST) - aretransactions with covered institutions,regardless of the amount involved, whereany of the following circumstances exist:1. There is no underlying legal ortrade obligation, purpose or economicjustification;2. The client is not properly identified;3. The amount involved is notcommensurate with the business orfinancial capacity of the client;4. Taking into account all knowncircumstances, it may be perceived that theclient’s transaction is structured in order toavoid being the subject of reportingrequirements under the AMLA, as amended;5. Any circumstance relating to thetransaction which is observed to deviatefrom the profile of the client and/or client’spast transactions with the coveredinstitutions;6. The transaction is in any wayrelated to an unlawful activity or anymoney laundering activity or offenseunder the AMLA as amended, that isabout to be, is being or has beencommitted; or7. Any transaction that is similar oranalogous to any of the foregoing.(D) Monetary instrument refers to:(1) Coins or currency of legal tender ofthe Philippines, or of any other country.(2) Drafts, checks and notes;(3) Securities or negotiable instruments,bonds, commercial papers, depositcertificates, trust certificates, custodialreceipts or deposit substitute instruments,trading orders, transaction tickets andconfirmations of sale or investments andmoney market instruments;(4) Contracts or policies of insurance,life or non-life, and contracts of suretyship;and(5) Other similar instruments wheretitle thereto passes to another byendorsement assignment or delivery.(E) Transaction - refers to any actestablishing any right or obligation orgiving rise to any contractual or legalrelationship between the parties thereto. Italso includes any movement of funds by anymeans with a covered institution.(F) Unlawful activity - refers to any actor omission or series or combination thereofinvolving or having direct relation to thefollowing:(1) Kidnapping for ransom underArticle 267 of Act No. 3815, otherwiseknown as the Revised Penal Code (RPC),as amended;(2) Sections 4, 5, 6, 8, 9, 10, 12, 13,14, 15 and 16 of R.A. No. 9165, otherwiseknown as the Comprehensive DangerousDrug Act of 2002;(3) Section 3 paragraphs “B”, “C”, “E”,“G”, “H” and “I” of R.A. No. 3019, asamended, otherwise known as theAnti-Graft and Corrupt Practices Act;(4) Plunder under R.A. No. 7080, asamended;(5) Robbery and extortion underArticles 294, 295, 296, 299, 300, 301 and302 of the RPC, as amended;(6) Jueteng and Masiao punished asillegal gambling under P.D. No. 1602;(7) Piracy on the high seas under theRPC as amended and P.D. No. 532;(8) Qualified theft under Article 315 ofthe RPC, as amended;Q RegulationsPart VIII - Page 2Manual of Regulations for Non-Bank Financial Institutions

§ 4803Q11.12.319) Swindling under Article 315 of theRPC, as amended;(10) Smuggling under R.A. Nos. 455and 1937;(11) Violations under R.A. No. 8792 ,otherwise known as the ElectronicCommerce Act of 2000;(12) Hijacking and other violationsunder R.A. No. 6235; destructive arson andmurder, as defined under the RPC, asamended, including those perpetrated byterrorists against non-combatant personsand similar targets;(13) Fraudulent practices and otherviolations under R.A. No. 8799, otherwiseknown as the Securities Regulation Codeof 2000; and(14) Felonies or offenses of a similarnature that are punishable under the penallaws of other countries.(G) Customer - refers to any person orentity that keeps an account, or otherwisetransacts business, with a coveredinstitution and any person or entity onwhose behalf an account is maintained ora transaction is conducted, as well as thebeneficiary of said transactions. A customeralso includes the beneficiary of a trust, aninvestment fund, a pension fund or acompany or person whose assets aremanaged by an asset manager, or a grantorof a trust.(H) Shell company - Legal entities whichhave no business substance in their ownright but through which financialtransactions may be conducted.(I) Shell bank - a shell companyincorporated as a bank or made to appearto be incorporated as a bank but has nophysical presence and no affiliation with aregulated financial group. It can also be abank that:(a) does not conduct business at afixed address in a jurisdiction in whichthe shell bank is authorized to engage;(b) does not employ one or moreindividuals on a full time basis at this fixedaddress;(c) does not maintain operating recordsat this address; and(d) is not subject to inspection by theauthority that licensed it to conductbanking activities.(J) Beneficial owner - refers to naturalperson(s) who ultimately owns or controlsa customer and/or the person on whosebehalf a transaction is being conducted.It also incorporates those persons whoexercise ultimate effective control over alegal person or arrangement.(K) Politically exposed person or PEP- an individual who is or has beenentrusted with prominent public positionsin the Philippines or in a foreign state,including heads of state or of government,senior politicians, senior national or localgovernment, judicial or military officials,senior executives of government or stateowned or controlled corporations andimportant political party officials.(L) Correspondent banking - refers toactivities of one bank (the correspondentbank) having direct connection or friendlyservice relations with another bank (therespondent bank).(M) Fund/wire transfer - refers to anytransaction carried out on behalf of anoriginator (both natural and juridical)through an FI (Originating Institution) byelectronic means with a view to making anamount of money available to a beneficiaryat another FI (Beneficiary Institution). Theoriginator person and the beneficiary personmay be the same person.(N) Cross border transfers - any wiretransfer where the originating andbeneficiary institutions are located indifferent countries. It shall also refer to anychain of wire transfer that has at least onecross-border element.(O) Domestic transfer - any wiretransfer where the originating andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 3

§ 4803Q - 4805Q11.12.31beneficiary institutions are located in thesame country. It shall refer to any chain ofwire transfer that takes place entirely withinthe borders of a single country, even thoughthe system used to effect the fund/wiretransfer may be located in another country.(P) Originating institution - refers to theentity utilized by the originator to transferfunds to the beneficiary and can either be:(a) a covered institution as speciallydefined by this part and as generallydefined by the AMLA, as amended, and itsRIRR; or(b) an FI operating outside thePhilippines that is other than coveredinstitutions referred to in Item “(a)” butconducts business operations and activitiessimilar to them.(Q) Beneficiary institution - refers to theentity that will pay out the money to thebeneficiary and can either be:(a) a covered institution as specificallydefined by this Part and as generallydefined by the AMLA, as amended, and itsRIRR, or(b) an FI operating outside thePhilippines that is other than coveredinstitutions referred to in Item “(a)” butconducts business operations and activitiessimilar to them.(R) Intermediary institution - refers tothe entity utilized by the originating andbeneficiary institutions where both have nocorrespondent banking relationship witheach other but have established relationshipwith the intermediary institution. It caneither be:(a) a covered institution as specificallydefined by this Part and as generally definedby the AMLA, as amended, and its RIRR; or(b) an FI operating outside thePhilippines that is other than coveredinstitutions referred to in Item “(a)” butconducts business operations and activitiessimilar to them.(Circular No. 706 dated 05 January 2011)Sec. 4804Q Basic Principles and Policiesto Combat Money Laundering. In line withthe declaration of policy, coveredinstitutions shall apply the followingprinciples:1. Conduct business in conformitywith high ethical standards in order toprotect its safety and soundness as well asthe integrity of the national banking andfinancial system;2. Know sufficiently your customer atall times and ensure that the financially orsocially disadvantaged are not deniedaccess to financial services while at thesame time prevent suspicious individualsor entities from opening or maintaining anaccount or transacting with the coveredinstitution by himself or otherwise;3. Adopt and effectively implement asound AML and terrorist financing riskmanagement system that identifies,assesses, monitors and controls risksassociated with money laundering andterrorist financing;4. Comply fully with this Part andexisting laws aimed at combating moneylaundering and terrorist financing bymaking sure that officers and employees areaware of their respective responsibilities andcarry them out in accordance with superiorand principled culture of compliance; and5. Fully cooperate with Anti-MoneyLaundering Council (AMLC) for theeffective implementation and enforcementof the AMLA, as amended, and its RIRR.(As amended by Circular No. 706 dated 05 January 2011)A. RISK MANAGEMENTSec. 4805Q Risk Management. All coveredinstitution shall develop sound riskmanagement policies and practices to ensurethat risks associated with money-launderingsuch as counterparty, reputational,operational, and compliance risks areidentified, assessed, monitored, mitigatedQ RegulationsPart VIII - Page 4Manual of Regulations for Non-Bank Financial Institutions

§§ 4805Q - 4805Q.211.12.31and controlled, as well as to ensure effectiveimplementation of this Part, to the end thatcovered institutions shall not be used as avehicle to legitimize proceeds of unlawfulactivity or to facilitate or finance terrorism.The four (4) areas of sound riskmanagement practices are adequate andactive Board and Senior Managementoversight, acceptable policies andprocedures embodied in a moneylaundering and terrorist financingprevention compliance program,appropriate monitoring and ManagementInformation System and comprehensiveinternal controls and audit.(As amended by Circular No. 706 dated 05 January 2011)§ 4805Q.1 Board and seniormanagement oversight. Notwithstandingthe provisions specifying the duties andresponsibilities of the compliance office andinternal audit, it shall be the ultimateresponsibility of the board of directors tofully comply with the provisions of this Part,the AMLA, as amended, and its RIRR. Forthis reason, it shall ensure that oversight onthe institution’s compliance management isadequate.(As amended by Circular No. 706 dated 05 January 2011)§ 4805Q.1.a Compliance OfficeManagement of the implementation of thecovered institution’s Money Laundering andTerrorist Financing Prevention Program(MLPP) shall be a primary task of theCompliance Office. To ensure theindependence of the Office, it shall have adirect reporting line to the board ofdirectors or any board-level or approvedcommittee on all matters related to AML andterrorist financing compliance and their riskmanagement. It shall be principallyresponsible for the following functionsamong other functions that may be delegatedby senior management and the board, towit:1. Ensure compliance by allresponsible officers and employees with thisPart, the AMLA, as amended, the RIRR andits own MLPP. It shall conduct periodiccompliance checking which covers, amongothers, evaluation of existing processes,policies and procedures including on-goingmonitoring of performance by staff andofficers involved in money laundering andterrorist financing prevention, reportingchannels, effectivity of the electronic moneylaundering transaction monitoring systemand record retention system through sampletesting and review of audit or examinationreports. It shall also report compliancefindings to the board or any board-levelcommittee;2. Ensure that infractions, discoveredeither by internally initiated audits or byspecial or regular examination conductedby the BSP, are immediately corrected;3. Inform all responsible officers andemployees of all resolutions, circulars andother issuances by the BSP and the AMLCin relation to matters aimed at preventingmoney laundering and terrorist financing;4. Alert senior management, the boardof directors, or the board-level or approvedcommittee if it believes that the institutionis failing to sensibly address anti-moneylaundering and terrorist financing issues; and5. Organize the timing and content ofAML training of officers and employeesincluding regular refresher trainings asstated in Sec. 4809Q.(Circular No. 706 dated 05 January 2011)§ 4805Q.2 Money laundering andterrorist financing prevention program. Allcovered institutions shall adopt acomprehensive and risk-based MLPP gearedtoward the promotion of high ethical andprofessional standards and the preventionof the bank being used, intentionally orunintentionally, for money laundering andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 5

§§ 4805Q.211.12.31terrorism financing. The MLPP shall beconsistent with the AMLA, as amended, andthe provisions set out in this Part anddesigned according to the coveredinstitution’s corporate structure and riskprofile. It shall be in writing, approved bythe board of directors or by the country/regional head or its equivalent for localbranches of foreign banks, and welldisseminated to all officers and staff whoare obligated by law and by their programto implement the same. Where a coveredinstitution has branches, subsidiaries,affiliates or offices located within and/oroutside the Philippines, it shall adopt aninstitution-wide MLPP that shall beimplemented on a consolidated basis.The MLPP shall also be readily availablein user-friendly form, whether in hard or softcopy. The covered institution must put up aprocedure to ensure an audit trailevidencing dissemination process for newand amended policies and procedures. Theprogram shall embody the following at aminimum:1) Detailed procedures of the coveredinstitution's compliance and implementationof the following major requirements of theAMLA, as amended, its RIRR, and this Part,to wit:a) Customer identification processincluding acceptance policies and on-goingmonitoring processes;b) Record keeping and retention;c) Covered transaction reporting; andd) Suspicious transaction reportingincluding the adoption of a system,electronic or manual, of flagging,monitoring and reporting of transactions thatqualify as suspicious transactions,regardless of amount or that will raise a “redflag” for purposes of conducting furtherverification or investigation, or transactionsinvolving amounts below the threshold tofacilitate the process of aggregating them forpurposes of future reporting of suchtransactions to the AMLC when theiraggregated amounts breach the threshold.The ST reporting shall include a reportingchain under which a suspicious transactionwill be processed and the designation of aboard level or approved committee who willultimately decide whether or not thecovered institution should file a report tothe AMLC. If the resources of the coveredinstitution do not permit the designation ofa committee, it may designate thecompliance officer to perform this functioninstead: Provided, That the board of directorsis informed of his decision.2) An effective and continuousanti-money laundering and counteringof terrorist financing training program forall directors, and responsible officers andemployees, to enable them to fully complywith their obligations and responsibilitiesunder this part, the AMLA, as amended, itsRIRR and their internal policies andprocedures as embodied in the MLPP. Thetraining program shall also include refreshertrainings to remind these individuals of theirobligations and responsibilities as well asupdate them of any changes in AML laws,rules and internal policies and procedures.3) An adequate screening andrecruitment process to ensure that onlyqualified personnel who have no criminalrecord/s are employed to assume sensitivebanking functions;4) An internal audit system inaccordance with Subsec. 4805Q.4;5) An independent audit program withwritten scope of audit that will ensure thecompleteness and accuracy of theinformation and identification documentsobtained from clients, the covered andsuspicious transactions reports submitted tothe AMLC, and the records retained incompliance with this Part as well asadequacy and effectiveness of the trainingprogram on the prevention of moneylaundering and terrorism financing;Q RegulationsPart VIII - Page 6Manual of Regulations for Non-Bank Financial Institutions

§ 4805Q.2 - 4805Q.411.12.316) A mechanism that ensures alldeficiencies noted during the audit and/orBSP regular or special examination areimmediately corrected and acted upon;7) Cooperation with the AMLC; and8) Designation of an AML complianceofficer, who shall at least be at seniorofficer level, as the lead implementor of theprogram within an adequately staffedcompliance office. The AML complianceofficer may also be the liaison between thecovered institution, the BSP and the AMLCin matters relating to the coveredinstitution’s AML compliance. Whereresources of the covered institution do notpermit the hiring of an AML complianceofficer, the compliance officer shall alsoassume the responsibility of the former.(Circular No. 706 dated 05 January 2011)§ 4805Q.2.a. Submission of the revisedand updated MLPP 1 ; Approval by the boardof directors or country head. Within 180days from 27 January 2011, all coveredinstitutions shall prepare and have availablefor inspection an updated MLPP embodyingthe principles and provisions stated in thispart. The compliance officer shall submitto the Anti-Money Laundering SpecialistGroup, SES I a sworn certification that therevised MLPP had been prepared, dulynoted and approved by the board ofdirectors or the country head or its equivalentfor local branches of foreign banks.Henceforth, each MLPP shall beregularly updated at least once every two(2) years to incorporate changes in AMLpolicies and procedures, latest trends inmoney laundering and terrorist financingtypologies, and latest pertinent BSPissuances. Any revision or update in theMLPP shall likewise be approved by boardof directors or the country/regional head or itsequivalent for local branches of foreign banks.(Circular No. 706 dated 05 January 2011 and M-2011-045 dated16 August 2011)§ 4805Q.3 Monitoring and reportingtools. All covered institutions shall adoptan AML and terrorist financing monitoringsystem that is appropriate for theirrisk-profile and business complexity and inaccordance with this Part. The systemshould be capable of generating timely,accurate and complete reports to lessen thelikelihood of any reputational andcompliance risks, and to regularly apprisethe board of directors and seniormanagement on anti-money laundering andterrorist financing compliance.As amended by Circular No. 706 dated 05 January 2011)§ 4805Q.3.a. Electronic monitoring andreporting systems for money launderingUBs and KBs shall adopt an electronic AMLsystem capable of monitoring risksassociated with money-laundering andterrorist financing as well as generatingtimely reports for the guidance andinformation of its board of directors andsenior management in addition to thefunctionalities mentioned in Subsec.4807Q.2.(Circular No. 706 dated 05 January 2011)§ 4805Q.3.b. Manual monitoring. Forcovered institutions other than UBs andKBs, it need not have an electronic systembut must ensure that it has the means ofcomplying with Subsec. 4805Q.3.(Circular No. 706 dated 05 January 2011)§ 4805Q.4 Internal audit. The internalaudit function associated with moneylaundering and terrorist financing should beconducted by qualified personnel who areindependent of the office being audited. Itmust have the support of the board ofdirectors and senior management and havea direct reporting line to the board or a boardlevel audit committee.The internal audit shall, in addition tothose specified by this Part, be responsiblefor the periodic and independent evaluation1RBs are given a three (3) months extension or up to 26 October 2011, within which to submit to the AMLSGthe Sworn Certification.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 7

§§ 4805Q.4 - 4806Q.1.a.11.12.31of the risk management, degree ofadherence to internal control mechanismsrelated to the customer identificationprocess, such as the determination of theexistence of customers and the completenessof the minimum information and/ordocuments establishing the true and fullidentity of, and the extent and standard ofdue diligence applied to, customers, CT andST reporting and record keeping andretention, as well as the adequacy andeffectiveness of other existing internalcontrols associated with money launderingand terrorist financing.For UBs and KBs with electronic moneylaundering transaction monitoring system,in addition to the above, the internal auditshall include determination of the efficiencyof the system’s functionalities as requiredby Subsecs. 4805Q.3 and 4807Q.2.The results of the internal audit shallbe timely communicated to the board ofdirectors and shall be open for scrutinyby BSP examiners in the course of theregular or special examination withoutprejudice to the conduct of its ownevaluation whenever necessary. Results ofthe audit shall likewise be promptlycommunicated to the compliance officefor its appropriate corrective action. TheCompliance Office shall regularly submitreports to the board to inform them ofmanagement’s action to addressdeficiencies noted in the audit.(As amended by Circular No. 706 dated 05 January 2011)B.Customer Identification ProcessSec. 4806Q Customer IdentificationA covered institution shall maintain asystem of verifying the true identity of theircustomers and, in case of corporate andjuridical entities, require a system ofverifying their legal existence andorganizational structure as well as theauthority and identification of all personspurporting to act on their behalf. Alongthis line, it shall formulate a risk-basedand tiered customer acceptance policy,customer retention policy and customeridentification process that involves reducedcustomer due diligence (CDD) forpotentially low risk clients and enhancedCDD for higher risk accounts.(Circular No. 706 dated 05 January 2011)§ 4806Q.1 Customer acceptance policyEvery covered institution shall develop clear,written and graduated acceptance policiesand procedures that will ensure that thefinancially or socially disadvantaged are notdenied access to financial services while atthe same time prevent suspiciousindividuals or entities from opening anaccount.(Circular No. 706 dated 05 January 2011)§ 4806Q.1.a. Criteria for type ofcustomers: low, normal and high risk;standards for applying reduced, averageand enhanced due diligence. Coveredinstitutions shall specify the criteria anddescription of the types of customers thatare likely to pose low, normal or high riskto their operations as well as the standardsin applying reduced, average and enhanceddue diligence including a set of conditionsfor the denial of account opening.Enhanced due diligence shall be appliedto customers that are assessed by thecovered institution or by this Part as highrisk for money laundering and terroristfinancing.For customers assessed to be of lowrisk such as an individual customer withregular employment or economicallyproductive activity, small account balanceand transactions, and a resident in the areaof the covered institution’s office orbranch, the covered institutions mayapply reduced due diligence. Some entitiesmay likewise be considered as low riskclients, these are: banking institutions,trust entities and QBs authorized by theQ RegulationsPart VIII - Page 8Manual of Regulations for Non-Bank Financial Institutions

§§ 4806Q.1.a. - 4806Q.1.c.11.12.31BSP to operate as such, public listedcompanies subject to regulatorydisclosure requirements, governmentagencies including GOCCs.In designing a customer acceptancepolicy, the following factors shall be takeninto account:1. Background and source of funds;2. Country of origin and residence oroperations;3. Public or high profile position of thecustomer or its directors/trustees,stockholders, officers and or/authorizedsignatory;4. Linked accounts;5. Watch list of individuals andentities engaged in illegal activities orterrorist related activities as circularized byBSP, AMLC, and other internationalentities or organizations such as the Officeof Foreign Assets Control (OFAC) of theU.S. Department of the Treasury and UnitedNations Sanctions List;6. Business activities; and7. Type of services/products/transactions to be entered with the coveredinstitutionsIn all instances, the covered institutionsshall document how a specific customerwas profiled (low, normal or high) and whatstandard of CDD (reduced, average orenhanced) was applied.(Circular No. 706 dated 05 January 2011)§ 4806Q.1.b. Enhanced due diligenceWhenever enhanced due diligence isapplied as required by this Part or by thecovered institution’s customer acceptancepolicy, the covered institution shall, inaddition to profiling of customers andmonitoring of their transactions, do thefollowing:1. Obtain additional information otherthan the minimum information and/ordocuments required for the conduct ofaverage due diligence as enumeratedunder Subsec. 4806Q.2.a and 4806Q.2.b;(a) In cases of individual customers,obtain a list of banks where the individualhas maintained or is maintaining anaccount, list of companies where he is adirector, officer or stockholder, andbanking services to be availed of.(b) For entities assessed as high riskcustomers, such as shell companies,covered institutions shall, in addition tominimum information and/or documentsenumerated above, obtain additionalinformation including but not limited toprior or existing bank references, the name,present address, date and place of birth,nature of work, nationality and source offunds of each of the primary officers(President, Treasurer and authorizedsignatory/ies), stockholders owning at least2% of the voting stock, and directors/trustees/partners as well as their respectiveidentification documents.2. Conduct validation procedures onany or all of the information provided inaccordance with Subsec. 4806Q.1.c.3. Obtain senior management approvalfor establishing business relationship.Where additional information cannot beobtained, or any information or documentprovided is false or falsified, or result of thevalidation process is unsatisfactory, thecovered institution shall deny bankingrelationship with the individual or entitywithout prejudice to the reporting of asuspicious transaction to the AMLC whencircumstances warrant.(Circular No. 706 dated 05 January 2011)§ 4806Q.1.c. Minimum validationprocedures. Validation procedures forindividual customers shall include but is notlimited to the following:1. Confirming the date of birth from aduly authenticated official document;2. Verifying the permanent addressthrough evaluation of utility bills, bank orcredit card statement or other documentsManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 9

§§ 4806Q.1.c. - 4806Q.1.e.1.11.12.31showing permanent address or throughon-site visitation;3. Contacting the customer by phone,email or letter (such as sending of “thankyou letters”); and4. Determining the authenticity of theidentification documents through validationof its issuance by requesting a certificationfrom the issuing authority or by any othermeans.For corporate or juridical entities,validation procedures shall include but notlimited to the following:1. Requiring the submission of auditedfinancial statements conducted by areputable accounting/auditing firm;2. Inquiring from the supervisingauthority the status of the entity;3. Obtaining bank references;4. On-site visitation of the company;and5. Contacting the entity by phone,email or letter (such as “thank you letters”).(Circular No. 706 dated 05 January 2011)§ 4806Q.1.d. Reduced due diligenceWhenever reduced due diligence is appliedin accordance with the covered institution’scustomer acceptance policy, the followingrules shall apply:a. For individual customers, a coveredinstitution may open an account under thetrue and full name of the account owner orowners and defer acceptance of theminimum information. Deferred acceptanceof minimum information shall meanobtaining information numbers 1 to 7 ofSubsec. 4806Q.2.a at the time of accountopening while the rest, numbers 8 to 11,may be obtained within a reasonable timebut not exceeding ninety (90) days fromaccount opening.b. For corporate, partnership, and soleproprietorship entities, and other entitiessuch as banking institutions, trust entitiesand QBs authorized by the BSP to operateas such, publicly listed companies subjectto regulatory disclosure requirements,government agencies including GOCCs, acovered institution may open an accountunder the official name of these entities withonly no. 4 of those required under Subsec.4806Q.2.b (Board Resolution duly certifiedby the Corporate Secretary authorizing thesignatory to sign on behalf of the entity)- obtained at the time of account opening.(Circular No. 706 dated 05 January 2011)§ 4806Q.1.e. Face-to-face contact. Nonew accounts shall be opened and createdwithout face-to-face contact and personalinterview between the covered institution’sduly authorized personnel and thepotential customer except under thefollowing arrangements:(Circular No. 706 dated 05 January 2011)§ 4806Q.1.e.1. Account openedthrough a trustee, agent, nominee, orintermediary. Where the account isopened through a trustee, agent, nomineeor intermediary, the covered institutionshall establish and record the true and fullidentity and existence of both the (a)trustee, nominee, agent or intermediaryand (b) trustor, principal, beneficialowner, or person on whose behalf theaccount is being opened. The coveredinstitution shall determine the true natureof the parties’ capacities and duties byobtaining a copy of the written documentevidencing their relationship and apply thesame criteria for assessing the risk profileand determining the standard of duediligence to be applied to both.In cases of several trustors, principals,beneficial owners, or persons on whosebehalf the account are being openedwhere the trustee, nominee, agent orintermediary opens a single account butkeeps therein sub-accounts that may beattributable to each trustor, principal,beneficial owner, or person on whosebehalf the account is being opened, theQ RegulationsPart VIII - Page 10Manual of Regulations for Non-Bank Financial Institutions

§§ 4806Q.1.e.1. - 4806Q.2.a.11.12.31covered institution shall, at the minimum,obtain the true and full name, place anddate of birth or date of registration, asthe case may be, present address, natureof work or business, and source of fundsas if the account was opened by themseparately. Where the covered institutionis required to report a CT or circumstanceswarrant the filing of an ST, it shall obtainsuch other information on every trustor,principal, beneficial owner, or person onwhose behalf the account is being openedin order that a complete and accuratereport may be filed with the AMLC.In case a covered institution entertainsdoubts that the trustee, nominee, agent orintermediary is being used as a dummy incircumvention of existing laws, it shallapply enhanced due diligence inaccordance with Subsec. 4806Q.1.b.(Circular No. 706 dated 05 January 2011)§ 4806Q.1.e.2. Outsourcingarrangement. Subject to existing rules onoutsourcing of specified bankingactivities, a covered institution, withoutprior Monetary Board approval, mayoutsource to a counterparty the conductof the requisite face-to-face contact:Provided, That such arrangement isformally documented and: Providedfurther, That the conditions under Subsec.4806Q.2.d are met.If the counterparty is an entity otherthan a covered institution as hereindefined, covered institutions shall ensurethat the employees or representatives ofthe counter-party conducting the face-tofacecontact undergo equivalent trainingprogram as that of its front-linersundertaking a similar activity. Coveredinstitutions shall likewise monitor andreview annually the performance of thecounter-party to assist it in determiningwhether or not to continue with thearrangement.(Circular No. 706 dated 05 January 2011)§ 4806Q.1.e.3. Third party relianceWhere a third party as defined underSubsec. 4806Q.2.e.1. has alreadyconducted the requisite face-to-facecontact on its own customer who wasreferred to a covered institution, the lattermay rely on the representation of the thirdparty that it has already conductedface-to-face contact: Provided, That thepertinent requirements in Subsec.4806Q.2.e.1. are also met.(Circular No. 706 dated 05 January 2011)§ 4806Q.2 Customer identificationCovered institutions shall establish andrecord the true identity of its customersbased on valid identification document/sspecified in Subsec. 4806Q.2.c.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.a. New individual customersCovered institutions shall develop asystematic procedure for establishing thetrue and full identity of new individualcustomers and shall open and maintain theaccount only in the true and full name ofthe account owner or owners.Unless otherwise stated in this Part,average due diligence requires that thecovered institution obtain, at the time ofaccount opening, all the followingminimum information and confirming theseinformation with the valid identificationdocuments stated in Subsec. 4806Q.2.c.from individual customers and authorizedsignatory/ies of corporate and juridicalentities:1. Name;2. Present address;3. Date and place of birth;4. Nature of work, name of employeror nature of self-employment/business;5. Contact details;6. Specimen signature;7. Source of funds;8. Permanent address;9. Nationality;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 11

§§ 4806Q.2.a. - 4806Q.2.c.11.12.3110. Tax identification number, SSSnumber or GSIS number, if any; and11. Name, present address, date andplace of birth, nature of work and source offunds of beneficial owner or beneficiary,whenever applicable.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.b. New corporate andjuridical entities. Covered institutions shalldevelop a systematic procedure foridentifying corporate, partnership and soleproprietorship entities as well as thestockholders/partners/owners, directors,officers and authorized signatory of theseentities. It shall open and maintain accountsonly in the true and full name of the entityand shall have primary responsibility toensure that the entity has not been, or is notin the process of being, dissolved,struck-off, wound-up, terminated, orotherwise placed under receivership orliquidation.Unless otherwise stated in this Part,average due diligence requires that thecovered institution obtain the followingminimum information and/or documentsbefore establishing business relationships:1. Certificates of Registration issued bythe Department of Trade and Industry forsingle proprietors, or by the SEC, forcorporations and partnerships, and by theBSP, for money changers/foreign exchangedealers and remittance agents;2. Articles of Incorporation orAssociation and By-Laws;3. Principal business address;4. Board or Partners’ Resolution dulycertified by the Corporate/Partners’Secretary authorizing the signatory to signon behalf of the entity;5. Latest General Information Sheetwhich lists the names of directors/trustees/partners, principal, stockholders owning atleast twenty percent (20%) of theoutstanding capital stock and primaryofficers such as the President and Treasurer;6. Contact numbers of the entity andauthorized signatory/ies;7. Source of funds and nature ofbusiness;8. Name, present address, date andplace of birth, nature of work and source offunds of beneficial owner or beneficiary, ifapplicable; and9. For entities registered outside thePhilippines, similar documents and/orinformation shall be obtained dulyauthenticated by the Philippine Consulatewhere said entities are registered.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.c. Valid identificationdocuments. The following guidelines governthe acceptance of valid ID cards for all typesof financial transaction by a customer andthe authorized signatory/ies of a corporateor juridical entity, including financialtransactions involving Overseas FilipinoWorkers (OFWs), in order to promoteaccess of Filipinos to services offered byformal FIs, particularly those residing in theremote areas, as well as to encourage andfacilitate remittances of OFWs through thebanking system:(1) Customers and the authorizedsignatory/ies of a corporate or juridicalentity who engage in a financial transactionwith covered institutions for the first timeshall be required to present the original andsubmit a clear copy of at least one (1) validphoto bearing ID document issued by anofficial authority.For this purpose, the term officialauthority shall refer to any of thefollowing:a. Government of the Republic of thePhilippines;b. Its political subdivisions andinstrumentalities;c. GOCCs; andd. Private entities or institutionsregistered with or supervised or regulatedeither by the BSP, SEC or IC.Q RegulationsPart VIII - Page 12Manual of Regulations for Non-Bank Financial Institutions

§§ 4806Q.2.c. - 4806Q.2.d.11.12.31Valid IDs include the following:1. Passport including those issued byforeign governments;2. Driver’s license;3. PRC ID;4. NBI clearance;5. Police clearance;6. Postal ID;7. Voter’s ID;8. Tax Identification Number;9. Barangay certification;10. GSIS e-Card;11. SSS card;12. Senior Citizen card;13. OWWA ID;14. OFW ID;15. Seaman’s book;16. Alien Certificate of Registration/Immigrant Certificate of Registration;17. Government office and GOCC ID(e.g., AFP, HDMF IDs);18. Certification from the NCWDP;19. DSWD certification;20. IBP ID; and21. Company IDs issued by privateentities or institutions registered with orsupervised or regulated either by the BSP,SEC or IC.(2) Students who are beneficiaries ofremittances/fund transfers and who are notyet of voting age, may be allowed to presentthe original and submit a clear copy of one(1) valid photo-bearing school ID duly signedby the principal or head of the school.(3) Where the customer or authorizedsignatory is a non-Philippine resident,similar IDs duly issued by the foreigngovernment where the customer is aresident or a citizen may be presented.(4) A covered institution shall requiretheir customers or authorized signatory tosubmit a clear copy of one (1) valid ID on aone (1)-time basis only at thecommencement of business relationship.They shall require their clients to submit anupdated photo and other relevant informationon the basis of risk and materiality.(5) A covered institution may classifyidentification documents based on itsreliability and ability to validate theinformation indicated in the identificationdocument with that provided by thecustomer.(6) Whenever it deems necessary, acovered institution may accept other IDs notenumerated above: Provided, That it shallnot be the sole means of identification.(7) In case the identification documentsmentioned above or other identificationdocuments acceptable to the coveredinstitution do not bear any photo of thecustomer or authorized signatory, or thephoto bearing ID or a copy thereof does notclearly show the face of the customer orauthorized signatory, a covered institutionmay utilize its own technology to take thephoto of the customer or authorizedsignatory.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.d. Outsourcing of thegathering of minimum information and/ordocuments. Except for deposit taking, whichis an inherent banking function that cannotbe outsourced and subject to existing ruleson outsourcing of specified bankingactivities, a covered institution may, withoutprior Monetary Board approval, outsourceto a counterparty, which may or may notbe a covered institution as herein defined,the gathering of the minimum informationand/or documents required to be obtainedby this Part: Provided, That the ultimateresponsibility for knowing the customer andfor keeping the identification documentsshall lie with the covered institution andcompliance with the following conditions:For covered institution counterparty:1. There is a written service levelagreement approved by the board ofdirectors of both covered institutions;2. The counterparty has a reliable andacceptable customer identification systemand training program in place; andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 13

§§ 4806Q.2.d. - 4806Q.2.e.1.a.11.12.313. In line with requirement no.1, allidentification information and/or documentsshall be turned over within a period notexceeding ninety (90) calendar days to thecovered institution, which shall carefullyreview the documents and conduct thenecessary risk assessment of the customer.For non-covered institutioncounterparty:1. All conditions required for coveredinstitutions counterparty;2. The covered institution outsourcingthe activity shall likewise ensure that theemployees or representatives of thecounterparty establishing the true and fullidentity of the customer undergo equivalenttraining program as that of the coveredinstitution’s own employees undertaking asimilar activity.3. Annual monitoring and review bythe covered institution of the performanceof the counterparty to assist it indetermining whether or not to continue withthe arrangement.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.e. Trustee, nominee, agentor intermediary account. Where anytransaction is conducted by a trustee,nominee, agent or intermediary, either asan individual or through a fiduciaryrelationship, a corporate vehicle orpartnership, on behalf of a trustor,principal, beneficial owner or person onwhose behalf a transaction is beingconducted, covered institutions shallestablish and record the true and full identityand existence of both the (1) trustee,nominee, agent or intermediary and the(2) trustor, principal beneficial owner orperson on whose behalf the transaction isbeing conducted. The covered institutionshall determine the true nature of the parties’capacities and duties by obtaining a copyof the written document evidencing theirrelationship and apply the same standardsfor assessing the risk profile and determiningthe standard of due diligence to be appliedto both.In case it entertains doubts as to whetherthe trustee, nominee, agent, or intermediaryis being used as a dummy in circumventionof existing laws, it shall apply enhanced duediligence is accordance with Subsec.4806Q.1.b.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.e.1. Where the customertransacts through a trustee, nominee, agentor intermediary which is a third party asherein defined (Third Party Reliance). Acovered institution may rely on the customeridentification process undertaken by a thirdparty. For purposes of this Subsection, the“third party” shall refer to ai) covered institution as hereinspecifically defined and as generally definedby AMLA, as amended, and its RIRR, orii) an FI operating outside the Philippinesthat is covered by equivalent customeridentification requirements. A BSPaccreditedcustodian may likewise rely inaccordance with these rules on the face-tofacecontact and gathering of minimuminformation to establish the existence andfull identity of the customer conducted bythe seller or issuer of securities or by theglobal custodian provided the latter has anequivalent customer identificationrequirements.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.e.1.a. Third party is acovered institution specifically defined bythis Part and as generally defined by AMLA,as amended and its RIRR. A coveredinstitution may rely on the identificationprocess conducted by this third partyprovided that the covered institution shallobtain from the third party a written sworncertification containing the following:1) The third party has conducted therequisite customer identificationrequirements in accordance with this PartQ RegulationsPart VIII - Page 14Manual of Regulations for Non-Bank Financial Institutions

§§ 4806Q.2.e.1.a. - 4806Q.2.h.11.12.31and its own MLPP including the face-to-facecontact requirement to establish theexistence of the ultimate customer and hasin its custody all the minimum informationand/or documents required to be obtainedfrom the customer; and2) The relying covered institution shallhave the ability to obtain identificationdocuments from the third party upon requestwithout delay.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.e.1.b. Third party is an FIoperating outside the Philippines that isother than covered institutions referred toin Subsec. X806.2.e.1.a but conductsbusiness operations and activities similarto them. All the contents required in thesworn certification mentioned in Subsec.4806Q.2.e.1.a shall apply with theadditional requirement that the laws of thecountry where the third party is operatinghas equal or more stringent customeridentification process requirement and thatit has not been cited in violation thereof. Itshall, in addition to performing normal duediligence measures, do the following:1) Gather sufficient information aboutthe third party and the group to which itbelongs to understand fully the nature of itsbusiness and to determine from publiclyavailable information the reputation of theinstitution and the quality of supervision,including whether it has been subject tomoney laundering or terrorist financinginvestigation or regulatory action;2) Document the respectiveresponsibilities of each institution; and3) Obtain approval from seniormanagement at inception of relationshipbefore relying on the third party.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.f. Private banking/wealthmanagement operations. These services,which by their nature involve high measureof client confidentiality, are more open tothe elements of reputational risk especiallyif the customer identification process is notdiligently followed. Covered institutionstherefore shall endeavor to establish andrecord the true and full identity of thesecustomers and establish a policy on whatstandard of due diligence will apply to them.They shall also require approval by asenior officer other than the privatebanking/wealth management/similaractivity relationship officer or the like foracceptance of customers of privatebanking, wealth management and similaractivities.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.g. Politically exposed personA covered institution shall endeavor toestablish and record the true and fullidentity of PEPs as well as their immediatefamily members and the entities related tothem and establish a policy on whatstandard of due diligence will apply to themtaking into consideration their position andthe risks attendant thereto.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.h. Correspondent bankingBecause of the risk associated with dealingwith correspondent accounts where it mayunknowingly facilitate the transmission, orholding and management of proceeds ofunlawful activities or funds intended tofinance terrorist activities coveredinstitutions shall adopt policies andprocedures for correspondent bankingactivities and designate an officerresponsible in ensuring compliance withthese policies and procedures. A coveredinstitution may rely on the customeridentification process undertaken by therespondent bank. In such case, it shallapply the rules on third party relianceunder Subsec. 4806Q.2.e.1., treating therespondent bank as the third party asdefined therein. In addition, thecorrespondent bank shall:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 15

§§ 4806Q.2.h. - 4806Q.2.i.11.12.31(a) Gather sufficient information aboutthe respondent institution to understand fullythe nature of the respondent’s business andto determine from publicly availableinformation the reputation of the institutionand the quality of supervision, includingwhether it has been subject to moneylaundering or terrorist financinginvestigation or regulatory action.(b) Assess the respondent institution’santi-money laundering and terroristfinancing controls.(c) Obtain approval from seniormanagement before establishingcorrespondent relationships.(d) Document the respectiveresponsibilities of each institution.(e) With respect to “payable-throughaccounts”, be satisfied that the respondentbank has verified the identity of, andperformed on-going due diligence on, thecustomers having direct access accountsof the correspondent and that it is able toprovide relevant customer identificationdata upon request by the correspondentbank.Correspondent banking customerspresenting greater risk, including shellcompanies, shall be subject to enhanced duediligence.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.i. Fund/Wire transferBecause of the risk associated with dealingwith fund/wire transfers, where a coveredinstitution may unknowingly transmitproceeds of unlawful activities or fundsintended to finance terrorist activities, it shallestablish policies and procedures designedto prevent it from being utilized for thatpurpose which shall include, but notlimited to, the following:(a) The beneficiary institution shall notaccept instructions to pay-out fund transfersto non-customer beneficiary, unless it hasconducted the necessary customer duediligence to establish the true and fullidentity and existence of said beneficiary.Should the originator and beneficiary be thesame person, the beneficiary institution mayrely on the customer due diligenceconducted by the originating institutionprovided the rules on third party relianceunder Subsec. 4806Q.2.e.1. are met,treating the originating institution as thirdparty as therein defined;(b) The originating institution shall notaccept instructions to fund/wire transferfrom a non-customer originator, unless ithas conducted the necessary customer duediligence to establish the true and fullidentity and existence of said originator;(c) In cross border transfers, if theoriginator is a high risk customer as hereindescribed, the beneficiary institution shallconduct enhanced due diligence on thebeneficiary and the originator. Whereadditional information cannot beobtained, or any information or documentprovided is false or falsified, or result ofthe validation process is unsatisfactory,the beneficiary institution shall refuse toeffect the fund/wire transfer or thepay-out of funds without prejudice to thereporting of a suspicious transaction tothe AMLC when circumstances warrant;(d) Whenever possible, manuallyinitiated fund transfer (MIFT) instructionsshould not be the primary delivery method.Every effort shall be made to provide clientwith an electronic banking solution.However, where MIFT is utilized, theexisting rules on validation procedures asprescribed by Circular No. 436 dated18 June 2004 shall apply;(e) Cross border and domestic fund/wiretransfers 1 and related message amountingto P50,000 or more or its equivalent shallinclude accurate and meaningfuloriginator information. The following arethe originator information that shall remainwith the transfer or related message throughthe payment chain:1The implementation of the originator information requirement is deferref for one (1) year, or until 26 July 2012(M-2011-049 dated 07 September 2011)Q RegulationsPart VIII - Page 16Manual of Regulations for Non-Bank Financial Institutions

§§ 4806Q.2.i. - 4806Q.2.j.2.11.12.311. Name of the originator2. Address or in its absence thenational identity number or date andplace of birth of the originator; and3. Account number of the originatoror in its absence, a unique referencenumber must be included.(f) Should any wire transfer amountingto P50,000 or more or its equivalent beunaccompanied by the required originatorinformation, the beneficiary institutionshall exert all efforts to establish the trueand full identity and existence of theoriginator by requiring additionalinformation from the originatinginstitution or intermediary institution. Itshall likewise apply enhanced duediligence to establish the true and fullidentity and existence of the beneficiary.Where additional information cannot beobtained, or any information or documentprovided is false or falsified, or result ofthe validation process is unsatisfactory,the beneficiary institution shall refuse toeffect the fund/wire transfer or the payoutof funds without prejudice to thereporting of a suspicious transaction tothe AMLC when circumstances warrant.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.j. Buyers of cashier’smanager’s or certified checks. A coveredinstitution may sell cashier’s, manager’s orcertified checks only to its existingcustomers and shall maintain a register ofsaid checks indicating the followinginformation:1. True and full name of the buyer orthe applicant if buying on behalf of anentity;2. Account number;3. Date of issuance and the number ofthe check;4. Name of the payee;5. Amount; and6. Purpose of such transaction.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.j.1. Buyers of cashier’s,manager’s or certified checks other thanits existing customer. Where anindividual or an entity other than anexisting customer applies for the issuanceof cashier’s, manager’s or certified checks,the covered institution shall, in addition tothe information required in Subsec.4806Q.2.j., obtain all the identificationdocuments and minimum informationrequired by this Part to establish the trueand full identity and existence of theapplicant. In no case shall reduced duediligence be applied to the applicant and,where circumstances warrant, enhanceddue diligence should be applied.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.j.2. Buyers of cashier’s,manager’s or certified checks in blank orpayable to cash, bearer or numberedaccount. A covered institution may issuecashier’s, manager’s or certified checks orother similar instruments in blank orpayable to cash, bearer or numberedaccount subject to the followingconditions:1. The amount of each check shall notexceed Ten Thousand pesos (P10,000);2. The buyer of the check is properlyidentified in accordance with its customeracceptance and identification policies andas required under Subsec. 4806Q.2.j. andSubsec. 4806Q.2.j.1;3. A register of said checks indicatingall the information required under Subsec.4806Q.2.j.4. A covered institution which issuesas well as those which accepts as deposits,said cashier’s, manager’s or certified checksor other similar instruments issued in blankor payable to cash, bearer or numberedaccount shall take such measure(s) as maybe necessary to ensure that said instrumentsare not being used/resorted to by the buyeror depositor in furtherance of a moneylaundering activity;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 17

§§ 4806Q.2.j.2. - 4806Q.2.m.11.12.315. The deposit of said instruments shallbe subject to the same requirements ofscrutiny applicable to cash deposits; and6.Transactions involving saidinstruments should be accordingly reportedto the AMLC if there is reasonable groundto suspect that said transactions are beingused to launder funds of illegitimate origin.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.k. Second-endorsed checksA covered institution shall enforce stricterguidelines in the acceptance of second-endorsed checks including the applicationof enhanced due diligence to ensure thatthey are not being used as instruments formoney laundering or other illegal activities.For this purpose, a covered institutionshall limit the acceptance ofsecond-endorsed checks from properlyidentified customers and only afterestablishing that the nature of the businessof said customer justifies, or at least makespractical, the deposit of second-endorsedcheck. In case of isolated transactionsinvolving deposits of second-endorsedchecks by customers who are not engagedin trade or business, the true and fullidentity of the first endorser shall beestablished and the record of theidentification shall also be kept for five (5)years.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.l. Foreign exchange dealers/money changers/remittance agentsA covered institution shall require theircustomers who are foreign exchangedealers, money changers and remittanceagents to submit a copy of the certificate ofregistration issued to them by the BSP aspart of their customer identificationdocument. The certificate of registration shallbe for each head office, branch agent,sub-agent, extension office or businessoutlet of foreign exchange dealers, moneychangers and remittance agents.Foreign exchange dealers, moneychangers and remittance agents customerspresenting greater risk, such as shellcompanies shall be subject to enhanced duediligence.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.m. High risk customerA customer from a country that isrecognized as having inadequateinternationally accepted anti-moneylaundering standards, or does notsufficiently apply regulatory supervisionor the Financial Action Task Force (FATF)recommendations, or presents greater riskfor crime, corruption or terrorist financingis considered a high risk customer.Information relative to these are availablefrom publicly available information suchas the websites of FATF, FATF StyleRegional Bodies (FSRB) like the AsiaPacific Group on Money Laundering andthe Egmont Group, national authoritieslike the OFAC of the U.S. Department ofthe Treasury, or other reliable third partiessuch as regulators or exchanges, whichshall be a component of a coveredinstitution’s customer identificationprocess.When dealing with high riskcustomers, a covered institution shouldtake extreme caution and vigilance. Inno case shall reduced diligence beapplied to high risk customers. On theother hand, in case the covered institutiondetermines, based on its standards, thatdealing with the high risk customer callsfor, or this Part requires, the applicationof enhanced due diligence, it shall applythe minimum requirements for enhanceddue diligence in accordance with Subsec.4806Q.1.b. In all instances of acceptanceof a high risk customer, approval of thecovered institution’s senior officer shallbe necessary.(Circular No. 706 dated 05 January 2011)Q RegulationsPart VIII - Page 18Manual of Regulations for Non-Bank Financial Institutions

§§ 4806Q.2.n. - 4806Q.3.a11.12.31§ 4806Q.2.n. Shell company/shell bankA covered institution shall undertakebanking relationship with a shellcompany with extreme caution andalways apply enhanced due diligence onboth the entity and its beneficial owner/s.Because of the dubious nature of shellbanks, no shell bank shall be allowed tooperate or be established in thePhilippines. A covered institution shallrefuse to enter into, or continue,correspondent banking relationship withthem. It shall likewise guard againstestablishing relations with foreign FIs thatpermit their accounts to be used by shellbanks.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.o. Numbered accountsNo peso and foreign currencynon-checking numbered accounts shall beallowed without establishing the true andfull identity and existence of customersand applying enhanced due diligence inaccordance with Subsec. 4806Q.1.b.Peso and foreign currencynon-checking numbered accounts existingprior to 17 October 2001 shall continueto exist but the covered institution shallestablish the true and full identity andexistence of the beneficial owners of suchaccounts and applying enhanced duediligence in accordance with Subsec.4806Q.1.b.(Circular No. 706 dated 05 January 2011)§ 4806Q.2.p. Prohibited accountsA covered institution shall maintainaccounts only in the true and full name ofthe account owner. The provisionsof existing law to the contrarynotwithstanding, anonymous accounts,accounts under fictitious names,numbered checking accounts, and allother similar accounts shall be absolutelyprohibited.(Circular No. 706 dated 05 January 2011)§ 4806Q.3 On-going monitoring ofcustomers, accounts and transactionsCovered institutions shall ensure that theyhave established the true and full identityof their customers and shall update allidentification information and documentsrequired to be obtained by the AMLA, asamended, its RIRR and this Part ofexisting customers on the basis ofmateriality and risk.With respect to monitoring oftransactions, in order that a coveredinstitution may be able to control andreduce risk associated with moneylaundering and terrorist financing, it isnecessary that it has a system that willenable it to understand the normal andreasonable account activity of customersand detect unusual or suspicious patternsof account activity. Thus, a risk-andmateriality-basedon-going monitoring ofcustomer’s accounts and transactions shouldbe part of a covered institution’s customerdue diligence.(Circular No. 706 dated 05 January 2011)§ 4806Q.3.a. Enhance due diligenceCovered institutions shall apply enhanceddue diligence on its customer inaccordance with Subsec. 4806Q.1.b. if itacquires information in the course of itscustomer account or transactionmonitoring that:1. Raises doubt as to the accuracy of anyinformation or document provided or theownership of the entity;2. Justifies re-classification of thecustomer from low or normal risk tohigh-risk pursuant to these rules or by itsown criteria; or3. Any of the circumstance for thefiling of a suspicious transaction exists suchas but not limited to the following:a. Transacting without any underlyinglegal or trade obligation, purpose oreconomic justification;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 19

§§ 4806Q.3.a. - 4807Q.111.12.31b. Transacting an amount that is notcommensurate with the business orfinancial capacity of the customer ordeviates from his profile;c. Structuring of transactions in order toavoid being the subject of coveredtransaction reporting; ord. knowing that a customer was or isengaged or engaging in any unlawfulactivity as herein defined.Where additional information cannot beobtained, or any information ordocument provided is false or falsified, orresult of the validation process isunsatisfactory, the covered institution shallimmediately close the account and refrainfrom further conducting businessrelationship with the customer withoutprejudice to the reporting of a suspicioustransaction to the AMLC whencircumstances warrant.(Circular No. 706 dated 05 January 2011)C. Covered and SuspiciousTransaction ReportingSec. 4807Q Covered and SuspiciousTransaction Reporting 1 . Coveredinstitutions shall report to the AMLC allcovered and suspicious transactions withinten (10) working days from occurrencethereof.Should a transaction be determined tobe both a covered and suspicioustransaction, the covered institution shall berequired to report the same as a suspicioustransaction.(Circular No. 706 dated 05 January 2011, as amended byCL -078 dated 11 October 2011)§ 4807Q.1 Deferred reporting ofcertain covered transactions. Pursuant toAMLC Resolution No. 58 dated 25 June2005 as amended by AMLC ResolutionNo. 24 dated 18 March 2009, the followingare considered as “non-cash, no/low riskcovered transactions” the reporting of whichto the AMLC are deferred:1. Transactions between banks and theBSP;2. Transactions between banksoperating in the Philippines;3. Internal operating expenses ofbanks;4. Transactions involving transfer offunds from one deposit account to anotherdeposit account of the same person withinthe same bank;5. Roll-overs of placements of timedeposit; and6. Loan/Interest principal paymentdebited against borrower’s deposit accountmaintained with the lending bank.In addition, pursuant to AMLCResolution No. 292 dated 24 October2003, covered institutions, other thanbanks, shall file CTRs on transactions incash or foreign currency or othermonetary instruments (other than checks)or properties. Due to the nature of thetransactions in the stock exchange, onlythe brokers-dealers shall be required tofile CTRs and STRs 2 .The Philippine Stock Exchange,Philippine Central Depository (PCD),Securities Clearing Corporation of thePhilippines (SCCP) and transfer agents areexempt from filing CTRs. They arehowever required to file STRs when thetransactions that pass through them aredeemed suspicious.The BSP may consider other transactionsas “no/low risk covered transactions” andpropose to the AMLC that they be likewisesubject to deferred reporting by coveredinstitutions.(Circular No. 706 dated 05 January 2011, as amended byCL-2011-035 dated 25 May 2011)1Submission of the hard copies of the STRs to the AMLC is deferred until further advice.2The filing of a CTR by a broker is deferred when the mode of payment is by checks or if the settlement betweenbrokers/dealers and their customers is made through fund transfers or “debiting and crediting” of theirrespective accounts.Q RegulationsManual of Regulations for Non-Bank Financial InstitutionsPart VIII - Page 20

§§ 4807Q.2 - 4807Q.411.12.31§ 4807Q.2 Electronic monitoringsystem for money laundering. UBs and KBsare required to adopt an electronic moneylaundering transaction monitoring systemwhich at the minimum shall detect and raiseto the bank’s attention, transactions and/oraccounts that qualify either as CTs or STsas herein defined.The system must have at least thefollowing automated functionalities:a. Covered and suspicious transactionmonitoring – performs statistical analysis,profiling and able to detect unusual patternsof account activity;b. Watch list monitoring – checkstransfer parties (originator, beneficiary, andnarrative fields) and the existing customerdatabase for any listed undesirableindividual or corporation;c. Investigation – checks for givennames throughout the history of paymentstored in the system;d. Can generate all the CTRs of thecovered institution accurately andcompletely with all the mandatory fieldproperly filled up;e. Must provide a complete audit trail;f. Capable of aggregating activities ofa customer with multiple accounts on aconsolidated basis for monitoring andreporting purposes; andg. Has the capability to record all STsand support the investigation of alertsgenerated by the system and brought to theattention of Senior Management whether ornot a report was filed with the AMLC.UBs and KBs with existing electronicsystem of flagging and monitoringtransactions already in place shall ensurethat their existing system is updated to befully compliant with functionalities as thoserequired herein. For this purpose, they shallbe given ninety (90) days from 27 January2011 within which to make their systemfully operational and automated with all thefunctionalities stated above.(Circular No. 706 dated 05 January 2011)§ 4807Q.3 Manual monitoring. Forcovered institutions other than UBs andKBs, it need not have an electronic systemof flagging and monitoring transactions butshall ensure that it has the means offlagging and monitoring the transactionsmentioned in Subsec. 4807Q.2. It shallmaintain a register of all STs that have beenbrought to the attention of SeniorManagement whether or not the same wasreported to the AMLC.(Circular No. 706 dated 05 January 2011)§ 4807Q.4 Electronic submission ofreports. The CTR and STR shall besubmitted to the AMLC in a securedmanner, in electronic form and inaccordance with the reporting proceduresprescribed by the AMLC. The coveredinstitutions shall provide complete andaccurate information of all the mandatoryfields required in the report. In order toprovide accurate information, the coveredinstitution shall regularly update customeridentification information at least onceevery three (3) years.For the purpose of reporting in asecured manner, all covered institutionsshall register with the AMLC within ninety(90) days from 27 January 2011 by directlycoordinating with that office for theproper assignment of their institution codeand facilitation of the reporting process.All covered institutions that havepreviously registered need not re-register.Only their respective complianceofficers or duly authorized officers shallelectronically sign their coveredtransaction reports and suspicioustransaction reports.Electronic copies of CTRs and STRsshall be preserved and safely stored for atleast for at least five (5) years from thedates the same were reported to theAMLC.(Circular No. 706 dated 05 January 2011, as amended byCL-2011-078 dated 11 October 2011)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 21

§§ 4807Q.5 - 4808Q11.12.31§ 4807Q.5 Exemption from BankSecrecy Laws. When reporting covered orsuspicious transactions to the AMLC,covered institutions and their officers andemployees shall not be deemed to haveviolated R.A. No. 1405, as amended, R.A.No. 6426, as amended, R.A. No. 8791 andother similar laws, but are prohibited fromcommunicating, directly or indirectly, in anymanner or by any means, to any person, thefact that a covered or suspicious transactionreport was made, the contents thereof, orany other information in relation thereto. Incase of violation thereof, the concernedofficer and employee of the coveredinstitution shall be criminally liable inaccordance with the provision of the AMLA,as amended.(Circular No. 706 dated 05 January 2011)§ 4807Q.6 Confidentiality provisionWhen reporting CTs and STs to the AMLC,covered institutions, their directors, officersand employees are prohibited fromcommunicating directly or indirectly, in anymanner or by any means, to any person orentity, the media, the fact that a covered orsuspicious transaction report was made, thecontents thereof, or any other informationin relation thereto. Neither may suchreporting be published or aired in anymanner or form by the mass media,electronic mail, or other similar devices. Incase of violation thereof, the concernedofficer and employee of the coveredinstitution and media shall be heldcriminally liable.(Circular No. 706 dated 05 January 2011)§ 4807Q.7 Safe harbor provisionNo administrative, criminal or civilproceedings, shall lie against any person forhaving made a CTR or an STR in the regularperformance of his duties in good faith,whether or not such reporting results in anycriminal prosecution under the AMLA, asamended, its RIRR or any other law.(Circular No. 706 dated 05 January 2011)D. Record Keeping and RetentionSec. 4808Q Record Keeping. All customeridentification records of covered institutionsshall be maintained and safely stored as longas the account exists. All transactionrecords, including all unusual or suspiciouspatterns of account activity whether or notan STR was filed with the AMLC, of coveredinstitutions shall be maintained and safelystored for five (5) years from the date oftransaction.Said records and files shall contain thefull and true identity of the owners orholders of the accounts involved in thetransactions such as the ID card andphoto of individual customers and thedocuments mentioned in Subsec.4806Q.2.b, for entities, customerinformation file, signature card ofauthorized signatory/ies, and all otherpertinent customer identificationdocuments as well as all factualcircumstances and records involved in thetransaction. Covered institutions shallundertake the necessary adequate securitymeasures to ensure the confidentiality ofsuch file. Covered institutions shallprepare and maintain documentation, inaccordance with the aforementionedclient identification requirements, on theircustomer accounts relationships andtransactions such that any account,relationship or transaction can bereconstructed as to enable the AMLC, and/or the courts to establish an audit trail formoney laundering.Whenever a bank engaged inmicro-finance operations has tagged amicro-finance client, as defined under BSPregulations, as low risk in accordance withSubsec. 4806Q.1.a., the customer’sidentification and transaction records shallbe retained for five (5) years except that saidretention period may be reduced to three(3) years provided that sufficient documentsduly support the low risk profile of saidQ RegulationsPart VIII - Page 22Manual of Regulations for Non-Bank Financial Institutions

§§ 4808Q - 4809Q11.12.31customer and the covered institutions keepa record of the names of these low riskcustomers after the lapse of three (3) years. Thisprovision is subject to Subsec. 4808Q.2, whena money laundering case is filed in court.(Circular No. 706 dated 05 January 2011)§ 4808Q.1 Closed accounts. Withrespect to closed accounts, the records oncustomer identification, account files andbusiness correspondences shall bepreserved and safely stored for at least five(5) years from the date of closure.(Circular No. 706 dated 05 January 2011)§ 4808Q.2 Retention of records in casea money laundering case has been filed incourt. If a money laundering case based onany report kept by the covered institutionconcerned has been filed in court, said filemust be retained beyond the five (5) yearretention period and until it is confirmedthat the case has been finally resolved orterminated by the court.(Circular No. 706 dated 05 January 2011)§ 4808Q.3 Safekeeping of records anddocuments. The covered institution shalldesignate at least two (2) officers who willbe jointly responsible and accountable inthe safekeeping of all records anddocuments required to be retained by theAMLA, as amended, its RIRR and this Part.They shall have the obligation to make thesedocuments and records readily availablewithout delay during BSP regular or specialexaminations.(Circular No. 706 dated 05 January 2011)§ 4808Q.4 Form of records. Recordsshall be retained as originals or copies insuch form as are admissible in courtpursuant to existing laws, such as theE-Commerce Act and its implementing rulesand regulations, and the applicable rulespromulgated by the Supreme Court.(Circular No. 706 dated 05 January 2011)E. Training ProgramSec. 4809Q AML Training ProgramCovered institutions shall formulate anannual AML training program aimed atproviding all their responsible officers andpersonnel with efficient, adequate andcontinuous education program to enablethem to fully and consistently complywith all their obligations under this Partrules, the AMLA, as amended, and itsRIRR.Trainings of officers and employeesshall include awareness of their respectiveduties and responsibilities under theMLPP particularly in relation to thecustomer identification process, recordkeeping requirements and CT and STreporting and ample understanding of theinternal processes including the chain ofcommand for the reporting andinvestigation of suspicious and moneylaundering activities.The program shall be designed in amanner that will comprise of variousfocuses for new staff, front-line staff,compliance office staff, internal audit staff,officers, senior management, directors andstockholders. Regular refresher trainingsshall likewise be provided in order toguarantee that officers and staff areinformed of new developments andissuances related to the prevention ofmoney laundering and terrorism financingas well as reminded of their respectiveresponsibilities vis-à-vis the coveredinstitution’s processes, policies andprocedures.Covered institution’s annual AMLtraining program and records of all AMLseminars and trainings conducted by thecovered institution and/or attended by itspersonnel (internal or external), includingcopies of AML seminar/training materials,shall be appropriately kept by thecompliance office/unit/department, andshould be made available during periodicor special BSP examination.(Circular No. 706 dated 05 January 2011)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart VIII - Page 23

§§ 4810Q - 4899Q11.12.31F. BSP Authority and EnforcementActionsSec. 4810Q BSP Authority to ExamineDeposits and Investments; AdditionalException to the Bank Secrecy Act;Annual Testing of Numbered AccountsTo ensure compliance with the AMLA, asamended, its RIRR, and this Part, the BSPmay inquire into or examine any depositor investment with any banking institutionor NBFI and their subsidiaries andaffiliates when the examination is madein the course of a periodic or specialexamination, in accordance with theRules of Examination of the BSP.The BSP may likewise conduct annualtesting solely limited to the determinationof the existence and true identity of theowners of numbered and similar accounts.In the course of the periodic andspecial examination for purposes ofcomplying with the provisions of theAMLA, as amended, its RIRR, and this Part,the covered institutions, their officers andemployees and the BSP shall not bedeemed to have violated the provisions ofR. A. No. 1405, as amended, R.A. No.6426, as amended, R.A. No. 8791 andother similar laws and Subsec. 4807Q.6,when disclosing information to BSPrelative to covered and suspicioustransaction reports filed with the AMLC.(Circular No. 706 dated 05 January 2011)Sec. 4811Q - 4898Q (Reserved)Sec. 4899Q Sanctions and Penalties. In linewith the objective of ensuring that coveredinstitutions maintain high anti-moneylaundering standards in order to protect itssafety and soundness as well as protectingthe integrity of the national banking andfinancial system, violation of this Part shallconstitute a major violation subject to thefollowing enforcement actions against theboard of directors, senior management andline officers, not necessarily according topriority:a. Written reprimand;b. Suspension or removal from theoffice they are currently holding; and/orc. Disqualification from holding anyposition in any covered institution.In addition to the non-monetarysanctions stated above, BSP may alsoimpose monetary penalties computed inaccordance with existing regulations andin coordination with the Anti-MoneyLaundering Council.Enforcement actions shall be imposedon the basis of the over-all assessment ofthe covered institution’s AML riskmanagement system. Whenever a coveredinstitution’s AML compliance system isfound to be grossly inadequate, this maybe considered as unsafe and unsoundbanking practices that may warrantinitiation of prompt corrective action.(Circular No. 706 dated 05 January 2011)Q RegulationsPart VIII - Page 24Manual of Regulations for Non-Bank Financial Institutions

§§ 4901Q - 4902Q.111.12.31PART NINEOTHER NON-BANK OPERATIONSA. BANKING FEES/CHARGESSec. 4901Q (Reserved)§ 4901Q.1 (2008 - 4652Q) Annual feeson quasi-banks. QBs shall contribute to theBSP an annual fee to help defray the cost ofmaintaining the appropriate department ofthe SES.For purposes of computing the annualfees chargeable against QBs, the term TotalAssessable Assets shall be the amountreferred to as the total assets under Section28 of R.A. No. 7653 (end-of-quarter totalassets per balance sheet, after deductingcash on hand and amounts due from banks,including the BSP and banks abroad) plusTrust Department accounts.Average Assessable Assets (AAAs) shallbe the summation of end-of-quarter totalassessable assets divided by the number ofquarters in operation during the particularassessment period.The annual fees for QBs beginningassessable year 2010 shall be one thirtysecond(1/32) of one percent (1%) multipliedby their AAAs of the preceding year.Securities held under custodianshipshall be exempt from annual fees.Annual fees to be collected from QBsshall be debited from their respectivedeposits with the BSP by the BSPComptrollership Department upon receiptof the notice of the assessment from theappropriate department of the SES.Where the deposit account isinsufficient to cover the assessment fee, theBSP shall bill the QB for the full amount ofthe annual fee or for the balance thereof notcovered by its deposit account, as the casemay be.Within thirty (30) calendar days fromreceipt of the bill, the QB shall make thecorresponding remittance to the BSP. Failureto pay the bill within the prescribed periodshall subject the QB to administrativesanctions.The guidelines in the collection of theannual supervisory fees for the year 2011are provided in Appendix Q-51.(As amended by M-2011-029 dated 26 May 2011, CircularNo. 714 dated 10 March 2011, M-2010 -013 dated 31 May 2010,Circular No. 687 dated 21 May 2010, M -2009-046 dated17 November 2009, M-2009-004 dated 12 February 2009 and CircularNo. 643 dated 10 February 2009)Sec. 4902Q (2008 - 4653Q) Payment ofFines and Other Charges. The followingregulations shall govern the payment of finesand other charges by QBs.§ 4902Q.1 (2008 - 4653Q.1)Guidelines on the imposition of monetarypenalties. The following are the guidelineson the imposition of monetary penalties onQBs, their directors and/or officers:a. Definition of terms. For purposes ofthe imposition of monetary penalties, thefollowing definitions are adopted:(1) Continuing offenses/violations areacts, omissions or transactions entered into,in violation of laws, BSP rules andregulations, Monetary Board directives, andorders of the Governor which persist fromthe time the particular acts were committedor omitted or the transactions were enteredinto until the same were corrected/rectifiedby subsequent acts or transactions. Theyshall be penalized on a per calendar daybasis from the time the acts were committed/omitted or the transactions were effected upto the time they were corrected/rectified.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart IX - Page 1

§§ 4902Q.1 - 4902Q.209.12.31(2) Transactional offenses/violations areacts, omissions or transactions entered intoin violation of laws, BSP rules andregulations, Monetary Board directives, andorders of the Governor which cannot becorrected/rectified by subsequent acts ortransactions. They shall be meted with onetimemonetary penalty on a per transactionbasis.(3) Continuing penalty refers to themonetary penalty imposed on continuingoffenses/violations on a per calendar daybasis reckoned from the time the offense/violation occurred or was committed untilthe same was corrected/rectified.(4) Transactional penalty refers to a one(1)-time penalty imposed on a transactionaloffense/violation.b. Basis for the computation of theperiod or duration of penalty. Thecomputation of the period or duration of allpenalties shall be based on calendar days.For this purpose the terms “per banking day”,“per business day”, “per day” and/or “a day”as used in the Manual, and other BSP rulesand regulations shall mean “per calendar day”and/or “calendar day” as the case may be.c. Additional charge for late paymentof monetary penalty. Late payment ofmonetary penalty shall be subject to anadditional charge of six percent (6%) perannum to be reckoned from the businessday immediately following the day saidpenalty becomes due and payable up to theday of actual payment. The penalty shallbecome due and payable fifteen (15)calendar days from receipt of the Statementof Account from the BSP. For QBs whichmaintain DDA with the BSP, penaltieswhich remain unpaid after the lapse of thefifteen (15)-day period shall be automaticallydebited against their corresponding DDAon the following business day withoutadditional charge. If the balance of theconcerned QB’s DDA is insufficient to coverthe amount of the penalty, said penalty shallalready be subject to an additional chargeof six percent (6%) per annum to bereckoned from the business day immediatelyfollowing the end of said fifteen (15)-dayperiod up to the day of actual payment.d. Appeal or request forreconsideration. A one (1)-time appeal orrequest for reconsideration on the monetarypenalty approved by the Governor/Monetary Board to be imposed on the QB,its directors and/or officers shall be allowed:Provided, That the same is filed with theappropriate department of the SES withinfifteen (15) calendar days from receipt of theStatement of Account/billing letter. Theappropriate department of the SES shallevaluate the appeal or request forreconsideration of the QB/individual andmake recommendations thereon withinthirty (30) calendar days from receipt thereof.The appeal or request for reconsiderationon the monetary penalty approved by theGovernor/Monetary Board shall be elevatedto the Monetary Board for resolution/decision. The running of the penalty periodin case of continuing penalty and/or theperiod for computing additional charge shallbe interrupted from the time the appeal orrequest for reconsideration was received bythe appropriate department of the SES up tothe time that the notice of the MonetaryBoard decision was received by the QB/individual concerned.(As amended by Circular Nos.662 dated 09 September 2009and 585 dated 15 October 2007)§ 4902Q.2 (2008 - 4653Q.2) Paymentof fines. QBs shall, within fifteen (15)calendar days from receipt of the statementof account from the BSP, pay the fines forreserve deficiency, reportorial delay/deficiency, refusal to permit examination,or failure to comply with, or violation of, anylaw or any order, instruction or regulationissued by the Monetary Board, or any order,instruction or ruling by the Governor.For QBs which maintain DDAs withthe BSP, fines which are unpaid after theQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart IX - Page 2

§§ 4902Q.2 - 4921Q09.12.31lapse of the fifteen (15)-day period shall beautomatically debited against thecorresponding DDA of the QB concerned:Provided, That if the balance of the entity’saccount is insufficient to cover the fines due,such fines shall be paid not later than thefollowing business day. For the purpose ofthis Section, business day means a day onwhich the BSP head office and the headoffice of the QB are open for business. Foruniform implementation of the aboveregulations, the procedural guidelinesembodied in Appendix Q-22 shall beobserved.(As amended by Circular Nos. 662 dated 09 September 2009and 585 dated 15 October 2007)§ 4902Q.3 (Reserved)§ 4902Q.4 (2008 - 4653Q.3) Check/demand draft payments to the BangkoSentral. QBs shall make all check anddemand draft payments for transactionsother than those required to be paid throughthe QBs’ DDA either to the BSP CashDepartment or to the BSP Regional Officesand Branches. Such payments shall beaccompanied by the appropriate form asshown in Appendix Q-22a. Payments notaccompanied by the required payment formsshall be presumed to be additions toreserves and shall be credited to the DDAof the paying QB.Check payments shall be value-datedwhen the check is cleared.(As amended by Circular Nos. 662 dated 09 September 2009and 585 dated 15 October 2007)Sec. 4903Q (2008 - 4604Q) Underwritingby Investment Houses. Underwritingcommitments and fees of IHs shall besubject to the rules issued by the SEC toimplement the provisions of P.D. No. 129,as amended (Appendix Q-18).Secs. 4904Q - 4920Q (Reserved)B. BANK AS COLLECTION/REMITTANCE AGENTSSec. 4921Q (2008 - 4660Q) Disclosure ofRemittance Charges and Other RelevantInformation. It is the policy of the BSP topromote the efficient delivery of competitivelypricedremittance services by banks and otherremittance service providers by promotingcompetition and the use of innovative paymentsystems, strengthening the financialinfrastructure, enhancing access to formalremittance channels in the source anddestination countries, deepening the financialliteracy of consumers, and improvingtransparency in remittance transactions,consistent with sound practices.Towards this end, NBFIs under BSPsupervision, including FXDs/MCs and RAs,providing overseas remittance services shalldisclose to the remittance sender and to therecipient/beneficiary, the followingminimum items of information regardingremittance transactions, as defined herein:a. Transfer/remittance fee - charge forprocessing/sending the remittance from thecountry of origin to the country ofdestination and/or charge for receiving theremittance at the country of destination;b. Exchange rate - rate of conversionfrom foreign currency to local currency, e.g.,peso-dollar rate;c. Exchange rate differential/spread -foreign exchange mark-up or the differencebetween the prevailing BSP reference/guiding rate and the exchange/conversionrate;d. Other currency conversion chargescommissions or service fees, if any;e. Other related charges - e.g.,surcharges, postage, text message ortelegram;f. Amount/currency paid out in therecipient country - exact amount of moneythe recipient should receive in local currencyor foreign currency; andManual of Regulations for Non-Bank Financial Institutions Q RegulationsPart IX - Page 3

§§ 4921Q - 4931Q.208.12.31g. Delivery time to recipients/beneficiaries - delivery period of remittanceto beneficiary stated in number of days,hours or minutes.Non-bank remittance service providersshall likewise post said information in theirrespective websites and display themprominently in conspicuous places within theirpremises and/or remittance/service centers.(Circular No. 534 dated 26 June 2006)Secs. 4922Q - 4930Q (Reserved)C. CREDIT RATING AGENCIESSec. 4931Q (2008 - 4657Q) Recognitionand Derecognition of Domestic CreditRating Agencies for Quasi-BankSupervisory Purposes. The followingregulations shall govern the recognitionand derecognition of domestic creditrating agencies (CRAs) for QB supervisorypurposes.§ 4931Q.1 (2008 - 4657Q.1) Statementof policy. The introduction in the financialmarket of new and innovative productscreate increasing demand for and relianceon CRAs by the industry players andregulators as well. As a matter of policy, theBSP wants to ensure that the reliance oncredit ratings is not misplaced. Thefollowing rules and regulations that shallgovern the recognition/derecognition ofdomestic CRAs for QB supervisory purposes.§ 4931Q.2 (2008 - 4657Q.2) Minimumeligibility criteria. Only ratings issued byCRAs recognized by the BSP shall beconsidered for BSP QB supervisorypurposes. The BSP, through the MonetaryBoard, may officially recognize a creditrating agency upon satisfaction of thefollowing requirements:a. Organizational structure(1) A domestic CRA must be a dulyregistered company under the SEC; and(2) A domestic CRA must have at leastfive (5) years track record in the issuance ofreliable and credible ratings. In the case ofnew entrants, a probationary status may begranted: Provided, That the CRA employsprofessional analytical staff with experiencein the credit rating business.b. Resources(1) Human Resources(a) The size and quality of the CRA’sprofessional analytical staff must have thecapability to thoroughly and competentlyevaluate the assessed/rated entity’screditworthiness;(b) The size of the CRA’s professionalanalytical staff must be sufficient to allowsubstantial on-going contact with seniormanagement and operational levels ofassessed/rated entities as a routinecomponent of the surveillance process;(c) The CRA shall establish a RatingCommittee composed of adequatelyqualified and knowledgeable individuals inthe rating business, majority of whom musthave at least five (5) years experience incredit rating business;(d) The directors of the CRA mustpossess a high degree of competencyequipped with the appropriate educationand relevant experience in the ratingbusiness;(e) The directors, officers, membersof the rating committee and professionalanalytical staff of the CRA have not at anytime been convicted of any offenseinvolving moral turpitude or violation ofthe SRC; and(f) The directors, officers, members ofthe rating committee and professionalanalytical staff of the CRA are not currentlyinvolved as a defendant in any litigationconnected with violations of the SRC norincluded in the BSP watchlist.(2) Financial resources(a) The CRA must have the financialcapability to invest in the necessarytechnological infrastructure to ensureQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart IX - Page 4

§ 4931Q.208.12.31speedy acquisition and processing ofdata/information and timely release ofreliable and credible ratings; and(b) The CRA must have financialindependence that will allow it to operatefree from economic and political pressures.c. Objectivity(1) The CRA must use a rigorous andsystematic assessment methodology that hasbeen established for at least one (1) year;however, a three (3)-year period ispreferable;(Next page is Part IX - Page 5)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsPart IX - Page 4a

§ 4931Q.208.12.31(2) The assessment methodology of theCRA must be based both on qualitative andquantitative approaches; and(3) The CRA must use an assessmentmethodology that is subject to on-goingreview and is responsive to changes in theoperations of assessed/rated entities.d. Independence(1) The CRA must be free from controlof and undue influence by the entities itassesses/rates;(2) The assessment process must befree from ownership pressures to allowmanagement to exercise independentprofessional judgement;(3) Persons directly involved in theassessment process of the CRA are freefrom conflicts of interest with assessed/rated entities, and(4) The CRA does not assess/rate anassociate entity.e. Transparency(1) A general statement of theassessment methodology used by the CRAshould be publicly available;(2) The CRA shall disseminate to thepublic thru a well-circularized publication,all assigned ratings disclosing whether therating issued is solicited or unsolicited;(3) The rationale of ratings issued andrisk factors considered in the assessmentshould be made available to the public;(4) The ratings issued by the CRAshould be available both to domestic andforeign institutions with legitimateinterest; and(5) Publication of changes in ratingstogether with the basis for the changeshould be done on a timely basis.f. Disclosure requirements(1) Qualitative disclosures(a) Definition of ratings along withcorresponding symbols;(b) Definition of what constitutes adefault, time horizon within which a defaultis considered and measure of loss given adefault;(c) Material changes within the CRA(i.e., changes in management ororganizational structure, rating personnel,modifications of rating practices, financialdeterioration) that may affect its ability toprovide reliable and credible ratings.(2) Quantitative disclosures(a) Actual default rates experienced ineach rating category; and(b) Rating transitions of assessed/ratedentities over time (i.e., likelihood of an AAAcredit rating transiting to AA etc. over time).g. Credibility(1) The CRA must have a generalreputation of high standards of integrity andfairness in dealing with its clients andconducts its business in an ethical manner;(2) The CRA is generally accepted bypredominant users in the market (i.e.,issuers, investors, bankers, FIs, securitiestraders); and(3) The CRA must carry out its ratingactivities with due diligence to ensureratings are fair and appropriate.For purposes of this Section, asubsidiary refers to a corporation, morethan fifty percent (50%) of the voting stockof which is owned or controlled directlyor indirectly by the CRA while an affiliaterefers to a corporation, not more than fiftypercent (50%) but not less than tenpercent (10%) of the voting stock ofwhich is owned or controlled directly orindirectly by the CRA.Control exists when the parent ownsdirectly or indirectly through subsidiariesmore than one-half (½) of the voting powerof an enterprise unless, in exceptionalcircumstance, it can be clearlydemonstrated that such ownership doesnot constitute control. Control may alsoexist even when ownership is one-half (½)or less of the voting power of an enterprisewhen there is:(a) power over more than one-half (½)of the voting rights by virtue of anagreement with other stockholders;Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart IX - Page 5

§§ 4931Q.2 - 4931Q.508.12.31(b) power to govern the financial andoperating policies of the enterprise undera statute or an agreement;(c) power to appoint or remove themajority of the members of the board ofdirectors or equivalent governing body;(d) power to cast the majority votes atmeetings of the board of directors orequivalent governing body; or(e) any other arrangement similar toany of the above.h. Internal compliance procedures(1) The CRA must have the necessaryinternal procedures to prevent misuse orunauthorized disclosure of confidential/non-public information; and(2) The CRA must have rules andregulations that prevent insider trading andother conflict of interest situations.§ 4931Q.3 (2008 - 4657Q.3) Prequalificationrequirements. The applicationof a domestic CRA for BSP recognitionshall be submitted to the appropriatedepartment of the SES together with thefollowing information/documents:a. An undertaking(1) That the CRA shall comply withregulations, directives and instructionswhich the BSP or other regulatory agency/body may issue from time to time; and(2) That the CRA shall notify the BSPin writing of any material changes withinthe organization (i.e., changes inmanagement or organizational structure,rating personnel, modifications of itsrating practices, financial deterioration)that may affect its ability to providereliable and credible ratings.b. Other documents/information:(1) Brief history of the CRA, majorrating activities handled includinginformation on the name of the client, typeof instruments rated, size and year of issue;(2) Audited financial statements forthe past three (3) years and such otherinformation as the Monetary Board mayconsider necessary for selection purposes;(3) For new entrants, employment ofprofessional analytical staff with experiencein the credit rating business;(4) List of major stockholders/partners[owning at least ten percent (10%) of thevoting stocks of the CRA directly or alongwith relatives within the 1st degree ofconsanguinity or affinity];(5) List of directors, officers, membersof the rating committee and professionalanalytical staff of the CRA; including theirqualifications, experience related torating activities, directorship andshareholdings in the CRA and in othercompanies, if any;(6) List of subsidiaries and affiliatesincluding their line of business and thenature of interest of the CRA in thesecompanies;(7) Details of the denial of a previousrequest for recognition, if any (i.e.,application date, date of denial, reason fordenial, etc.); and(8) Details of all settled and pendinglitigations connected with the securitiesmarket against the CRA, its directors,officers, stockholders, members of therating committee and professionalanalytical staff, if any.§ 4931Q.4 (2008 - 4657Q.4) Inclusionin BSP list. The BSP will regularlycircularize to all banks and NBFIs anupdated list of recognized CRAs. The BSP,however, shall not be liable for any damageor loss that may arise from its recognitionof CRAs to be engaged by users.§ 4931Q.5 (2008 - 4657Q.5)Derecognition of credit rating agenciesa. Grounds for derecognition. CRAsmay be derecognized from the list of BSPrecognized CRAs under the followingcircumstances:Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsPart IX - Page 6

§§ 4931Q.5 - 4999Q08.12.31(1) Failure to maintain compliance withthe requirements under Subsec. 4657Q.2or any willful misrepresentation in theinformation/documents required underSubsec. 4657Q.3;(2) Involvement in illegal activitiessuch as ratings blackmail; creation of a falsemarket or insider trading; divulging anyconfidential information about a clientwithout prior consent to a third partywithout legitimate interest; indulging inunfair competition (i.e., luring clients ofanother rating agency by assuring higherratings, etc.); and(3) Any violation of applicable laws,rules and regulations.b. Procedure for derecognition. ACRA shall only be derecognized upon priornotice and after being given theopportunity to defend itself.§ 4931Q.6 (2008 - 4657Q.6) Recognitionof PhilRatings as domestic credit ratingagency for bank supervisory purposesCredit ratings assigned by Philippine RatingServices Corporation (PhilRatings) may beused, among others, for determiningappropriate risk weights in ascertainingcompliance with existing rules andregulations on risk-based capitalrequirements.Sec. 4932Q (2008 - 4659Q) InternationallyAccepted Credit Rating AgenciesInternationally accepted CRAs arerecognized for bank supervisory purposesto undertake local and national ratings:Provided, That said CRAs shall have at leasta representative office in the Philippines.Accordingly, credit ratings assigned bysaid CRAs may be used, among others, asbasis for determining appropriate riskweights in ascertaining compliance withexisting rules and regulations on risk-basedcapital requirements.Sec. 4933Q (2008 - 4659Q.6) Recognitionof Fitch Singapore Pte Ltd as InternationalCredit Rating Agency for BankSupervisory Purposes. The national ordomestic credit ratings of Fitch SingaporePte Ltd., a BSP-recognized internationalCRA with representative office in thePhilippines, is hereby recognized by theBSP for bank supervisory purposes.Accordingly, national or domestic creditratings assigned by Fitch Singapore PteLtd. may be used, among others, as basisfor determining appropriate risk weightsin ascertaining compliance with existingrules and regulations on risk-based capitalrequirements.Secs. 4934Q - 4998Q (Reserved)D. GENERAL PROVISION ONSANCTIONSSec. 4999Q (2008 - 4199Q) GeneralProvision on Sanctions. Unless otherwiseprovided, any violation of the provisionsof this Part shall be subject to Sections 36and 37 of R.A. No. 7653.The guidelines for the imposition ofmonetary penalty for violations/offenseswith sanctions falling under Section 37 ofR.A. No. 7653 on QBs, their directors and/or officers are shown in Appendix Q-39.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsPart IX- Page 7

APP. Q-108.12.31GUIDELINES TO EVALUATE INVESTMENT HOUSES(Appendix to Sec. 4105Q)a. Capital - The requirement is aminimum paid-in capital of P200.0 millionfor an investment house to be establishedin Metro Manila and P100.0 million for allothers. Foreign equity, if any, shall beregistered with and approved by the Boardof Investments and the BSP.b. Citizenship - Majority (51%) of thevoting stock shall be owned by Filipinos.c. Directorship/Officership - Majorityof the board members shall be Filipinos.Resident foreign directors and techniciansshall register with the Bureau ofImmigration and Deportation. Compliancewith the prohibition on interlockingdirectorship/officership between banks andinvestment houses and between QBs shallbe observed.d. Promotion of Public Interest andEconomic Growth -(1) Submission of a one (1)-yearinvestment program indicating:(a) Underwriting and distributionactivities. These shall show in details thevarious stages leading to the completionof an agreement. Target dates for each stagein the underwriting process shall beindicated which should serve as referencepoints in the event that an investment houseis unable to bring the program and itscomponents to fruition. Target volume ofunderwriting would be set initially attwenty-five percent (25%) of paid-in capital.(b) Fund mobilization. Emphasisshall be on maturities beyond one (1)year. Domestic and foreign sources shallbe indicated and the latter shall beevaluated in terms of pertinent BSPregulations.(c) Fund usage. Support of priorityinvestment areas of the Government andother projects which may be determinedby the BSP shall be emphasized. Fundsplaced on maturities beyond one (1) yearshall be preferred.(d) Planned distribution of portfolioActivities indicating money-marketservices and investment in subsidiariesand affiliates, while necessary to sustainthe investment house, shall besubordinated to the preferred activitiesabove-indicated. Other activities asfinancial management, counseling,distribution of equity and debentures for"public" ownership, etc., shall beconsidered.(2) The one (1)-year investmentprogram of the investment house shall berelated to the government developmentplan by indicating the portion of theinvestment and savings targets in the planwhich would be supported by theinvestment house industry.(3) A one (1)-year projected incomestatement showing major sources ofincome and expense items.(4) Operational agreement with otherFIs.(5) A statement justifying the operationof the investment house as not in conflictwith public interest and economic growth,taking into account the existing number ofinvestment houses, indicating:(a) record of underwriting;(b) evidence of medium and long-termloans;(c) evidence of obtaining funds withmaturity beyond one (1) year; and(d) equity investments which weresubsequently distributed to the public.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-1 - Page 1

APP. Q-108.12.31e. Organization, Direction andAdministration - The organizational/functional chart should match the organizationframework with operational objectives. Themanagement of the company, board ofdirectors and the managerial staff, must befirmly designated before it can be granted alicense to operate as an investment house.f. Integrity, Experience and Expertiseof Board and Management Staff(1) Formal training, academic or others;(2) Experience along financialmanagement, securities dealing, fundmanagement, project evaluation andfeasibility studies;(3) Absence of administrative orcriminal conviction; and(4) Affiliation with professionalorganizations.g. Branching - The rate at whichbranch offices are to be established shalldepend upon the ability of the companyto conduct operations from headquarters/head offices as well as on correspondent(banking) arrangements.Other factors to be considered are thefollowing:(1) Reserve and liquidity position; and(2) Profitability and capacity to absorblosses.Q RegulationsAppendix Q-1 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-208.12.31DETERMINATION OF AMOUNT OF ADDITIONAL CAPITALTHE ENTITY MUST PUT UP(PROJECTION BASE - LATEST AVAILABLE REPORT)(in thousand pesos)(Appendix to Subsec. 4151Q.2)(Name of Entity)A. 1. Estimated Amount of Risk Assets of PresentOffice for the Next 12 Monthsa. Actual Risk Assets P xxxb. Add: xx% of (a) xxxRisk Assets - (Base Period)P xxxRisk Assets - (Previous Year)xxxIncreaseP xxxRate of Increase = increase = xx%actual risk assetsc. Total of (a) and (b) P xxx2. Maximum Possible Level of Risk Assets Basedon the Base Period Figures:a. Net worth Less 30% of Paid-inCapital (Pxxx - xxx)P xxxb. 100% of Borrowings (Bills Payable) xxxc. 80% of Unutilized Acceptances orCredit Line with Foreign Bank(s) xxx P xxxB. Estimated Risk Assets for the First 12Months of Operation:1. Branch Approved but not yet Opened: P xxx2. Branch Being Applied for: xxxAdd: Lower of A.1 or A.2xxxC. Total Estimated Risk Assets for 12 Months P xxxD. 10% of C (Minimum Paid-in Capital Required) P xxxManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-2 - Page 1

APP. Q-208.12.31E. Less:Present Combined Capital AccountsP xxx(Base Period Figures)Add: xx% of above xxx xxxCapital Accounts - (Base Period)Capital Accounts - (Previous Year)IncreaseP xxxxxxP xxx*Rate of Increase = Increase = xx%Capital Accounts ofPrevious YearF. Estimated Excess of Capital over Minimum CapitalRequired or Additional Amount of Capital ApplicantMust Put Up, as the case may be P xxx*The computation to arrive at the "rate of increase" in capital accounts shall only be considered if there is sufficientindication or evidence that the NBQB will continue to follow the same amount of increase in capital accounts for thesucceeding year. If no evidence is found that the NBQB will continue to increase its capital accounts for the same amountfor the succeeding year, then computations should consider only the amount of net profits (after dividends) plowed into thebusiness for the year immediately preceding the date of application plus the amount of capital that the NBQB promised toput up per its schedule or program submitted to the Bangko Sentral. If no such schedule or program was submitted, thenonly the amount of net profits (after dividends) for the year immediately preceding the date of application should beconsidered.Q RegulationsAppendix Q-2 - Page 2Manual of Regulations for Non-Bank Financial Institutions

Manual of Regulations for Non-Bank Financial InstitutionsA-1 Unnumbered 4115Q(Cir. No.574 dated07.10.07)A-2LIST OF REPORTS REQUIRED FROM QUASI-BANKS[Appendix to Sec. 4192Q (2008 - 4162Q)]Submission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureComputation of the Adjusted Risk-Based CapitalAdequacy Ratio Covering Combined Credit Risk,Market Risk and Operational Risk 1-solo basis (Head Office and branches)- consolidated basis (Parent QB plus subsidiaryfinancial allied undertakings but excluding insurancecompanies)Computation of the Risk-Based Capital Adequacy ratioCovering credit Risks- solo basis (Head Office and branches)- consolidated basis (Parent QB plus subsidiaryfinancial allied undertakings but excluding insurancecompanies)QuarterlyQuarterly- 15th business day afterend of reference quarter-30th business day afterend of reference quarter- 15th business day afterend of reference quarter-30th business day afterend of reference quarterOriginal copy toCPCD/ISDAppropriate departmentof the SESA-1 4192Q.3Copy of Published Statement of Condition withPublisher's CertificateQuarterly5th business day frompublication dateOriginal - Appropriatedepartment of the SESQ RegulationsAppendix Q-3 - Page 1A-1 Unnumbered 4611Q.5(Cir.No.668 dated10.02.09)1For QBs which are subsidiaries of UBs and KBsReport on Outstanding Derivatives ContractsMonthly15th banking day fromend of reference month-do-APP. Q-309.12.31

Q RegulationsAppendix Q-3 - Page 2Submission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureA-1 Unnumbered 4611Q.5(Cir. No.668 dated10.02.09)A-2 Unnumbered 4141Q.9(no prescribedform)Report on Trading Gains/(Losses) on FinancialDerivativesAcknowledgment receipt of copies of specific dutiesand responsibilities of the board of directors and of adirector and certification that they fully understandthe sameMonthlyAnnual oras directorsare elected15th banking day fromend of reference month30th business day afterdate of electionOriginal - Appropriatedepartment of the SESAppropriate department ofthe SESAPP. Q-309.12.31Manual of Regulations for Non-Bank Financial InstitutionsA-2 BSP-7-26-02-A/B 4192QA-2 BSP-7-26-02-A 4192QSchedule 1(IHs only)A-2 BSP-7-26-02-B 4192QSchedule 1(FCs only)A-2 BSP-7-26-02-A 4192QSchedule 5(For IHs)A-2 BSP 7-26-02-B 4192QSchedule 5(For FCs)A-2 BSP-7-26-02-A/B 4192QSchedule 4A-2 BSP-7-26-02-A/B 4192QSchedule 3Consolidated Statement of ConditionSchedules:Loans/Receivables, Trading Account Securities (TAS)- Loans Underwritten Debt SecuritiesLoans/Receivables and Trading Account Securities(TAS) - LoansBills Payable and Bonds PayableBills Payable and Bonds PayableRemaining Maturities of Selected Accounts InterestRate and Maturity MatchingInterest Rate and Maturity MatchingMonthly15th business day afterend of reference monthSeparate report for HeadOffice and each Branch;and a Consolidated Reportfor Head Office andBranches; to be submittedvia electronic mail to SDC

Manual of Regulations for Non-Bank Financial InstitutionsSubmission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureA-2 BSP-7-26-02-A 4192QSchedule 2(For IHs)A-2 BSP-7-26-02-B 4192QSchedule 2(For FCs)A-2 BSP-7-26-02-A 4192QSchedule 2.1(For IHs)A-2 BSP-7-26-02-B 4192QSchedule 2.1(For FCs)A-2 BSP-7-26-02-A 4192QSchedule 1(For IHs)Underwritten Securities, Trading Account Securities -Investments, Available for Sale Securities andInvestments in Bonds & Other Debt InstrumentsTrading Account Securities Investments, Available forSale Securities and Investments in Bonds & Other DebtInstrumentsUnderwritten Securities, Trading Account Securities -Investments, Available for Sale Securities andInvestments in Bonds & Other Debt Instruments(Government Issue - Local Government Units)Trading Account Securities - Investments, Availablefor Sale Securities and Investments in Bonds & OtherDebt Instruments (Government Issue - LocalGovernment Units)Loans/Receivables, Trading Account Securities - Loansand Underwritten Debt SecuritiesA-2 BSP-7-26-02-B 4192QSchedule 1(For FCs)Loans/Receivables and Trading Account Securities -LoansA-2 BSP-7-26-02-B 4192QSchedule 1.1(For FCs)Loans/Receivables and Trading Account Securities -Loans (Borrowing of Local Government Units)Q RegulationsAppendix Q-3 - Page 3A-2 BSP-7-26-02-A 4192QSchedule 1.1(For IHs)A-2 BSP-7-26-02-B 4192QSchedule 6(FCs only)Loans/Receivables, Trading Account Securities - Loansand Underwritten Debt Securities (Borrowings of LocalGovernment Units)Data on Firm's BusinessesAPP. Q-309.12.31

Q RegulationsAppendix Q-3 - Page 4Submission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureA-2 BSP-7-26-03-A/B 4192QConsolidated Statement of Income and ExpensesMonthly15th business dayfollowing end ofreference monthSeparate report for HeadOffice and each branch;and a Consolidated Reportfor Head Office andBranches; to be submittedvia electronic mailAPP. Q-309.12.31A-2 BSP-7-26-05 4253Q(Asamendedby MABdated02.24.05)Consolidated Report on Required and AvailableReserves Against Deposit Substitutes and SpecialFinancingWeekly4th business day followingend of reference weekcc: mail or e-mail to SDC,hard copy to appropriatedepartment of the SESManual of Regulations for Non-Bank Financial InstitutionsA-2 BSP-7-26-05.1 4253QBSP-7-26-05.2 4253QA-2 BSB-7-26-05.3 4253QA-2 BSP-7-26-06 4115Q4115QComponents of Deposit Substitutes with OriginalMaturities of 730 Days or LessComponents of Deposit Substitutes with OriginalMaturities of more than 730 daysEligible Philippine Government Securities Utilized asReserves Against Deposit SubstitutesStatement of Capital Required and Capital AccountsControl Prooflist duly signed by the authorized officerof the institution-do--do-Semi-Monthly7th business day after15th and end of monthSeparate report for HeadOffice and each branch;and a Consolidated Reportfor Head Office andBranches; to be submittedvia electronic mail-do--do--do-E-mail to SDC:srsobqb@bsp.gov.phFax to SDC @ 523-3461

Manual of Regulations for Non-Bank Financial InstitutionsSubmission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureA-2 BSP-7-26-24 4192Q(Asamendedby CLdated08.06.03)A-2 Unnumbered 4239Q.3(no prescribed form)A-2 Unnumbered 4801Q(Rev.May2002 asamendedby Cir. No.612 dated06.03.08)A-2 Unnumbered 4801QCredit and Equity Exposures to Individuals/Companies/Groups Aggregating P1 million and above.Notarized Control ProoflistNotice to BSP on SEC's approval of bond issue togetherwith the documents required by the SEC for the creationand registration of the bond issueReport on Suspicious TransactionsReport on Covered TransactionsQuarterlyAsapprovedAstransactionoccurs15th business day fromend of reference quarter3rd business day fromapproval by SEC10th business day fromdate of transaction/knowledgeElectronic submission/diskette - SDCFax to SDCOriginal - Appropriatedepartment of the SESOriginal and duplicate -Anti-Money LaunderingCouncil (AMLC)-do--do--do--do--do-A-2 Unnumbered 4801Q(no prescribed form)Certification of compliance with existing anti-moneylaundering regulationsAnnually20th business day afterdate of electionTo be submitted to theappropriate departmentof the SESQ RegulationsAppendix Q-3 - Page 5A -2 Unnumbered (Cir. No.609 dated05.26.08as amendedby M-022dated06.26.08)Financial Reporting Package for Trust InstitutionsSchedules:Balance SheetA1 to A2B to B2Main ReportDetails of Investments in Debt and EquitySecuritiesQuarterly20th banking day afterend of reference quarterSDCsdcnbfi-frpti@bsp.gov.phAPP. Q-309.12.31

Q RegulationsAppendix Q-3 - Page 6Submission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureC to C2D to D2EE1 to E1BDetails of Loans and ReceivablesWealth/Asset/Fund Management - UITFFiduciary AccountsOther Fiducirary Services - UITFAPP. Q-309.12.31Income StatementControl ProoflistQuarterly20th banking day afterend of reference quarterSDCsdcnbfi-frpti@bsp.gov.phA-3 BSP-7-26-18DF 4326QConsolidated Monthly Report on CreditAccommodations to Directors, Officers,Stockholders and Their Related InterestsMonthly15th calendar day fromend of reference monthSDCManual of Regulations for Non-Bank Financial InstitutionsA-3 BSP-7-26-18.1 4326QA-3 Unnumbered 4192Q(CL-050dated10.04.07andCL-059dated11.28.07)A-3 Unnumbered 4334QA-3 Unnumbered 4328Q.5(Cir. No.560 dated01.31.07)Credit Accommodations to Directors, Officers,Stockholders, and Their Related InterestsReport on Borrowings of BSP PersonnelCopy of Written Approval of Board of Directors onCredit Accommodations to Directors, Officers,Stockholders, and Their Related InterestsTransmittal of Board Resolution/Written Approval onCredit Accomodations to Subsidiaries and/or Affiliates-do--do-QuarterlyAsApprovedAs loan tosubsidiariesand/oraffiliates isapproved15th business day afterend of reference quarter20th business day fromdate of approval20th banking day afterdate of approval ordirectorOriginal CPCD/ISDOriginal to SDCOriginal - Appropriatedepartment of the SESOriginal and duplicateappropriate department ofthe SES

Manual of Regulations for Non-Bank Financial InstitutionsSubmission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureB Unnumbered 4141Q.4B Unnumbered 4143Q.4(no prescribedform)B BSP-7-26-13 4306QB BSP-7-26-15 4192Q(IH only)B BSP-7-26-20 4381QB BSP-7-26-21 4103Q(Asamendedby Cir.No. 557dated01.12.07)Notice of Election/Appointment of Members of Boardof Directors and CommitteesReport on Disqualification of Director/OfficerPast Due Receivables, Loans and/or CommercialPapers/Private SecuritiesReport on Underwriting ActivitiesReport on Equity Investments in Non-AlliedUndertakingsBorrowing-Investment ProgramAs changeoccursAsdisqualificationoccursQuarterly-do--do-SemestrallyAnnually10th day from election/assumption of officeWithin 72 hours fromreceipt of report byboard of directors15th calendar day afterend of reference quarterEnd of month followingeach quarter15th business dayfollowing end ofreference semesteron or before Nov. 30Original - Appropriatedepartment of the SESAppropriatedepartment of the SESOriginal - Appropriatedepartment of the SES-do-See Annex Q-3-a fordetails of the reportB BSP-7-26-22 4192Q(IH only)Annual Underwriting ProgramAnnually1st working day ofMarch of reference yearOriginal - Appropriatedepartment of the SESQ RegulationsAppendix Q-3 - Page 7B BSP-7-26-26 4192Q.3Statement of Condition for Publication(See Sec. 4192Q.3 for requirement on publication ofnames of directors/officers)Control Prooflist duly signed by the authorized officerof the institutionQuarterly20th business day fromreceipt of callE-mail to SDC:srso-nbqb@bsp.gov.phFax to SDC@523-3461APP. Q-309.12.31

Q RegulationsAppendix Q-3 - Page 8Submission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureB Unnumbered 4235Q.14B Unnumbered 4190QDaily Report on Interbank Borrowings not EffectedThrough Clearing Account with BSPConsolidated Annual Financial Statements ofFinancial Intermediaries and their AlliedUndertakings/Affiliates/Subsidiaries supported byIndividual Annual Undertakings/Affiliates/Subsidiariesand their Audited Financial StatementsDaily(only whenthere aretransactionscovered)AnnuallyNoon of business dayfollowing date of report120th calendar day afterend of reference yearOriginal - Appropriatedepartment of the SES-do-APP. Q-309.12.31(Refer to Subsec. 4192Q.3 for guidelines onconsolidation of statements)Manual of Regulations for Non-Bank Financial InstitutionsB Unnumbered 4192Q(no prescribed form)B Unnumbered 4190Q(no prescribed form)B Unnumbered 4192QBUnnumbered 4192QB Unnumbered 4192QAnnual Report of Management to StockholdersCovering Results of Operations for the Previous YearAudited Financial Statements for Previous YearPrepared by the External Auditor and theCorresponding Auditor's Letter of CommentsReport on Crimes/Losses for Head Office/BranchesSee Annex Q-3-c for reporting guidelinesBoard resolution on quasi-bank's signatories of reportsubmitted to BSPDocumentary requirements/information onorganizational structure and operational policiesAnnuallyAnnuallyAs crime orincidentoccursAsauthorizedUponsubmissionofapplicationto engage inQBFAs changesoccursAs soon as available90th day after the startof audit48th hour fromknowledge of crime/incident3rd day from date ofresolution15th calendar day fromchange/issuance-doSee Annex Q-3-e ford o c u m e n t a r yrequirements/informationrequired-do--do--do--do-

Manual of Regulations for Non-Bank Financial InstitutionsSubmission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureB Unnumbered 4192Q(no prescribedform)B Unnumbered 4425Q.2(no prescribedform)Corporate Secretary's Certification under oath on listof stockholders and/or groups of stockholdersReport on Required and Available Reserves on Peso-Denominated CTFs, Such Other Managed Peso Fundsand TOFA-OthersControl Prooflist duly signed by the authorizedofficer of the institutionReconciliation statement on demand deposit with BSPAs change incomposition ofstockholdersoccursWeeklyMonthlyImmediately after change3rd business dayfollowing referenceweek7th business day fromreceipt of BSP statementof accountOriginal - Appropriatedepartment of the SESTo be submitted byinstitutions with trustoperationsOriginal - Appropriatedepartment of the SESE-mail to SDC:srso-nbqb@bsp.gov.phFax to SDC @ 523-3461Original to be submittedto BSP ComptrollershipDepartment; onecopy to appropriatedepartment of the SESB Unnumbered 4625Q.9(Rev. Dec.2007 perCir. No.591 dated12.27.07)Report on FX Swaps with Customers 1 where 1st Leg isa Purchase of FX Against Pesos (For QBs withderivatives licenseMonthly5th business day afterend of reference monthID @ e-mail:iod@bsp.gov.phcc: mail SDCQ RegulationsAppendix Q-3 - Page 9B Unnumbered 4625Q.9Report on Cancellations, Roll-overs and Non-Deliveryof FX Forwards Purchase-Sales Contracts and ForwardLeg of Swap Contracts 1 (For QBs with derivativeslicense)Monthly5th business day afterend of reference month-do-APP. Q-309.12.31

Q RegulationsAppendix Q-3 - Page 10Submission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureB SES Form 6H 4306Q.5(CBP-7-16-21),revisedNotice/Application for Write-off of Loans, Other CreditAccommodations, Advances and Other AssetsWaiver of the Confidentiality of Information underSections 2 and 3 of R.A. No. 1405, as amendedAs write-offoccursAstransactionoccurs25th business day priorto the intended date ofwrite-offOriginal and duplicate -Appropriate department ofthe SESAPP. Q-309.12.31B SEC Form MABdated09.02.05General Information SheetAnnually30th day from date ofAnnual Stockholders'meeting or if changesoccur, 7th day from dateof changeDrop box - SEC CentralReceiving SectionManual of Regulations for Non-Bank Financial InstitutionsM-005dated02.04.08M-019dated05.05.08B Unnumbered 4235Q.12(Cir. No.467 dated01.10.05)Disclosure Statement on SPV TransactionsReport on NDF transactions wirh non-residentControl ProoflistReport on the Undocumented RepurchaseAgreementsQuarterlyWeekly-do-15th banking day afterend of reference quarter2nd banking day afterend of referenceweekWithin 72 hours fromknowledge of transactionsSDCEmail to SDCsdc-ndf@bsp.gov.phcc: Treasury Dept.fx-omo@bsp.gov.phFax to SDC @(632) 5233461or 5230230Appropriate departmentof the SES

Manual of Regulations for Non-Bank Financial InstitutionsSubmission SubmissionCategory Form No. MOR Ref. Report Title Frequency Deadline ProcedureB Unnumbered 4235Q.12(Cir. No.467 dated01.10.05)B SES II Form 15 4142Q(NP08-TB) (Asamendedby M-024dated07.31. 08)MAB dated09.02.05Notarized certification that the bank did not enter inRepurchase Agreement covering GovernmentSecurities, Commercial Papers and other Non-Negotiable Securities or Instruments that are notdocumentedBiographical Data of Directors/Officers- If submitted in diskette form - Notarized first pageof each of the directors'/officers' bio-data saved indiskette and control prooflist- If sent by electronic mail - Notarized first page ofBiographical Data or Notarized list of names ofDirectors/Officers whose Biographical Data weresubmitted thru electronic mail to be faxed to SDC(CL dated 01.09.01)Certification under oath of independent directors thathe/she is an independent directors as defined underSubsec. X141.10 and that all the information therebysupplied are true and correctSemestralAfterelection orappointmentand aschangesoccur5th banking day afterend of every semester7th banking day fromthe date of the meetingof the board of directorsin which the directors/officers are elected orappointedAppropriate departmentof the SESEmail to SDC orhardcopy - Appropriatedepartment of the SEScc: SDCCir. No.513 dated02.10.06Verified statement of directors/officers that he/she hasall the aforesaid qualifications and none of thedisqualificationsQ RegulationsAppendix Q-3 - Page 11B Form 1 M-031Schedule 1 dated09.11.09and Cir.No. 649dated03.09.09Report on Electronic Money TransactionsQuarterly Statement of E-Money Balances andActivity - Volume and Amount of E-Money TransactionsSchedule1 - E-Money BalancesQuarterly15 banking day after endof reference quartere-mail -sdcnbfiemoney@bsp.gov.phhardcopy - SDCAPP. Q-309.12.31

APP. Q-308.12.31Annex Q-3-aINFORMATION ON ONE-YEAR BORROWING-INVESTMENT PROGRAMTO BE SUBMITTED BY QUASI BANKS(Annex to Appendix Q-3)1. Investment areas indicatingindustry direction of the corporationengaged in quasi-banking, indicating as aminimum, the following:(a) money market operations;(b) investments in stocks and bonds;(c) investments in governmentsecurities;(d) receivables financing;(e) leasing activities; and(f) direct loaning operations.Likewise to be disclosed are theother preferred areas of investment, e.g.,real estate, condominium, and thoserelated to the government programs andother projects which may be determinedby the BSP.For investment houses with quasibankingfunctions, the proposedunderwriting program, as well as theprevious year's activities, shall also besubmitted identifying debt and equityissues.2. Borrowing operations to support theinvestment program indicating among others:(a) Maturity - short-term: less than ayear- medium-term: one (1)year to five (5) years- long-term: more thanfive (5) years(b) Interest rate per annum for theabove three types of borrowings (moreindicatory than fixed).Individual or institutional source of funds;whether domestic or foreign, governmentalor private, financial or non-financial.3. Preference shall be given to fundusage and mobilization at terms beyondone (1) year.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-3 - Page 15

APP. Q-308.12.31Annex Q-3-bGUIDELINES GOVERNING THE CONSOLIDATION OF FINANCIALSTATEMENTS OF FINANCIAL INTERMEDIARIES AND THEIR ALLIEDUNDERTAKINGS/SUBSIDIARIES/AFFILIATES(Annex to Appendix Q-3)(deleted by Cir. No. 494 dated 20 September 2005)Q RegulationsAppendix Q-3 - Page 16Manual of Regulations for Non-Bank Financial Institutions

APP. Q-308.12.31Annex Q-3-cREPORTING GUIDELINES ON CRIMES/LOSSES(Annex to Appendix Q-3)1. QBs shall report on the followingmatters through the appropriatedepartment of the SES:a. Crimes whether consummated,frustrated or attempted against property/facilities (such as robbery, theft, swindlingor estafa, forgery and other deceits) andother crimes involving loss/destruction ofproperty of the QBs when the amountinvolved in each crime is P20,000 or more.Crimes involving QB personnel,regardless of whether or not such crimesinvolve the loss/destruction of property ofthe QB, even if the amount involved isless than those above specified, shalllikewise be reported to the BSP.b. Incidents involving material loss,destruction or damage to the institution'sproperties/facilities, other than arising froma crime, when the amount involved perincident is P100,000 or more.2. The following guidelines shall beobserved in the preparation andsubmission of the report.a. The report shall be prepared intwo (2) copies and shall be submittedwithin five (5) business days fromknowledge of the crime or incident, theoriginal to the appropriate departmentof the SES and the duplicate to the BSPSecurity Coordinator, thru the Director,Security Investigation and TransportDepartment.b. Where a thorough investigationand evaluation of facts is necessary tocomplete the report, an initial reportsubmitted within the five (5)-businessday deadline may be accepted:Provided, That a complete report issubmitted not later than fifteen (15)business days from termination ofinvestigation.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-3 - Page 17

APP. Q-309.12.31DOCUMENTARY REQUIREMENTS ON DIRECTORS/OFFICERS/MAJOR INDIVIDUAL STOCKHOLDERS(Annex to Appendix Q-3)Annex Q-3-d(Deleted by Circular No. 661 dated 01 September 2009)Q RegulationsAppendix Q-3 - Page 18Manual of Regulations for Non-Bank Financial Institutions

APP. Q-308.12.31Annex Q-3-eDOCUMENTS/INFORMATION ON ORGANIZATIONALSTRUCTURE AND OPERATIONAL POLICIES(Annex to Appendix Q-3)I. Documents on organizationalstructure and operational policies1. Chart of the firm's organizationalstructure or any substitute therefor;2. Name of departments/units/officeswith their respective duties andresponsibilities;3. Designations of positions in eachdepartment/unit/office with the respectiveduties and responsibilities;4. Manual of Instructions or the likeembodying the operating policies/procedures of each department/unit/office,covering such areas as:(a) Signing/delegated authority;(b) Procedure/flow of paper work; and(c) Other matters.5. Memoranda-Circulars or the likeissued covering organizational andoperational and operation policies;6. Sample copies of each of theforms/reports used by each office/unit/department other than those submitted tothe BSP; and7. Such other documents/informationwhich may be required from time to time.II. Other Data1. Name of Institution2. Address3. P.O. Box number5. Board of Directors includingCorporate Secretary:(a) Names of Chairman, Vice-Chairman and Directors(b) Number of directors per By-Laws(c) Number of vacancies in the Board(d) Names of corporations where theyserve as Chairman of the Board or asPresident and names of other businessenterprises of which they are proprietorsor partners(e) For the Corporate Secretary,indicate if he is also a Director(f) Date of annual election of directorsper By-Laws6. Executive officers including Auditor:(a) Names and titles(b) Telephone number of each officer(office)(c) For the Executive Vice-President,state the names of corporations where heserves as Chairman of the Board and namesof other business enterprises where he isproprietor or partner(d) For Vice-Presidents and otherofficers with non-descriptive titles, indicatearea of responsibility, e.g. Vice-Presidentfor Operations or Vice-President,International Department(e) Include officers from President toVice-President7. Branches, agencies and extensionoffices:(a) Name of branch, agency orextension office, e.g. Quiapo Branch orMakati Agency(b) Address(c) Names and telephone number of:(1) Manager(2) Cashier(3) Accountant(d) For agencies and extension offices,indicate name of mother branch.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-3 - Page 19

APP. Q-308.12.31Annex Q-3-fGUIDELINES ON CALCULATING ADDITIONAL INFORMATION REQUIRED INPUBLISHED STATEMENT OF CONDITION(Annex to Appendix Q-3)In calculating the additional information required to be disclosed in the Statement ofCondition for publication, the following guidelines shall be observed:1. All amounts and ratios to be reported shall be as of the same call date. However, thebasis for computing the Return on Average Equity shall be the latest quarter immediatelypreceding the call date.2. Return on Average Equity shall be computed as follows:Return on Average Net Income/(Loss) After Income Tax=Equity (%) Average Total Capital Accountsx 100Where Net Income After Tax and Average Total Capital Accounts shall be:Net Income After Tax Average Total CapitalAccountsMarch Quarter End Net Income Sum of end-month CapitalAfter Tax Multiplied by 4 Accounts (December-March)divided by 4.June Semester End Net Income Sum of end-month CapitalAfter Tax Multiplied by 2 Accounts (December - June)divided by 7.September Nine (9) months Ended Sum of end-month CapitalNet Income After Tax Accounts (December -multiplied by 1.333333 September) divided by 10.December Year Ended Net Income Sum of end-month CapitalAfter Tax Accounts (December -December) divided by 13.Q RegulationsAppendix Q-3 - Page 20Manual of Regulations for Non-Banks Financial Institutions

APP. Q-408.12.31GUIDELINES ON PRESCRIBED REPORTS SIGNATORIESAND SIGNATORY AUTHORIZATION[Appendix to Subsec. 4192Q.1 (2008 - 4162Q.1 )]Category A-1 reports shall be signed bythe chief executive officer, or in his absence,by the executive vice president, and by thecomptroller, or in his absence, by the chiefaccountant, or by officers holding equivalentpositions. The designated signatories in thiscategory, including their specimensignatures, shall be contained in a resolutionapproved by the board of directors in theformat prescribed in Annex Q-4-a.Category A-2 reports of head officesshall be signed by the president, executivevice-presidents, vice-presidents or officersholding equivalent positions. Such reportsof other offices/units (such as branches)shall be signed by their respectivemanagers/officers in-charge. Likewise, thesigning authority in this category shall becontained in a resolution approved by theboard of directors in the format prescribedin Annex Q-4-b.Categories A-3 and B reports shall besigned by officers or their alternates, whoshall be duly designated in a resolutionapproved by the board of directors in theformat as prescribed in Annex Q-4-c.Copies of the board resolutions on thereport signatory designations shall besubmitted to the appropriate departmentof the SES within three (3) days from thedate of resolution.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-4 - Page 1

APP. Q-408.12.31Annex Q-4-aFORMAT OF RESOLUTION FOR SIGNATORIES OF CATEGORY A-1 REPORTSResolution No. _____Whereas, it is required under Subsec. 4192Q.1 that Category A-1 reports be signed by theChief Executive Officer, or in his absence, by the Executive Vice-President, and by thecomptroller, or in his absence, by the Chief Accountant, or by officers holding equivalent positions.Whereas, it is also required that aforesaid officers of the institution be authorized undera resolution duly approved by the institution's Board of Directors;Whereas, we, the members of the Board of Directors of (Name of Institution) ,are conscious that, in designating the officials who would sign said Category A-1 reports,we are actually empowering and authorizing said officers to represent and act for or in behalfof the Board of Directors in particular and (Name of Institution) in general;Whereas, this Board has full faith and confidence in the institution's Chief ExecutiveOfficer, Executive Vice-President, Comptroller and Chief Accountant, as the case may be,and, therefore, assumes responsibility for all the acts which may be performed by aforesaidofficers under their delegated authority;Now, therefore, we, the members of the Board of Directors, resolve, as it is herebyresolved that:1. Mr.____________ President _________________Specimen SignatureorExecutive2. Mr.____________ Vice-President _________________Specimen Signatureand3. Mr.____________ Comptroller _________________Specimen SignatureorChief4. Mr.____________ Accountant _________________Specimen Signatureare hereby authorized to sign Category A-1 reports of (Name of Institution) .Done in the City of ________________ Philippines, this ____day of ____, 20____.CHAIRMAN OF THE BOARDDIRECTOR DIRECTORDIRECTOR DIRECTORDIRECTOR DIRECTORATTESTED BY:CORPORATE SECRETARYQ RegulationsAppendix Q-4 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-408.12.31Annex Q-4-bFORMAT OF RESOLUTION FOR SIGNATORIES OF CATEGORY A-2 REPORTSResolution No. _____Whereas, it is required under Subsec. 4192Q.1 that Category A-2 reports of head officesbe signed by the President, Executive Vice-Presidents, Vice-Presidents or officers holdingequivalent positions, and that such reports of other offices be signed by the respectivemanagers/officers-in-charge;Whereas, it is also required that aforesaid officers of the institution be authorized undera resolution duly approved by the institution's Board of Directors;Whereas, we, the members of the Board of Directors of (Name of Institution) , areconscious that, in designating the officials who would sign said Category A-2 reports, we areactually empowering and authorizing said officers to represent and act for or in behalf of theBoard of Directors in particular and (Name of Institution) in general;Whereas, this Board has full faith and confidence in the institution's President (and/orthe Executive Vice-President, etc., as the case may be) and, therefore, assumes responsibilityfor all the acts which may be performed by aforesaid officers under their delegated authority;Now, therefore, we, the members of the Board of Directors, resolve, as it is herebyresolved that:Name of Officer Specimen Signature Position Title Report No._____________ ________________ __________ _________are hereby authorized to sign the Category A-2 reports of (Name of Institution) .Done in the City of ________________ Philippines, this ____day of ____, 20____.CHAIRMAN OF THE BOARDDIRECTOR DIRECTORDIRECTOR DIRECTORDIRECTOR DIRECTORATTESTED BY:CORPORATE SECRETARYManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-4 - Page 3

APP. Q-408.12.31Annex Q-4-cFORMAT OF RESOLUTION FOR SIGNATORIES OF CATEGORIES A-3 AND BREPORTSResolution No. _____Whereas, it is required under Subsec. 4192Q.1 that Categories A-3 and B reports besigned by officers or their alternates;Whereas, it is also required that aforesaid officers of the institution be authorized undera resolution duly approved by the institution's Board of Directors;Whereas, we the members of the Board of Directors of (Name of Institution) areconscious that, in designating the officials who would sign said Categories A-3 and B reports,we are actually empowering and authorizing said officers to represent and act for or inbehalf of the Board of Directors in particular and (Name of Institution) in general;Whereas, this Board has full faith and confidence in the institution's authorized signatoriesand, therefore, assumes responsibility for all the acts which may be performed by aforesaidofficers under their delegated authority;Now, therefore, we, the members of the Board of Directors, resolve, as it is herebyresolved that:Name of Authorized Signatory/Alternate Specimen Signature Position Title Report No.1. Authorized(Alternate)2. Authorized(Alternate)etc.are hereby authorized to sign the Category A-3 and B reports of (Name of Institution) .Done in the City of ________________ Philippines, this ____day of ____, 20____.CHAIRMAN OF THE BOARDDIRECTOR DIRECTORDIRECTOR DIRECTORDIRECTOR DIRECTORATTESTED BY:CORPORATE SECRETARYQ RegulationsAppendix Q-4 - Page 4Manual of Regulations for Non-Bank Financial Institutions

MINIMUM INTERNAL CONTROL STANDARDS FOR QUASI-BANKS(Appendix to Sec. 4185Q (2008 - 4171Q)]APP. Q-508.12.31I. Proper Accounting Records1. QBs should maintain proper andadequate accounting records.2. These records should be keptcurrently posted and should containsufficient detail so that an audit trail isestablished.3. All entries should bear officialapproval and should be initialed by theperson originating and another personchecking them.II. Independent Balancing1. Independent balancing shall meanthat records posted by a person or cash heldby a cashier shall be balanced or countedby another person.2. The minimum independentbalancing procedures which should beadopted are the following:a. Monthly reconcilement of generalledger balances against their respectivesubsidiary and supporting records anddocumentations by someone other than thebookkeeper, the person handling therecords, or the person directly connectedwith processing the transactions.b. Irregular and unannounced countof cashier's cash and checks and other cashitems at least twice a month by the auditor/control officer or by an officer notconnected with the treasurer's/cashier'soffice or its equivalent.c. Monthly reconcilement of cash inbanks accounts (domestic and foreign) anddue from/to head office/branches bysomeone other than the check custodian,the person posting the general ledgerentries or the authorized signatory of thebank account.d. Periodic verification of securitiesand collaterals by someone other than theircustodians. Verification should include boththe physical inventory of securities and therecord checking.e. Periodic verification of the accuracyof the interest credits and payments todeposit substitute liabilities accounts.3. All exceptions in the reconciliation/verification should be followed upimmediately until satisfactorily corrected.III. Division of Duties and Responsibilities1. The duties of all the officers andemployees should be segregated, clearlydefined, understood, documented andmanualized if possible. No individual shallhave complete authority and responsibilityfor handling all phases of any transactionfrom beginning to end.2. The physical handling of atransaction should be separated from itsrecording and supervision as follows:a. A person handling cash should notbe permitted to post the ledger records norshould posting of the general ledger beperformed by an employee who posts theinvestor's/creditor's subsidiary ledgers;b. A loaning officer should never beallowed to disburse proceeds of notes,accept note payment nor process loanledgers;c. The functions of issuing, recordingand signing of checks should be separated;d. The receipt of statements fromdepository banks should be assigned to anemployee other than the one connectedwith the preparation, recording and signingof checks;e. Custodians of securities should notbe allowed to handle security transactions;f. Collateral appraisals should be doneby an employee/officer other than the onesapproving the loans;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-5 - Page 1

APP. Q-508.12.31g. Incoming checks and other cashitems should be recorded chronologicallyin a register by an employee other thanthe bookkeeper;h. Credit reports should be obtainedby someone other than lending officers;i. Mailing of client's statements anddelinquent notices should be done by anemployee other than the one who grantedthe loan or the one handling the records;andj. Paid checks/drafts should becontrolled and maintained by an officer/employee other than the authorizedsignatory or the cashier.3. Extensive background checking ofpersons intended to be assigned to handlecash and securities should be conducted.Frequent follow-up checking after theiremployment should also be made.IV. Joint Custody1. Joint custody shall mean theprocessing of transactions in the presenceof and under the direct observation of asecond person. Both persons shall beequally accountable for the physicalprotection of the items and recordsinvolved.2. Physical protection should bedeemed established through the use of two(2) locks or combinations on a file chest orvault compartment.3. Two (2) or more persons should beassigned to each half of the control so thatoperating efficiency is not impaired if oneperson is not immediately available.4. Persons who are related to eachother within the third degree ofconsanguinity or affinity should not bemade joint custodians.5. The following should be under jointcustody:a. Cash on hand or in vaultb. All accountable formsc. Collateralsd. Securitiese. Documents of title and/orownership of properties or fixed assetsf. Safekeeping itemsg. Vault doors and safe combinations.V. Signing AuthoritiesSigning authorities for the differentlevels of officers to sign for and in behalfof the institutions should be approved bythe board of directors and the extent ofeach level of authority should be clearlydefined. These signing authorities shouldinclude but need not be limited to thefollowing:a. Lending;b. Borrowing;c. Investments;d. Approval of expenses;e. Various supervisory reports; andf. Checks.VI. Dual Control1. Dual control shall mean the workof one (1) person is to be verified by asecond person to determine (a) thatproper authority has been given tohandle the transaction, (b) that thetransaction is properly recorded, and (c)that proper settlement of the transactionis made.2. The routine of each transactionshould be designed so that at least two (2)or more individuals are involved in thecompletion of every transaction.3. The following accounts/transactionsshould be under dual control:a. Checks - The signature of at leasttwo (2) officers should be required in theissuance of checks.b. Borrowing - The signature of atleast two (2) authorized officers should berequired.c. All transactions giving rise to "dueto" or "due from" account and allinstruments of remittances evidencingQ RegulationsAppendix Q-5 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-508.12.31these transactions particularly thoseinvolving substantial amounts, should beapproved by two (2) authorized officers.VII. Number Control1. Sequence number controls shouldbe incorporated in the accounting systemsand should be used in registering notes,in issuing official checks and in othersimilar situations. Number control shouldbe policed by a person designated bysenior management who should bedetached from the particular operationsinvolved.2. The following are the forms,instruments and accounts that should benumber-controlled:a. Checks;b. Promissory notes and othercommercial papers;c. Official and provisional receipts;d. Certificate of stocks;e. Loan accounts; andf. Expense vouchers.VIII. Rotation of Duties1. The duties of personnel handlingcash, securities and bookkeeping recordsshould be rotated.2. Rotation assignment should beirregular, unannounced and long enoughto permit disclosure of irregularities ormanipulations.IX. Independence of the Internal Auditor1. The position of internal auditorshould be provided for in the by-lawstogether with the duties andresponsibilities, scope and objectives ofinternal auditing.2. The internal auditor should reportdirectly to the Audit Committee.3. The internal auditor should notinstall nor develop procedures, preparerecords or engage in other activities whichhe normally reviews or appraises.X. Direct Verification1. Direct verification shall mean theconfirmation of account or records by directcorrespondence/visits with the institution'scustomers.2. The following accounts, amongothers, should be subject to direct verificationby the internal auditing staff at least once ayear:a. Balances of loans and creditaccommodations of borrowers;b. Outstanding balances of borrowingsand other liabilities;c. Outstanding balances of receivables/payables; andd. Collaterals securing said accounts.XI. Other Internal Control Standards1. Investmentsa. Investment limits and a list ofaccredited companies as approved by theBoard of Directors or by its Credit Committeeshould be established as a guide for investingin any FI engaged in money market trading.b. Investments should be secured byassets approved by the Board of Directorsor by its Credit Committee.c. Checks representing placements ofinvestments should be released only uponreceipt of either the deposit substituteinstrument or the underlying securities ordocuments of title.2. Miscellaneousa. Loan applications and relateddocuments should be spot-checked to insuretheir authenticity, including verification ofname, residence, employment and currentreputation of the borrowers.b. No employee should be permittedto process transaction affecting his ownaccount.c. Cashiers and other employeeshaving contact with customers should beprohibited from preparing depositsubstitute tickets or other records for thecustomers.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-5 - Page 3

APP. Q-508.12.31d. QBs should have a soundrecruitment policy since internal controlbegins from point of hiring.e. QBs should secure adequateinsurance coverages, fidelity and otherindemnity protection, viz:(1) Insurance coverage - for lossesarising from calamities and theft/robberies.(2) Fidelity bonds - for losses arisingfrom dishonest, fraudulent and criminalacts of accountable officers/employees.Q RegulationsAppendix Q-5 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-608.12.31STANDARDIZED DEPOSIT SUBSTITUTE INSTRUMENTS[Appendix to Subsec. 4235Q.3 (2008 - 4211Q.3)]Serial No.(Name of Quasi-Bank)PROMISSORY NOTEIssue Date : , 20Maturity Date : , 20FOR PESOS (P )(Present Value/Principal)RECEIVED,(Name of Issuer/Maker)(Name/Account Number of Payee)promises to payor order, the sumof PESOS (P )(Maturity Value/Principal & Interest)subject to the terms and conditions on the reverse side hereof.(Duly Authorized Officer)NOT INSURED WITH THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-6 - Page 1

APP. Q-608.12.31TERMS AND CONDITIONS OF A PROMISSORY NOTE1. Computation of YieldInterest is hereby stipulated/computed at % per annum, compounded( ) monthly ( ) quarterly ( ) semi-annually ( ) others.2. No PreterminationThis promissory note shall not be honored or paid by the issuer/maker before the maturitydate indicated on the face hereof.3. Liquidated DamagesIn case of default, issuer/maker shall pay, in addition to stipulated interest, liquidateddamages of (Amount or %) , plus attorney's fees of (Amount or %) and costsof collection in case of suit.4. Renewal( ) No automatic renewal.( ) Automatic renewal under the following terms:5. Collateral/Delivery( ) No collateral( ) Collateral/secured by (describe collateral)( ) Physically delivered to Payee( ) Evidenced by Custodian Receipt No. datedissued by( ) Collateralized/secured by (fraction or %)share of (describe collateral) as evidencedby Custodian Receipt No.datedissued by .6. Substitution of Securities( ) Not acceptable to Payee( ) Acceptable to Payee, however, actual substitution shall be with prior written consentof payee.7. Separate Stipulations( ) This Agreement is subject to the terms and conditions of(describe document)datedexecuted by (name of party/ies) andmade an integral part hereof.Q RegulationsAppendix Q-6 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-608.12.31Serial No.(Name of Quasi-Bank)REPURCHASE AGREEMENTIssue Date : , 20Repurchase Date : , 20FOR AND IN CONSIDERATION OF PESOS (P )Vendor, (name of Quasi-Bank) hereby sells, transfers and conveys in favor of Vendee,(name of Vendee) the security(ies) described below, it being mutuallyagreed upon that the same shall be resold by Vendee and repurchased by Vendor onthe repurchase date indicated above at the price of PESOS ( P ),subject to the terms and conditions stated on the reverse side hereof.(Description of Securities)Issuer Serial Number/s Maturity Date/s Face Value Interest/YieldPPT O T A L P PCONFORME:(Duly Authorized Officer)(Signature of Vendee)NOT INSURED WITH THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-6 - Page 3

APP. Q-608.12.31TERMS AND CONDITIONS OF A REPURCHASE AGREEMENT1. Computation of YieldYield is hereby stipulated/computed at % per annum, compounded( ) monthly ( ) quarterly ( ) semi-annually ( ) others.2. No PreterminationVendor shall not repurchase subject security/ies before the repurchase date stipulatedon the face of this document.3. Liquidated DamagesIn case of default, the Vendor shall be liable, in addition to stipulated yield, for liquidateddamages of (Amount or %) , plus attorney's fees of (Amount or %) ,and costs of collection in case of suit.4. Renewal( ) No automatic renewal( ) Automatic renewal under the following terms:5. Delivery/Custody of Securities( ) Physically delivered to Payee( ) Evidenced by Custodian Receipt No. dated,issued by6. Substitution of Securities( ) Not acceptable to Payee( ) Acceptable to Payee, however, actual substitution shall be with prior written consentof payee.7. Separate Stipulations( ) This Agreement is subject to the terms and conditions of (describe document)dated , executed by (name of Party/ies)and made an integral part hereof.Q RegulationsAppendix Q-6 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-608.12.31Serial No.(Name of Quasi-Bank)CERTIFICATE OF ASSIGNMENT WITH RECOURSEIssue Date: , 20FOR AND IN CONSIDERATION OF PESOS (P )(name of Assignor)hereby assigns, conveys, and transferswith recourse to (name of Assignee) the debt of (name of Principal Debtor)to the Assignor, specifically described as follows:(Description of Debt Securities)Principal Debtor Serial Number/s Maturity Date/s Face Value Interest/YieldPPT O T A L P Pand Assignor hereby undertakes to pay, jointly and severally with the Principal Debtor, theface value of, and the interest/yield on, said debt securities. The assignment shall be subjectto the terms and conditions on the reverse side hereof.C O N F O R M E :(Signature of Assignee)(Duly Authorized Officer)NOT INSURED WITH THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-6 - Page 5

APP. Q-608.12.31TERMS AND CONDITIONS OF CERTIFICATE OF ASSIGNMENTWITH RECOURSE1. No PreterminationAssignor shall not pay nor repurchase subject security/ies before the maturity date thereof.2. Liquidated DamagesIn case of default, Assignor shall be liable, in addition to interest, for liquidated damagesof (Amount or %) plus attorney's fees of (Amount or %) ,and costs of collection in case of suit.3. Delivery/Custody of Securities( ) Physically delivered to Assignee( ) Evidenced by Custodian Receipt No. dated ,issued by .4. Separate Stipulations( ) This Agreement is subject to the terms and conditions of ,dated executed by (name of Party/ies)and made an integral part hereof.Q RegulationsAppendix Q-6 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-608.12.31Serial No.(Name of Quasi-Bank)CERTIFICATE OF ASSIGNMENT WITH RECOURSEIssue Date: , 20FOR AND IN CONSIDERATION OF PESOS (Present Value/Principal) (P ),(name of Assignor) hereby assigns, conveys, and transfers with recourse to(name of Assignee) the debt of (name of Principal Debtor) to the Assignor, specificallydescribed as follows:Principal Debtor Serial Number/s Maturity Date/s Face Value Interest/YieldPPT O T A L P Pand hereby undertakes that in case of default of the Principal Debtor, Assignor shall paythe face value of, and the interest/yield on, said debt securities, subject to the terms andconditions on the reverse side hereof.C O N F O R M E :(Duly Authorized Officer)(Signature of Assignee)NOT INSURED WITH THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-6 - Page 7

APP. Q-608.12.31TERMS AND CONDITIONS OF CERTIFICATE OF ASSIGNMENTWITH RECOURSE1. No PreterminationAssignor shall not pay nor repurchase subject security/ies before the maturity datethereof.2. Liquidated DamagesIn case of default, Assignor shall be liable, in addition to interest, for liquidated damagesof (Amount or %) plus attorney's fees of (Amount or %) ,and costs of collection in case of suit.3. Delivery/Custody of Securities( ) Physically delivered to Assignee( ) Evidenced by Custodian Receipt No. dated ,issued by4. Separate Stipulations( ) This Agreement is subject to the terms and conditions of ,dated executed by (name of Party/ies) andmade an integral part hereof.Q RegulationsAppendix Q-6 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-608.12.31Serial No:(Name of Quasi-Bank)CERTIFICATE OF PARTICIPATION WITH RECOURSEIssue Date: , 20FOR AND IN CONSIDERATION OF PESOS (P ) ,this certificate of participation is hereby issued to evidence the (Fraction or %)share of (name of Participant) in the loan/s of granted by/assigned to the herein Issuer, specifically described as follows:(Description of Debt Securities)Principal Debtor Serial Number/s Maturity Date/s Face Value Interest/YieldPPT O T A L P PThe issuer shall pay, jointly and severally with the Principal Debtor, (Fraction or %) shareof the face value of, and the interest/yield on, said debt security(ies), subject to theterms and conditions on the reverse side hereof.C O N F O R M E :(Duly Authorized Officer)(Signature of Participant)NOT INSURED WITH THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-6 - Page 9

APP. Q-608.12.31TERMS AND CONDITIONS OF CERTIFICATE OF PARTICIPATIONWITH RECOURSE1. No PreterminationIssuer shall not pay nor repurchase the participation before the maturity date ofsubject security(ies).2. Liquidated DamagesIn case of default, the Issuer of this instrument shall be liable, in addition to interest, forliquidated damages of (Amount or %) , plus attorney's fees of (Amount or %) ,and costs of collection in case of suit.3. Delivery/Custody of Securities( ) Physically delivered to Participant( ) Evidenced by Custodian Receipt No. dated ,issued by4. Separate Stipulations( ) This Agreement is subject to the terms and conditions of (describe document) ,dated executed by (name of Party/ies) and madean integral part hereof.Q RegulationsAppendix Q-6 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-608.12.31Serial No:(Name of Quasi-Bank)CERTIFICATE OF PARTICIPATION WITH RECOURSEIssue Date: , 20FOR AND IN CONSIDERATION OF PESOS , (P )this certificate of participation is hereby issued to evidence the (Fraction or %) shareof (Participant) in the loan/s of granted by/assignedto the herein Issuer, specifically described as follows:(Description of Debt Securities)Principal Debtor Serial Number/s Maturity Date/s Face Value Interest/YieldPPTOTAL P PIn case of default of the Principal Debtor, the Issuer shall pay the (Fraction or %) shareof the face value of, and the interest/yield on, said debt security(ies), subject to the termsand conditions on the reverse side hereof.C O N F O R M E :(Duly Authorized Officer)(Signature of Participant)NOT INSURED WITH THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-6 - Page 11

APP. Q-608.12.31TERMS AND CONDITIONS OF CERTIFICATE OF PARTICIPATIONWITH RECOURSE1. No PreterminationIssuer shall not pay nor repurchase the participation before the maturity date of subjectsecurity(ies).2. Liquidated DamagesIn case of default, the Issuer of this instrument shall be liable, in addition to interest, forliquidated damages of (Amount or %) , plus attorney's fees of (Amount or %) ,and costs of collection in case of suit.3. Delivery/Custody of Securities( ) Physically delivered to Participant( ) Evidenced by Custodian Receipt No. dated ,issued by .4. Separate Stipulations( ) This Agreement is subject to the terms and conditions of (describe document)dated executed by (name of Party/ies) and made anintegral part hereof.Q RegulationsAppendix Q-6 - Page 12Manual of Regulations for Non-Bank Financial Institutions

APP. Q-708.12.31NEW RULES ON REGISTRATION OF SHORT-TERM COMMERCIAL PAPERS[Appendix to Subsec. 4235Q.10 (2008 - 4211Q.9)]Pursuant to Presidential Decree No. 678,as amended by Presidential Decree No. 1798,and other existing applicable laws, theSecurities and Exchange Commission (SEC)hereby promulgates the following newRules and Regulations governing shorttermcommercial papers, in the interest offull disclosure and protection of investorsand lenders, in accordance with themonetary and credit policies of the BSP.Sec. 1. Scope. These Rules andRegulations shall apply to short-termcommercial papers issued by corporations.Sec. 2. Definition. For the purposeof these Rules, the following definitionsshall apply:(a) Commercial paper is an evidenceof indebtedness of any corporation to anyperson or entity with a maturity of 365 daysor less.(b) Interbank loan transactions shallrefer to borrowings between and amongbanks and NBFIs duly authorized toperform quasi-banking functions.(c) Issue means creation of acommercial paper and its actual orconstructive delivery to the payee.Sec. 3. Registration of CommercialPapers. Any corporation desiring to issuecommercial paper shall apply forregistration with, and submit to, the SECthe following:(a) Ordinary Registration;(1) Sworn Registration Statement in theprescribed form;(2) Board resolution signed bymajority of its members (a) authorizing theissue of commercial paper, (b) indicatingthe aggregate amount to be applied for, (c)providing that the registration statementshall be signed by the principal executiveofficer, the principal operating officer, theprincipal financial officer, the comptroller,or principal accounting officer, or personsperforming similar functions, and(d) designating at least two senior officerswith a rank of vice-president or higher, ortheir equivalent, to sign the commercialpaper instrument to be issued;(3) The latest audited financialstatements; and should the same be as of adate more than three (3) months prior tothe filing of the registration statement, anunaudited financial statement as of the endof the immediately preceding month:Provided, however, That such unauditedfinancial statement shall be certified underoath by the accountant and the seniorfinancial officer of the applicant, dulyauthorized for the purpose, and substitutedwith an audited financial statement within120 days after the end of the applicant'sfiscal year.(4) Schedules A to L, based on subsection(3) above, in the form attached asAnnex "A";(5) A committed credit lineagreement with a bank, or any FI whichmay be qualified subsequently by the BSP,earmarked specifically for repayment ofaggregate outstanding commercial paperissues on a pro-rata basis, with thefollowing features:(i) A firm, irrevocable commitment tomake available funds to cover at least 20%of the aggregate commercial papersoutstanding at any time: Provided, That ifthe commitment is extended by a group,there shall be a lead bank or any FI whichmay be qualified subsequently by the BSPacting for the group;(ii) The commitment shall be effectivefor as long as the issues are outstanding andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-7 - Page 1

APP. Q-708.12.31may be renewed by the bank or any FIwhich may be qualified subsequently bythe BSP;(iii) The request for drawdown shall beaddressed to the bank or any FI which maybe qualified subsequently by the BSP, whichrequest shall be duly signed by a member ofthe board of directors and a senior financialofficer of the commercial paper issuer, dulyauthorized for the purpose by an appropriateboard resolution, which shall also provide forthe designation of the alternate signatories(likewise a member of the board of directorsand a senior financial officer);(iv) A provision that availments shall beallowed only for repayment of commercialpapers which are due and payable inaccordance with the terms of thecommercial paper;(v) Notwithstanding the foregoingrequirements for a committed credit linewith a bank, or any FI which may bequalified subsequently by the BSP, anycorporation desiring to issue commercialpapers may be exempted from compliancetherewith by the SEC, should it meet all ofthe following financial ratios based onconsolidated audited financial statementsfor the immediate past three (3) years:1) Average current ratio shall be atleast 1.2:1 computed as follows:Current ratio =Current AssetsCurrent LiabilitiesORAverage acid-test ratios shall be at least0.5:1 computed as follows:Acid-test ratio=Cash, receivables, andmarketable securitiesCurrent Liabilities2) Average solvency position shall beone whereby total assets must not be lessthan total liabilities;3) Average net profit margin shall beat least 3% computed as follows:Net profit margin=Net income after income tax,corporate developmenttaxes, and other non-cashchargesNet sales or revenuesORAverage annual return on equity shallbe at least 8% computed as follows:Return on equity=Net income after income tax,corporate developmenttaxes, and other non-cashTotal stockholders' equity4) Average interest service coverageratio shall be at least 1.2:1 computed asfollows:Net income-before-interestexpense, income tax,corporate developmentInterest servicecoverage ratio =taxes, and other non-cashchargesInterest expense5) Debt-to-equity ratio shall not exceed2.5:1.The SEC may, in its discretion, consultwith industry organization(s) such asInvestment Houses (IHs) Association of thePhilippines (IHAP) and Bankers Associationof the Philippines (BAP) and/or the CreditInformation Bureau, Inc.6) A selling agreement for thecommercial paper issues with an expandedcommercial bank or an investment house,or any FI which may be qualifiedsubsequently by the BSP, with minimumconditions that the selling agent, amongothers, shall be responsible for ensuringthat the issuer observes the provisions ofthese rules pertaining to the use ofproceeds of the committed credit line and,with the issuer, shall be jointly responsiblefor complying with all reportorialrequirements of the SEC and the BSP inQ RegulationsAppendix Q-7 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-708.12.31connection with the commercial paperissue, it being understood that theprimary responsibility for thesubmission of the report to saidregulatory agencies is upon the sellingagent: Provided, however, That if thecommercial paper issuer is unable toprovide the information necessary tomeet such reportorial requirements, theselling agent shall, not later than two(2) working days prior to the date whenthe report is due, notify the SEC of suchinability on the part of the issuer:Provided, finally, That if the sellingagreement is with a group, composed ofexpanded commercial banks and/orinvestment houses or any FIs which maybe qualified subsequently by the BSP,there shall be a syndicate manager actingand responsible for the group.(7) Income statements for theimmediate past three (3) fiscal yearsaudited by an independent certifiedpublic accountant: Provided, That, if theapplicant has been in operation for lessthan three years, it shall submit incomestatements for such number of years thatit has been in operation.(8) A printed copy of a preliminaryprospectus approved by the applicant'sBoard of Directors which, amongothers, shall contain the following:(i) A statement printed in red onthe left-hand margin of the front pageof the following tenor:"A registration statement relating tothese short-term commercial papershas been filed with, but has not yet beenapproved by, the SEC. Informationcontained herein is subject tocompletion or amendment. These shorttermcommercial papers may not besold nor may offer to buy be acceptedprior to the time the registrationstatement is approved. Thispreliminary prospectus shall notconstitute an offer to buy nor shall therebe any sale of these commercial papers inthe Philippines as such offer, solicitation,or sale is prohibited prior to registrationunder the Securities Act, as amended byP.D. No. 678 and P.D. No. 1798."(ii) Aggregate maximum amountapplied for, stated on the front page of theprospectus;(iii) Description and nature of theapplicant's business;(iv) Intended use of proceeds;(v) The nature of the firm,irrevocable, and committed credit line,the amount of the line which shall be atleast 20% of the aggregate outstandingcommercial paper issues, proceeds ofwhich shall be allocated on a pro-ratabasis to the aggregate outstandingcommercial paper issue (regardless ofthe order of their maturities), and themanner of availments, as stipulated in thecredit line agreement between the bankand the issuer;(vi) The provision in the sellingagreement naming the selling agent andthe responsibilities of the selling agentin connection with, among others, theuse by the issuer of the proceeds of thebank committed credit line and thereportorial requirements under theserules;(vii) Other obligations of thecommercial issuer classified bymaturities (maturing within six (6)months; from six (6) months to one (1)year; over one (1) year; and past-dueamounts);(viii) Encumbered assets;(ix) Directors, officers, andstockholders owning 2% or more of thetotal subscribed stock of the corporation,indicating any advance to said directors,officers, and stockholders;(x) List of entities where it ownsmore than 33-1/3% of the total equity, aswell as borrowings and advances to saidentities;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-7 - Page 3

APP. Q-708.12.31(xi) Financial statements for theimmediate past three (3) fiscal yearsaudited by an independent certified publicaccountant: Provided, That if the applicanthas been in operation for less than three(3) years, it shall submit financial statementsfor such number of years that it has beenin operation.(b) Special RegistrationIn the case of special registrationprovided for under Section 10 hereof, thefollowing shall, in addition to theimmediately preceding requirements, beprepared and submitted by the sellingagent on behalf of the applicant:(1) Projected annual cash flowstatement as of the date of filing, presentedon a quarterly basis, supported byschedules on actual maturity patterns ofexisting receivables and liabilities (undersix (6) months, six (6) months to one (1)year, over one (1) year, and past-dueamounts) and inventory turnover as of theend of the month prior to the filing of theregistration statement; and(2) Complementary financial ratiosfor each of the immediate past three (3)fiscal years:(i) Ratio of (a) the total of cash onhand, marketable securities, currentreceivables to (b) the total of currentliabilities;(ii) Debt-to-equity ratio, with debtreferring to all kinds of indebtedness,including guarantees;(iii) Ratio of (a) net income after taxesto (b) net worth;(iv) Net profits-to-sales ratio; and(v) Such other financial indicatorsas may be prescribed by the SEC. Theseadditional data shall likewise beincorporated in the prospectus.(c) The SEC may, whenever itdeems necessary impose otherrequirements in addition to thoseenumerated in subsections (a) and/or (b)above.Sec. 4. Commercial Papers ExemptPer Se. The following specific debtinstruments are exempt per se from theprovisions of these Rules:(a) Evidence of indebtedness arisingfrom interbank loan transactions;(b) Evidence of indebtedness issuedby the national and local governments;(c) Evidence of indebtedness issuedto the BSP under its open market and/orrediscounting operations;(d) Evidence of indebtedness issuedby the BSP, Philippine National BanK(PNB), Development Bank of thePhilippines (DBP), Land Bank of thePhilippines (LBP), Government ServiceInsurance System, and the Social SecuritySystem (GSIS);(e) Evidence of indebtednessissued to the following primaryinstitutional lenders: banks, includingtheir trust accounts, trust companies,QBs, IHs, including their trust accounts,financing companies, investmentcompanies, non-stock savings and loanassociations (NSSLA), building and loanassociations, venture capital corporations,special purpose corporations referred toin Central Bank Monetary Board Res. No.1051 dated 19 June 1981, insurancecompanies, government FIs, pawnshops,pension and retirement funds approvedby the Bureau of Internal Revenue (BIR),educational assistance funds establishedby the national government; and otherentities that may be classified as primaryinstitutional lenders by the BSP, inconsultation with the SEC: Provided,That all such evidences of indebtednessshall be held on to maturity and shallneither be negotiated nor assigned toany one other than the BSP and the DBP,with respect to private developmentbanks in connection with theirrediscounting privilege, and financialintermediaries with quasi-bankingfunctions;Q RegulationsAppendix Q-7 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-708.12.31(f) Evidence of indebtedness thetotal outstanding amount of which doesnot exceed P5,000,000 and issued to notmore than ten (10) primary lenders otherthan those mentioned in subsection (e)above, which evidence of indebtednessshall be payable to a specific person andnot to bearer and shall neither benegotiated nor assigned but held on tomaturity;(g) Evidence of indebtednessdenominated in foreign currencies; and(h) Evidence of indebtedness arisingfrom bonafide sale of goods or property.Sec. 5. Other Commercial PapersExempt from Registration. Commercialpapers issued by any financialintermediary authorized by the BSP toengage in quasi-banking functions shall beexempt from registration under Section 3,but shall be subject to payment of theexemption fee, as provided under Section15, and to the reportorial requirementsunder Section 17, all under these Rules.Sec. 6. Prohibition. No commercialpaper, except of a class exempt underSections 4 and 5 hereof, shall be issuedunless such commercial paper shall havebeen registered under these Rules:Provided, That no registered commercialpaper issuer may issue commercial paperexempt per se under Section 4 (f) hereof.Sec. 7. Compliance with BangkoSentral Quasi-Banking RequirementsNothing in these Rules shall be construedas an exemption from or a waiver of theapplicable BSP rules/regulations orcirculars governing the performance ofquasi-banking functions or financialintermediaries duly authorized to engagein quasi-banking activities. Any violationof said BSP rules/regulations or circularsshall be considered a violation of theserules and regulations.Sec. 8. Action on Application forRegistration(a) Within sixty (60) days afterreceipt of the complete application forregistration, the SEC shall act upon theapplication and shall, in the appropriatecase, grant the applicant a Certificate ofRegistration and Authority to IssueCommercial Papers.(b) The SEC shall return anyapplication for registration, in cases wherethe requirement of applicable laws andregulations governing the issuance ofcommercial papers have not beencomplied with, or for reasons which shallbe so stated.Sec. 9. Ordinary Registration. If thevalue of commercial papers applied for,when added to the total outstandingliabilities of the applicant, does not exceed300% of networth based on the financialstatements referred to under Section 3(a)(3), the commercial papers shall beregistered upon compliance with therequirements specified in Section 3(a)hereof. The same principle shall apply inthe case of renewal of the Authority toIssue Commercial Paper.Sec. 10. Special Registration. If thevalue of commercial paper applied forexceeds 300% of networth, ascontemplated in the preceding section, itshall be subject to compliance with therequirement under Section 3(b) hereof.Sec. 11. Validity Period of theAuthority to Issue CommercialPaper.The authority to issue commercialpapers shall be valid for a period of 365days which shall be indicated in theAuthority to Issue Commercial Paper,provided that renewal thereof, uponapplication filed at least forty five (45)days prior to its expiry date, may be for aperiod shorter than 365 days.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-7 - Page 5

APP. Q-708.12.31Sec. 12. Conditions of the Authorityto Issue Commercial Paper(a) In the event that the commercialpaper issuer fails to pay in full anycommercial paper upon demand at statedmaturity date, the Authority to IssueCommercial Paper is automaticallysuspended. The selling agent shall, withinthe next working day, notify the SECthereof, and the SEC shall forthwith issuea formal Cease-and-Desist Order,enjoining both the issuer and the sellingagent from further issuing or sellingCommercial papers.(b) Whenever necessary toimplement the monetary and creditpolicies promulgated from time to timeby the Monetary Board of the BSP, the SECmay suspend the Authority to IssueCommercial Paper, or reduce theauthorized amount thereunder, orschedule the maturities of the registeredcommercial paper to be issued.Sec. 13. Basic Features ofRegistered Commercial Papers(a) All registered commercial paperinstruments shall have a standard format,serially pre-numbered, and denominated.The instrument shall state, among others,the debt ceiling of the registrant and anotice that information about the registrantsubmitted in connection with theregistration and other reportorialrequirements from the issuer is availableat the SEC and open to public inspectionand that the issuer is not authorized by theBSP to perform quasi-banking functions.(b) A specimen of the proposedcommercial paper instrument shall besubmitted to the SEC for approval of thetext thereof.(c) The approved instrument shall beprinted by the BSP Security Printing Plantpursuant to a prior authorization from theSEC, and shall be released by the SEC tothe issuer.Sec. 14. Minimum Maturity ValueThe maturity value of each registeredcommercial paper instrument shall not belower than P300,000.Sec. 15. Fees. Every registrant shallpay the following fees:(a) Upon application for registration,and for renewals thereof, a filing fee ofnot more than 1/50th of 1% based on thetotal commercial paper proposed to beissued.(b) For issuers of commercial paperexempt under Section 5 hereof, an annualexemption fee of P10,000.Sec. 16. Notice of AvailmentWhenever the credit line is drawn upon,the selling agent and/or issuer shall, withintwo (2) working days immediatelyfollowing the date of drawdown, notify theSEC of such event, indicating the amountavailed of and the total availment as of thatgiven time.Sec. 17. Periodic Reports(a) Issuers of registered commercialpapers and those exempt under Section 5hereof shall submit to the SEC and the BSPthe following reports in the prescribed form:(1) Monthly reports on commercialpapers outstanding as at the end of eachmonth, to be submitted within ten (10)working days following the end of thereference month;(2) Quarterly reports on commercialpaper transactions, accompanied by aninterim quarterly financial statement, to besubmitted within thirty (30) calendar daysfollowing the end of the reference quarter; and(3) For issuers whose application forregistration was under Section 10 hereof,the projected quarterly cash flow statementswith the corresponding quarter's actualfigure, to be submitted within ten (10)working days following the end of thereference quarter;Q RegulationsAppendix Q-7 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-708.12.31(b) These periodic reports shall besigned under oath by the corporate officersauthorized pursuant to a board resolutionpreviously filed with the SEC;(c) Issuers whose offices are locatedin the provinces may submit their reportsto the nearest extension offices of the SEC.Sec. 18. Administrative Sanctions. Ifthe SEC finds that there is a violation ofany of these Rules and Regulations andimplementing circulars or that any issuer,in a registration statement and itssupporting papers, as well as in theperiodic reports required to be filled withthe SEC and the BSP, has made any untruestatement of a material fact, or omitted tostate any material fact required to be statedtherein or necessary to make the statementstherein not misleading, or refuses to permitany lawful examination into its corporateaffairs, the SEC shall, in its discretion, imposeany or all of the following sanctions:(a) Suspension or revocation, afterproper notice and hearing, of the Certificateof Registration and Authority to IssueCommercial Paper;(b) A fine in accordance with theguidelines that the SEC shall issue fromtime to time: Provided, however, That suchfine shall in no case be less than P200 ormore than P50,000 for each violation, plusnot more than P500 for each day ofcontinuing violation. Annex "B" hereof shallinitially be the guideline on the scale of fines;(c) Other penalties within the powerof the SEC under existing laws; and(d) The filing of criminal charges againstthe individuals responsible for the violation.Sec. 19. Cease-and-Desist Order. TheSEC may, on its own motion or uponverified complaint by an aggrieved party,issue a Cease-and-Desist Order ex-parteif the violation(s) mentioned in Section 18may cause great or irreparable injury tothe investing public, or may amount topalpable fraud, or violation of the disclosurerequirements of the Securities Act and ofthese Rules and Regulations.The issuance of such Cease-and-DesistOrder automatically suspends theAuthority to Issue Commercial Paper.Such Cease-and-Desist Order shall beconfidential in nature until after the impositionof the sanctions mentioned in Section 18 shallhave become final and executory.Immediately upon the issuance of anex-parte Cease-and-Desist Order, the SECshall notify the parties involved, andschedule a hearing on whether to lift suchorder, or to impose the administrativesanctions provided for in Section 18 not laterthan fifteen (15) days after receipt of notice.Sec. 20. Repealing Clause. TheseRules and Regulations supersede the Ruleson Registration of Commercial Papersdated 10 December 1975, and all theamendments to said Rules. All other rules,regulations, orders, and memorandacircular of the SEC which are inconsistentherewith are likewise hereby repealed ormodified accordingly.Sec. 21. Transitory Provision. Anyauthority to Issue Commercial Paper, validand subsisting as of the date of theeffectivity of these Rules and Regulations,shall remain valid and upon its expirationmay, at the discretion of the SEC andsubject to such conditions as it mayimpose, be renewed on the basis of theRules of Registration of Commercial Papersdated 10 December 1975 for an aggregateperiod not exceeding fifteen (15) monthsfrom its expiry date.Sec. 22. Effectivity. These Rules andRegulations shall take effect on11 December 1981.(Editors Note: Annexes "A" and "B" arenot reproduced in this Appendix.)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-7 - Page 7

APP. Q-808.12.31NEW RULES ON THE REGISTRATION OF LONG-TERM COMMERCIAL PAPERS[Appendix to Subsecs. 4235Q.10 and 4239Q.2 (2008 - 4211Q.9 and 4217Q.3)]Pursuant to Section 4(b) of the RevisedSecurities Act and other existing applicablelaws, the SEC hereby promulgates thefollowing New Rules and Regulationsgoverning long-term commercial papers, inthe interest of full disclosure and protectionof investors and lenders, in accordance withthe monetary and credit policies of the BSP:Section 1. Scope. These Rules shallapply to long-term commercial papersissued by corporations.Sec. 2. Definitions. For purposes ofthese Rules, the following definitions shallapply:a. Long-term commercial papersshall refer to evidence of indebtedness ofany corporation to any person or entity withmaturity period of more than 365 days.b. Interbank loan transactions shallrefer to borrowings between and amongbanks and QBs.c. Issue shall refer to the creation ofcommercial paper and its actual orconstructive delivery to the payee.d. Appraised value shall refer to thevalue of chattel and real property, asestablished by a duly licensed andindependent appraiser.e. Current market value shall referto the value of the securities at currentprices, as quoted at the stock exchanges.f. Recomputed debt-to-equity ratioshall refer to the proportion of totaloutstanding liabilities, including theamount of long-term commercial papersapplied for, and any unissued authorizedcommercial papers to net worth.g. Specific person shall refer to a dulynamed juridical or natural person as aninvestor for its or his own account, a trusteefor one or more trustors, an agent or fundmanager for a principal under a fundmanagement agreement, and does notinclude numbered accounts.h. Net worth shall refer to the excessof total assets over total liabilities, net ofappraisal surplus.i. Subsidiary shall refer to a companymore than fifty percent (50%) of theoutstanding voting stock of which is directlyor indirectly owned, controlled, or heldwith power to vote by another company.j. Affiliate shall refer to a concernlinked, directly or indirectly, to another bymeans of:1) Ownership control and power tovote of ten percent (10%), but not morethan fifty percent (50%), of the outstandingvoting stock.2) Common major stockholders; i. e.,owning ten percent (10%), but not morethan fifty percent (50%), of the outstandingvoting stock.3) Management contract or anyarrangement granting power to direct orcause the direction of management andpolicies.4) Voting trustee holding ten percent(10%), but not more than fifty percent(50%), of the outstanding voting stock.5) Permanent proxy constituting tenpercent (10%), but not more than fifty percent(50%), of the outstanding voting stock.k) Underwriting shall refer to the actor process of distributing and selling of anykind of original issues of long-termcommercial papers of a corporation otherthan those of the underwriter itself, eitheron guaranteed or best-effort basis.l) Trust accounts shall refer to thoseaccounts with a FI authorized by the BSPto engage in trust functions, wherein thereis a trustor-trustee relationship under a trustagreement.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-8 - Page 1

APP. Q-808.12.31Sec. 3. Conditions for RegistrationLong-term commercial papers shall beregistered under any of the followingconditions:a. CollateralThe amount of long-term commercialpapers applied for is covered by thefollowing collaterals which are notencumbered, restricted, or earmarked forany other purpose and which shall bemaintained at their respective values at alltimes, indicated in relation to the face valueof the long-term commercial paper issue;1) Securities listed in - Current marketthe stock exchanges value of 200%2) Registered real estate - Appraised valuemortgage of 150%3) Registered chattel mort- - Appraised valuegage on heavy equipment, of 200%machinery, and similarassets acceptable to theCommission and registrablewith the appropriategovernment agencyb. Financial RatiosA registrant who meets such standard,as may be prescribed by the SEC, basedon the following complementary financialratios for each of the immediate past three(3) fiscal years:1) Ratio of (a) the total cash,marketable securities, current receivablesto (b) the total of current liabilities;2) Debt-to-equity ratio, with debtreferring to all kinds of indebtedness,including guarantees;3) Ratio of (a) net income after taxesto (b) net worth;4) Net profits to sales ratio; and5) Such other financial indicators, asmay be required by the SEC.c. Debt to equityThe recomputed debt-to-equity to ratioof the applicant based on the financialstatements required under Sec. 4.c. hereofshall not exceed 4:1: Provided, That theauthorized short-term commercial papersdo not exceed 300% of net worth and uponcompliance with the registrationrequirements specified in Sec. 4 hereof.The conditions under which thecommercial papers of a registrant wereregistered shall be strictly maintainedduring the validity of the Certificate ofRegistration.Sec. 4. Registration RequirementsAny corporation desiring to issue long-termcommercial papers shall apply forregistration with, and submit to, the SECthe following:a. Sworn Registration Statement in theform prescribed by the SEC;b. Board resolution signed by amajority of its members -1) authorizing the issue of long-termcommercial papers;2) indicating the aggregate amount tobe applied for;3) stating purpose or usage ofproceeds thereof;4) providing that the registrationstatement shall be signed by any of thefollowing: the principal executive officer,the principal operating officer, the principalfinancial officer, the comptroller orprincipal accounting officer, or personsperforming similar functions; and5) designating at least two seniorofficers with a rank of Vice-President, orhigher of their equivalent, to sign thecommercial paper instruments to be issued.c. The latest audited financial statementsand should the same be as of a date morethan three (3) months prior to the filing of theregistration statements, an unauditedfinancial statement as of the end of theimmediately preceding month; Provided,however, That such unaudited financialstatement shall be certified under oath bythe accountant and the senior financial officerof the applicant duly authorized for thepurpose and substituted with an auditedfinancial statement within 105 days after theend of the applicant's fiscal year;Q RegulationsAppendix Q-8 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-808.12.31d. Schedules A to L based onSubsection c above, in the form attachedas Annex "A";e. Income statements for theimmediate past three (3) fiscal yearsaudited by an independent certified publicaccountant: Provided, That if the applicanthas been in operation for less than three(3) years, it shall submit income statementsfor such number of years that it has beenin operation;f. An underwriting agreement forthe long-term commercial paper issueswith an expanded commercial bank or aninvestment house, or any other FI whichmay be qualified subsequently by the BSPwith minimum condition, among others,that the underwriter and the issuer shall bejointly responsible for complying with allreportorial requirements of the SEC andthe BSP in connection with the long-termcommercial paper issue, it beingunderstood that the primary responsibilityfor the submission of the report to theseregulatory agencies is upon theunderwriting agreement and thereafter,the responsibility shall devolve upon thisissuer: Provided, however, That if the issueris unable to provide the informationnecessary to meet such reportorialrequirements, the underwriter shall, notlater than two (2) working days prior tothe date when the report is due, notify theSEC of such inability on the part of theissuer: Provided, further, That if theunderwriting agreement is with a groupcomposed of expanded commercial banksand/or investment houses or any FIswhich may be qualified subsequently bythe BSP, there shall be a syndicate manageracting and responsible for the group:Provided, finally, That the underwriter maybe changed subject to prior approval by theSEC;g. A typewritten copy of apreliminary prospectus approved by theapplicant's Board of Directors which,among others, shall contain the following:1) A statement printed in red on theleft-hand margin of the front page, to wit:"A registration statement relating tothese long-term commercial papers hasbeen filed with, but has not yet beenapproved by, the SEC. Informationcontained herein is subject to completionor amendment. These long-termcommercial papers may not be sold normay offers to buy be accepted prior tothe approval of the registration statement.This preliminary prospectus shall notconstitute an offer to buy nor shall therebe any sale of these long-termcommercial papers in the Philippines assuch offer, solicitation, or sale isprohibited prior to registration under theRevised Securities Act."2) Aggregate maximum amountapplied for, stated on the front page of theprospectus;3) Description and nature of theapplicant's business;4) Intended use of proceeds;5) Provisions in the underwritingagreement, naming the underwriter and itsresponsibilities in connection with, amongothers, the reportorial requirements underthese Rules;6) Other obligations of the applicantclassified by maturities - maturing within six(6) months; from six (6) months to one (1)year; and one (1) year and past-due amounts;7) List of assets which areencumbered, restricted, or earmarked forany other purposes;8) List of directors, officers, andstockholders owning two percent (2%) ormore of the total outstanding voting stockof the corporation, indicating any advanceto said directors, officers, and stockholders;9) List of entities where it owns morethan thirty three and one third percent (331/3%) of the total outstanding voting stock,as well as borrowings from, and advancesto, said entities.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-8 - Page 3

APP. Q-808.12.31h. Projected annual cash flowstatement presented on a quarterly basisas of the approximate date of issuance fora period co-terminus with the life time ofthe issue, indicating the basic assumptionsthereto and supported by schedules onactual maturity patterns of outstandingreceivables and liabilities (under six (6)months, six (6) months to one (1) year, overone (1) year, and past-due accounts) andinventory turnover;i. Data on financial indicators, as maybe prescribed by the SEC, for each of theimmediate past three (3) fiscal years, suchas on solvency, liquidity, and profitability.The SEC may, whenever it deemsnecessary, impose other requirements inaddition to those enumerated above.Sec. 5. Action on Application forRegistrationa. Within sixty (60) days after receiptof the complete application for registration,the SEC shall act upon the application andshall, in the appropriate case, grant theapplicant a Certificate of Registration andAuthority to Issue Long-Term CommercialPapers valid for one (1) year, which maybe renewed annually with respect to theunissued balance of the authorized amount,upon showing that the registrant has strictlycomplied with the provisions of these Rulesand the terms and conditions of theCertificate of Registration.b. The SEC shall return any applicationfor registration, in cases where therequirements of applicable laws andregulations governing the issuance of longtermcommercial papers have not beencomplied with, or for reasons which shallbe so stated.Sec. 6. Close-end RegistrationRegistration of long-term commercialpapers under these Rules shall be a closeendprocess, whereby the portion of theauthorized amount already issued shall bededucted from the authorized amount andmay no longer be reissued even ifreacquired in any manner, pursuant to theterms and conditions of issue.Sec. 7. Long-Term CommercialPapers Exempt Per Se. The followingspecific long-term debt instruments areexempt per se from the provisions ofthese Rules:a. Evidence of indebtedness arisingfrom interbank loan transactions;b. Evidence of indebtedness issuedby the national and local governments;c. Evidence of indebtedness issuedby government instrumentalities, therepayment and servicing of which arefully guaranteed by the NationalGovernment;d. Evidence of indebtedness issuedto the BSP under its open market and/orrediscounting operations;e. Evidence of indebtedness issuedby the BSP, PNB, DBP, and LBP;f. Evidence of indebtedness issuedto the following primary institutionallenders: banks, including their trustaccounts, trust companies,QBs,investment houses, including their trustaccounts, financing companies,investment companies, NSSLAs, buildingand loan associations, venture capitalcorporations, special purpose corporationsreferred to in Central Bank MonetaryBoard Resolution No. 1051 dated 19 June1981, insurance companies, governmentFIs, pawnshops, pension and retirementfunds approved by the BIR, educationalassistance funds established by thenational government, and other entitiesthat may be classified as primaryinstitutional lenders by the BSP, inconsultation with the SEC: Provided, Thatall such evidences of indebtedness shallbe held on to maturity and shall neitherbe negotiated nor assigned to any oneother than the BSP, and the DBP, withQ RegulationsAppendix Q-8 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-808.12.31respect to private development banks inconnection with their rediscountingprivileges, and financial intermediarieswith quasi-banking functions;g. Evidence of indebtedness, thetotal outstanding amount of which doesnot exceed P15.0 million and issued tonot more than fifteen (15) primarylenders other than those mentioned insubsection (f) above, which evidence ofindebtedness shall be payable to specificpersons, and not to bearers, and shallneither be negotiated nor assigned butheld on to maturity: Provided, That theaggregate amount of P15.0 million shallinclude outstanding short-termcommercial papers: Provided, further,That in reckoning compliance with thenumber of primary lenders under thisSection, holders of such papers exemptunder Sec. 4(f) of the Rules onRegistration of Short-Term CommercialPapers, as amended, shall be counted:Provided, furthermore, That such issuershall:1) File (1) a disclosure statement priorto the issuance of any evidence ofindebtedness; and (2) a quarterly report onsuch borrowings in the forms prescribedby the SEC; and2) Indicate in bold letters on theface of the instrument the words"NON-NEGOTIABLE, NON-ASSIGNABLE":and Provided, finally, That any issuer, inaccordance with the Rules on Registrationof Long-Term Commercial Papers andBonds dated 15 October 1976 and withoutstanding long-term commercial papersfalling under this subsection as of theeffectivity date hereof, shall likewise filethe prescribed disclosure statementand the quarterly report on suchborrowings;h. Evidence of indebtednessdenominated in foreign currencies; andi. Evidence of indebtedness arisingfrom bona fide sale of goods or property.Sec. 8. Other Long-Term CommercialPapers Exempt from Registration. Thefollowing long-term commercial papersshall be exempt from registration underSecs. 3 and 4 hereof, but shall be subjectto the payment of the exemption fee, asprescribed under Section 14, and to thereportorial requirements under Section 15of these Rules:a. Long-term commercial papersissued by a financial intermediaryauthorized by the BSP to engage in quasibankingfunctions;b. Long-term commercial papersfully secured by debt instruments of theNational Government and the BSP andphysically delivered to the trustee in theTrust Indenture.Sec. 9. Prohibitionsa. No long-term commercial papersshall be issued, or negotiated or assignedunless the requirements of these Rules shallhave been complied with: Provided, Thatno registered long-term commercial paperissuer may issue long-term commercialpaper exempt per se under Section 7(g)hereof.b. There shall be no preterminationof long-term commercial papers either bythe issuer or the lender within 730 daysfrom issue date. Pretermination shallinclude optional redemption, partialinstallments, and amortization payments;however, installment and amortizationpayments may be allowed, if so stipulatedin the loan agreement.Sec. 10. Compliance with BangkoSentral Quasi-Banking RequirementsNothing in these Rules shall be construedas an exemption from, or a waiver of, theapplicable BSP rules and regulationsgoverning the performance of quasibankingfunctions. Any violation of saidBSP rules and regulations shall beconsidered a violation of these Rules.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-8 - Page 5

APP. Q-808.12.31Sec. 11. Conditions of the Authorityto Issue Long-Term Commercial Papersa. During the effectivity of theunderwriting agreement, should the issuerfail to pay in full any interest due on orprincipal of long-term commercial paperupon demand at stated maturity date, theAuthority to Issue Long-Term CommercialPapers shall be automatically suspended.The underwriter shall, within the nextworking day, notify the SEC thereof, andthe SEC shall forthwith issue a formalCease-and-Desist Order enjoining boththe issuer and the underwriter from furtherissuing or underwriting long-termcommercial papers.b. Upon the expiration of theunderwriting agreement, it shall be theresponsibility of the issuer to notify the SECthat it failed to pay in full any interest dueon, or principal of, long-term commercialpaper upon demand at stated maturity dateand has accordingly automaticallysuspended the issuance of its long-termcommercial papers. Within the nextworking day, the SEC shall forthwith issuea formal Cease-and-Desist Order enjoiningthe issuer from further issuing long-termcommercial papers.c. Whenever necessary to implementthe monetary and credit policiespromulgated from time to time by theMonetary Board of the BSP, the SEC maysuspend the authority to issue long-termcommercial paper, or reduce theauthorized amount thereunder, orschedule the maturities of the registeredlong-term commercial paper to be issued.Sec. 12. Basic Features of RegisteredCommercial Papersa. All registered commercial paperinstruments shall have a standard format,serially pre-numbered, and denominated.The instrument shall state, among others,the debt ceiling of the registrant and a noticethat information about the registrantsubmitted in connection with theregistration, and other reportorialrequirements from the issuer is availableat the SEC and open to public inspection,and that the issuer is not authorized by theBSP to perform quasi-banking functions.b. A specimen of the proposedcommercial paper instrument shall besubmitted to the SEC for approval of thetext thereof.c. The instrument approved by theSEC shall be printed by an entity authorizedby the SEC and shall be released by theSEC to the issuer.Sec. 13. Minimum Principal AmountThe minimum principal amount of eachregistered long-term commercial paperinstrument shall not be lower than theamounts indicated in the followingschedule:a. Up to two years P100,000b. Over two years but lessthan four years 50,000c. Four years or more 20,000Sec. 14. Fees. Every registrant shallpay the following fees:a. Upon application for registration,a filing fee of 1/20 of one percent 1% basedon total commercial paper proposed to beissued, but not to exceed P75,000.b. For issuers of commercial papersexempt under Section 8 hereof, an annualexemption fee of P10,000.Sec. 15. Periodic Reportsa. Issuers of registered long-termcommercial papers, through theirunderwriters and those exempt underSection 8 hereof, shall submit the followingreports in the form prescribed by the SEC:1) Monthly reports on long-termcommercial papers outstanding as at theend of each month, to be submitted withinten (10) working days following the end ofthe reference month;Q RegulationsAppendix Q-8 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-808.12.312) Quarterly reports on long-termcommercial paper transactions,accompanied by an interim quarterlyfinancial statement to be submitted withinthirty (30) calendar days following the endof the reference quarter; and3) Actual quarterly cash flowstatement, to be submitted within ten (10)working days following the end of thereference quarter.b. These periodic reports shall besigned under oath by the corporate officersauthorized, pursuant to a board resolutionpreviously filed with the SEC.c. Issuers whose offices are locatedin the provinces may, through theirunderwriters, submit their reports to thenearest extension office of the SEC.Sec. 16. Administrative SanctionsIf the SEC finds that there is a violation ofany of these Rules and Regulations andimplementing circulars, or that any issuer,in a registration statement and itssupporting papers, as well as in the periodicreports required to be filed with the SECand the BSP, has made any untruestatement of a material fact, or omitted tostate any material fact required to be statedtherein or necessary to make thestatements therein not misleading, orrefuses to permit any lawful examinationinto its corporate affairs, the SEC shall, inits discretion, impose any or all of thefollowing sanctions:a. Suspension or revocation, afterproper notice and hearing, of the Certificateof Registration and Authority to IssueCommercial Paper;b. A fine in accordance with theguidelines that the SEC shall issue from timeto time: Provided, however, That such fineshall in no case be less than P200 nor morethan P50,000 for each violation, plus notmore than P500 for each day of continuingviolation. Annex "B" hereof shall initially bethe guidelines on the scale of fines;c. Other penalties within the powerof the SEC under existing laws; andd. The filing of criminal chargesagainst the individuals responsible for theviolation.Sec. 17. Cease-and-Desist Ordera. The SEC may, on its own motionor upon verified complaint by anaggrieved party, issue a Cease-and-DesistOrder ex-parte, if the violation(s)mentioned in Section 16 hereof maycause great or irreparable injury to theinvesting public, or will amount topalpable fraud or violation of thedisclosure requirements of the RevisedSecurities Act and of these Rules andRegulations.b. The issuance of such Cease-and-Desist Order automatically suspends theAuthority to Issue Long-Term CommercialPaper.c. Such Cease-and-Desist Ordershall be confidential in nature, until afterthe imposition of the sanctions mentionedin Section 16 hereof shall have becomefinal and executory.d. Immediately upon the issuanceof an ex-parte Cease-and-Desist Order,the SEC shall notify the parties involved,and schedule a hearing on whether to liftsuch order, or to impose the administrativesanctions provided for in Section 16 notlater than fifteen (15) days after receipt ofnotice.Sec. 18. Repealing Clause. TheseRules and Regulations supersede theRules on Registration of Long-TermCommercial Paper and Bonds dated15 October 1976 and all the amendmentsto said Rules except as provided in Section19 hereof. All other rules, regulations,orders, memoranda circular of the SEC,which are inconsistent herewith, arelikewise hereby repealed or modifiedaccordingly.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-8 - Page 7

APP. Q-808.12.31Sec. 19. Transitory Provisiona. Any authority or Certificate ofExemption to Issue Long-TermCommercial Papers, granted under theRules on Registration of Long-TermCommercial Papers dated 15 October1976, valid and subsisting as of the dateof the effectivity of these Rules, shallremain valid with respect only to alloutstanding issue until such issues areretired or redeemed.b. The SEC may, at its discretion andsubject to such conditions it may impose,authorize issuance of any unissued portionof the issuer's approved long-term debtceiling solely for refinancing of maturinglong-term commercial paper issue for aperiod not beyond fifteen (15) months fromthe effectivity date of these Rules.Sec. 20. Effectivity. These Rulesand Regulations shall take effect fifteen(15) days after publication in twonewspapers of general circulation in thePhilippines.(Ed. Note: Annexes "A" and "B" are notreproduced in this Appendix.)Q RegulationsAppendix Q-8 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-908.12.31LIST OF RESERVE - ELIGIBLE AND NON-ELIGIBLE SECURITIES[Appendix to Subsec. 4254Q (2008 - 4246Q.1]A. Government securities ELIGIBLE asreserves1. Direct obligations of the Governmentof the Republic of the Philippines eligibleas reserve against peso deposit liabilitiesand deposit substitute liabilities:a. 4% PWED Bonds all outstandingseriesb. 4% NPC Bonds (26th - 50th Seriesexcept 39th Ser. which bear 6% -obligation assumed by the NationalGovernment)c. 4% Treasury Bonds (30th S; 57thS; 59th-71st S; 78th-93rd S)Treasury Bonds with less than 4% perannum interest considered eligible byreason of expressed BSP limited support tooriginal purchaser:2% T/Bond L of 1973/20031st Series (1st & 2nd Release)3% T/Bond L of 1978/200855th Series (1st Release)4% T/Bond L of 1979/200955th Series (2nd Release)3-¼% T/Bond L of 1974/19996th Series (1st-2nd Release)3-¼% T/Bond L of 1978/200354th Series (1st--3rd Release)d. 4% Treasury Notes L of 1980/1995115th Seriese. Bonds made specifically eligible toits holders only:4% Treasury Capital Bonds - DBP only2% Capital Treasury Bonds - PNB only2. Bonds and other evidences ofindebtedness bearing interest rate of fourpercent (4%) per annum, issued bygovernment-owned or controlledcorporations, political subdivisions andinstrumentalities likewise eligible asreserves against peso deposit liabilities anddeposit substitute liabilities:4% NAWASA Bonds(1st to 9th &13th Series)3. The following government securitiesbearing more than four percent (4%) perannum interest, whether Bangko Sentralsupported or not, if being used by banks/QBs as reserve against deposit substituteliabilities as of 17 January 1977 shallcontinue to be eligible as such: Provided,That whenever said securities shall havematured, they shall be replaced bysecurities carrying the features/conditionsenumerated under Circular No. 638, dated8 November 1978, as amended:6% PWED Bonds - All outstanding issues6% NPC Bonds - -do7% NPC Bonds - -do8-½% NPC Bonds - 13th - 22nd Series7% MWSS Capital Bonds- All outstanding issues6% NIA Bonds - -do-4½% Treasury Bonds - -do-4 7 % Treasury Bonds - 7th Series105% Treasury Bonds - 9th Series6% Treasury Bonds - 8th Series7% Treasury Bonds - All outstandingissuesexcept 15th Series10-¾% Treasury Bonds - All outstanding issues9% Treasury Notes - 60th - 65th Series10-½% Treasury Notes- 101st Series (1st & 2ndRelease)10-¾% Treasury Notes - 56th and 61st Series11-¼% Treasury Notes - 59th Series6% NAWASA Bonds - 11th, 12th and 1stSeries10% EPZA Bonds - 9th - 11th Series10-¾% EPZA Bonds - 3rd - 8th SeriesManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-9 - Page 1

APP. Q-908.12.31B. The following government securitiesare not eligible whatsoever for reservepurposes:Negotiable Land Certificate (NLC)Cultural Center of the Philippines (CCP) BondsPhilippine Charity Sweepstakes Office (PCSO)BondsPublic Estate Authority (PEA) BondsNational Development Company (NDC) BondsNational Housing Authority (NHA) BondsNational Food Authority (NFA) BondsNHMFC Bahayan CertificatesLight Rail Transit Authority (LRTA) NotesCBCIs (Auctioned/discounted) - 24th -29th SeriesCBCIs (Negotiated) A to D-1Series and 5th to 7thSeries (18 months)CBCIs 10-½% Special Series 1st - 32nd SeriesCentral Bank Bills (Negotiated/discounted)Treasury Bills (Negotiated/discounted)Treasury Notes and Treasury Bonds bearing lessthan four percent (4%) per annum, but notgiven BSP support as follows:Treasury Bonds2% T/Bond L of 1973/2003 4th Series2-¾%T/Bond L of 1974/1986 7-A & 7-B Series3% T/Bond L of 1976/2001 26th, 27th, 31st -34th, 46th & 47th Series3% T/Bond L of 1977/2002 49th Series3-¼%T/Bond L of 1974/19996th Series 3rd & 4th Release3-¼%T/Bond L of 1977/20026th Series 5th Release3-¼%T/Bond L of 1975/200021st Series 1st Release3-¼%T/Bond L of 1977/200221st Series 2nd Release3-¼%T/Bond L of 1977/200251st Series 1st & 2nd Release3-¼%T/Bond L of 1978/200354th Series 1st & 34th Release3-¼%T/Bond L of 1980/2005 58th Series3-¾%T/Bond L of 1973/2003 2nd SeriesTreasury Notes2% T/Notes L of 1976/1991 79th Series3% T/Notes L of 1982/1997 128th Series3% T/Notes L of 1981/1986120th Series & 125th Series3-½%T/Notes L of 1982/1997Special Series 1st-24th ReleaseQ RegulationsAppendix Q-9 - Page 2Manual of Regulations for Non-Bank Financial Institutions

GUIDELINES IN IDENTIFYING AND MONITORING PROBLEM LOANSAND OTHER RISK ASSETS AND SETTING UP OF ALLOWANCEFOR PROBABLE LOSSES(Appendix to Sec. 4302Q)APP. Q-1008.12.31I. Classification of loans. In addition toclassifying loans as either current or pastdue, the same should be qualitativelyappraised and grouped as Unclassified orClassified.A. Unclassified loans. These are loansthat do not have a greater-than-normal riskand do not possess the characteristics ofclassified loans as defined below. Theborrower has the apparent ability to satisfyhis obligations in full and therefore no lossin ultimate collection is anticipated. Thefollowing loans, among others, shall notbe subject to classification:1. Loans or portions thereof securedby hold-outs on deposit substitutesmaintained in the lending institutions,margin deposits, or government-supportedsecurities;2. Loans with technical defects anddeficiencies in documentation and/orcollateral requirements. These deficienciesare isolated cases where the exceptionsinvolved are not material nor is the QB’schance to be repaid or the borrower’sability to liquidate the loan in an orderlymanner undermined. These exceptionsshould be brought to management’sattention for corrective action during theexamination and those not correctedshall be included in the Report ofExamination under “MiscellaneousExceptions – Loans”. Moreover,deficiencies which remained uncorrectedin the following examination shall beclassified as “Loans EspeciallyMentioned”.The following are examples of loans tobe cited under “Miscellaneous Exceptions– Loans”:a. Loans with unregistered mortgageinstrument which is not in compliance withthe loan approval;b. Loans with improperly executedsupporting deed of assignment/pledgeagreement/chattel mortgage/real estatemortgage;c. Loans with unnotarized mortgageinstruments/agreements;d. Loans with collaterals not coveredby appraisal reports or appraisal reports notupdated;e. Loan availments against expiredcredit line; availments in excess of creditline; availments against credit line withoutprior approval by appropriate authority;f. Loans with collaterals not insuredor with inadequate/expired insurancepolicies or the insurance policy is notendorsed in favor of the QB;g. Loans granted beyond the limits ofapproving authority;h. Loans granted without compliancewith conditions stated in the approval; andi. Loans secured by property the titleto which bears an uncancelled annotationor lien or encumbrance.B. Classified loans. These are loans whichpossess the characteristics outlinedhereunder. Classified loans are subdividedinto (1) loans especially mentioned;(2) substandard; (3) doubtful; and (4) loss.1. Loans especially mentioned. Theseare loans that have potential weaknessesthat deserve management’s closeattention. These potential weaknesses, ifleft uncorrected, may affect the repaymentof the loan and thus increase credit risk tothe QB. Their basic characteristics are asfollows:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-10 - Page 1

APP. Q-1008.12.31a. Loans with unlocated collateralfolders and documents including, but notlimited to, title papers, mortgageinstruments and promissory notes;b. Loans to firms not supported byboard resolutions authorizing theborrowings;c. Loans without credit investigationreport;d. Loans not supported by thedocuments required under Subsec.4304Q.1 except:(1) consumer loans, with originalamounts not exceeding P2.0 million:Provided, That these loans are current, andare supported by latest ITR or by BIR Form2316 or payslips for at least three (3)months immediately preceding the dateof loan application, and financialstatements submitted for taxation purposesto the BIR, as may be applicable, at thetime they were granted, renewed,restructured or extended. For this purpose,consumer loans is defined to includehousing loans, loans for purchase of car,household appliance(s), furniture andfixtures, loans for payment of educationaland hospital bills, salary loans and loansfor personal consumption, including creditcard loans.(2) Loans which are exempted fromthe additional documentary requirementsunder Subsec. 4304Q.1e. Loans the repayment of which maybe endangered by economic or marketconditions that in the future may affect theborrower’s ability to meet scheduledrepayments as evidenced by a decliningtrend in operations, illiquidity, or increasingleverage trend in the borrower’s financialstatements;f. Loans to borrowers whoseproperties securing the loan (previouslywell-secured by collaterals) havedeclined in value or with other adverseinformation;g. Loans past due for more than thirty(30) days up to ninety (90) days; andh. Loans previously cited asMiscellaneous Exceptions stilluncorrected in the current BSPexamination.2. Substandard. These are loans orportions thereof which appear to involvea substantial and unreasonable degree ofrisk to the institution because ofunfavorable record or unsatisfactorycharacteristics. There exists in such loansthe possibility of future loss to theinstitution unless given closersupervision. Those classified as“Substandard” must have a well-definedweakness or weaknesses thatjeopardize their liquidation. Suchwell-defined weaknesses may includeadverse trends or development offinancial, managerial, economic orpolitical nature, or a significant weaknessin collateral. Their basic characteristicsare as follows:a. Secured loans(1) Past due and circumstances aresuch that there is an imminent possibilityof foreclosure or acquisition of thecollateral because of failure of all collectionefforts;(2) Past due loans to borrowers whoseproperties securing the loan have declinedin value materially or have been found withdefects as to ownership or other adverseinformation; and(3) Current loans to borrowers whoseAFSs show impaired/negative net worthexcept for start-up firms which should beevaluated on a case-to-case basis.b. Unsecured loans(1) Renewed/extended loans ofborrowers with declining trend inoperations, illiquidity, or increasingleverage trend in the borrower’s financialstatements without at least twenty percent(20%) repayment of the principal beforerenewal or extension; and(2) Current loans to borrowers withunfavorable results of operations for two(2) consecutive years or with impaired/Q RegulationsAppendix Q-10 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1008.12.31negative net worth except for start-up firmswhich should be evaluated on a case-tocasebasis.c. Loans under litigation;d. Loans past due for more thanninety (90) days;e. Loans granted without requiringsubmission of the latest AFS/ITR and/orstatements of assets and liabilities todetermine paying capacity of theborrower;f. Loans with unsigned promissorynotes or signed by unauthorized officersof the borrowing firm; andg. Loans classified as “LoansEspecially Mentioned” in the last BSPexamination which remained uncorrectedin the current examination.3. Doubtful. These are loans orportions thereof which have theweaknesses inherent in those classified as“Substandard”, with the addedcharacteristics that existing facts,conditions, and values make collectionor liquidation in full highly improbableand in which substantial loss is probable.Their basic characteristics are as follows:a. Past due clean loans classified as“Substandard” in the last BSP examinationwithout at least twenty percent (20%)repayment of principal during thesucceeding twelve (12) months or withcurrent unfavorable credit information;b. Past due loans secured bycollaterals which have declined in valuematerially such as, inventories,receivables, equipment, and otherchattels without the borrower offeringadditional collateral for the loans andpreviously classified “Substandard” in thelast BSP examination;c. Past due loans secured by realestate mortgage, the title to which issubject to an adverse claim renderingsettlement of the loan throughforeclosure doubtful; andd. Loans wherein the possibility ofloss is extremely high but because ofcertain important and reasonably specificpending factors that may work to theadvantage and strengthening of the asset,its classification as an estimated loss isdeferred until a more exact status isdetermined.4. Loss. These are loans or portionsthereof which are considered uncollectibleor worthless and of such little value thattheir continuance as bankable assets is notwarranted although the loans may havesome recovery or salvage value. Theamount of loss is difficult to measure andit is not practical or desirable to deferwriting off these basically worthless assetseven though partial recovery may beobtained in the future. Their basiccharacteristics are as follows:a. Past due clean loans the interest ofwhich is unpaid for a period of six (6) months;b. Loans payable in installmentswhere amortization applicable to interestis past due for a period of six (6) months,unless the loan is well secured;c. When the borrower’s whereaboutsis unknown, or he is insolvent, or hisearning power is permanently impairedand his co-makers or guarantors areinsolvent or that their guaranty is notfinancially supported;d. Where the collaterals securing theloans are considered worthless and theborrower and/or his co-makers areinsolvent;e. Loans considered as absolutelyuncollectible; andf. Loans classified as “Doubtful” inthe last BSP examination and without anypayment of interest or substantialreduction of principals during thesucceeding twelve (12) months, or havecurrent unfavorable credit informationwhich renders collection of the loanshighly improbable.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-10 - Page 3

APP. Q-1008.12.31C. Credit card receivables. Credit cardreceivables shall be classified inaccordance with age as follows:No. of days past due Classification91 - 120 Substandard121 - 180 Doubtful181 or more LossThe foregoing is the minimumclassification requirement. Managementmay therefore formulate additional specificguidelines.II. Investments and Other Risk AssetsA. Investment in debt securities andmarketable equity securities. Theclassification, accounting procedures,valuation and sales and transfers ofinvestment in all debt securities andmarketable equity securities is inAppendix Q-20.B. Equity investment in affiliates shall bebooked at cost or book value whichever islower on the date of acquisition. If cost isgreater than book value, the excess shallbe charged in full to operations or bookedas deferred charges and amortized asexpense over a period not exceeding five(5) years. Subsequent to acquisition, if thereis an impairment in the recorded value, theimpairment should adequately be providedwith allowance for probable losses.C. Other property owned or acquired1. The basic characteristics of realestate property acquired subject to"Substandard" classification are as follows:a. Acquired for less than five (5) yearsunless worthless.b. Converted into a Sales ContractReceivable.c. Sold subject to a firm purchasecommitment from a third party before theclose of the examination.2. The basic characteristics of realestate property acquired subject to "Loss"classification are as follows:a. Foreclosure expenses and othercharges included in the book value of theproperty, excluding the amount of nonrefundablecapital gains tax anddocumentary stamp tax paid in connectionwith the foreclosure/purchase which meetthe criteria for inclusion in the book valueof the acquired property.b. The excess of the book value overthe appraised value.c. Property whose title is definitely lostto a third party or is being contested incourt.d. Property wherein the exercise of theright of usufruct is not practicable orpossible as when it is eroded by a river oris under any like circumstances.Real estate property acquired are notsound bank assets. Because of their nature,that is, non-liquid and non-productive, theirimmediate disposal through sale is highlyrecommended.D. Acquired or repossessed personalproperty1. All personal property owned oracquired held for three (3) years or less fromdate of acquisition shall be classified asSubstandard assets.2. The basic characteristics ofacquired or repossessed personal propertyclassified as Loss are as follows:a. Property not sold for more thanthree (3) years from date of acquisition;b. Property which is worthless or notsaleable;c. Property whose title is lost or isbeing contested in court;d. Foreclosure expenses and othercharges included in the book value of theproperty; ande. The excess of the book value ofthe property over its appraised orrealizable value.Q RegulationsAppendix Q-10 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1008.12.31E. Accounts Receivable1. Accounts receivable arising fromloan and investment accounts stilluncollected after six (6) months from thedate such loans or loan installments havematured or have become past due shall beprovided with a 100% allowance foruncollected accounts receivable.2. All other accounts receivableshould be classified in accordance with ageas follows, unless there is good reason fornon-classification:No. of Days Outstanding Classification61 - 180 Substandard181 - 360 Doubtful361 or more LossThe classification according to age ofaccounts receivable should be used inclassifying other risk assets not coveredabove. However, their classification shouldbe tempered by favorable informationgathered in the review.F. Accrued Interest Receivable1. Accrued interest receivable onloans or loan installments still uncollectedafter three (3) months from the date suchloans or loan installments have matured orhave become non-performing shall beprovided with a 100% allowance foruncollected interest on loans.2. All other accrued interest receivableon loans or loan installments shall beclassified similar to the classification of theirrespective loan accounts.III. Allowance for probable losses. Anallowance for probable losses on the loanaccounts should be set up as follows:A. Specific allowanceClassification Allowance (Percent)1. Unclassified 02. Loans Especially Mentioned 53. Substandard(a) Secured 10(b) Unsecured 254. Doubtful 505. Loss 100B. General allowance. In addition to theallowance for probable losses requiredunder Item "A", a general provision for loanlosses shall also be set up as follows:1. Five percent (5%) of the outstandingbalance of unclassified restructured loansless the outstanding balance of restructuredloans which are considered non-risk underexisting laws, rules and regulations; and2. One percent (1%) of the outstandingbalance of unclassified loans other thanrestructured loans less loans which areconsidered non-risk under existing laws,rules and regulations.The general loan loss provision shall becomputed as follows:For Loans Not RestructuredGross Loan Portfolio Pxxx(Excluding Restructured Loans)Less:Classified Loans(based on latest BSP examination)Loans especially mentioned P xxxSubstandardSecuredxxxUnsecuredxxxDoubtfulxxxLoss xxx xxxUnclassified LoansPxxxLess: Loans considered non-riskunder existing regulationsxxxLoan Portfolio, net of exclusionsPxxxGeneral Loan Loss Provision(1% of net loan portfolio) PxxxFor Restructured LoansRestructured Loans (Gross)PxxxLess: Classified Loans(based on latest BSP examination)Loans especially mentioned PxxxSubstandardSecuredxxxUnsecuredxxxDoubtfulxxxLoss xxx xxxUnclassified Restructured Loans PxxxLess: Loans considered non-riskunder existing regulations xxxRestructured Loans, net of exclusions PxxxGeneral Loan Loss Provision(5% of net restructured loans) PxxxThe excess of the booked general loanloss provisions over the amount requiredManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-10 - Page 5

APP. Q-1008.12.31as a result of the reduction of the amountrequired to be set up to one percent (1%)shall first be applied to unbooked specificvaluation reserves, whether or notauthorized to be booked on a staggeredbasis and only the remainder can beconsidered as income.The specific and general allowances forprobable losses shall be adjustedaccordingly for additional allowancerequired by the BSP: Provided, That incases of partially secured loans, only tenpercent (10%) allowance shall be requiredfor the portion thereof which are coveredby the appraised value of the collateral:Provided, further, That said collateral isreappraised at least annually.Management is, however, encouragedto provide additional allowance as it deemsprudent and to formulate additional specificguidelines within the context of the hereindescribedsystem.(As amended by Circular Nos. 622 dated 16 September 2008,549 dated 09 October 2006 and 520 dated 20 March 2006)Q RegulationsAppendix Q-10 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1108.12.31FORMAT-DISCLOSURE STATEMENT OFLOAN/CREDIT TRANSACTION[Appendix to Subsec. 4307Q.2 (2008 - 4309Q.2)](Business Name of Creditor)DISCLOSURE STATEMENT OF LOAN/CREDIT TRANSACTION (SINGLE PAYMENTOR INSTALLMENT PLAN)(As required under R.A. 3765, Truth in Lending Act)Name of BorrowerAddress1. Cash/Purchase Price or Net Proceeds of Loan P(Item Purchased)2. LESS: Downpayment and/or Trade-in Value (Not applicable forloan transaction)3. Unpaid Balance of Cash/Purchase Price or Net Proceeds of Loan4. Non-Finance Charges [Advanced by Seller/Creditor]:a. Insurance Premium Pb. Taxesc. Registration Feesd. Documentary/Science Stampse. Notarial Feesf. Others:Total Non-Finance Charges5. Amount to be Financed (Items 3 + 4) PManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-11 - Page 1

APP. Q-1108.12.316. Finance Charges 1a. Interest % p.a. Pfromto[ ] Simple [ ] Monthly[ ] Compound [ ] Quarterly[ ] Semi-Annual[ ] Annualb. Discountsc. Service/Handling Chargesd. Collection Chargese. Credit Investigation Feesf. Appraisal Feesg. Attorney's/Legal Feesh. Other charges incidental to theextension of credit (specify):Total Finance ChargesP7. Percentage of Finance Charges to Total Amount Financed(Computed in accordance with Subsec. 4307Q.1) %8. Effective Interest Rate(Method of computation attached) %9. Paymenta. Single Payment due P(Date)b. Total Installment Payments(Payable in weeks/months @ P ) P1Time price differential should be disclosed as a finance charge. If an itemization cannot be made, a lump-sum figuremay be reported among Other charges incidental to the extension of credit in Item 6h.Q RegulationsAppendix Q-11 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1108.12.3110. Additional charges in case certain stipulations in the contract are not met by the debtor:Nature Rate AmountCERTIFIED CORRECT:(Signature of Creditor/AuthorizedRepresentative Over Printed Name)PositionI ACKNOWLEDGE RECEIPT OF A COPY OF THIS STATEMENT PRIOR TO THECONSUMMATION OF THE CREDIT TRANSACTION AND THAT I UNDERSTAND ANDFULLY AGREE TO THE TERMS AND CONDITIONS THEREOF.(Signature of Buyer/BorrowerOver Printed Name)DATENOTICE TO BUYER/BORROWER: YOU ARE ENTITLED TO A COPYOF THIS PAPER WHICH YOU SHALL SIGN.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-11 - Page 3

ABSTRACT OF "TRUTH IN LENDING ACT" (Republic Act No. 3765)[Appendix to Subsec. 4307Q.4 (2008 - 4309Q.4)]APP. Q-1208.12.31Section 1. This Act shall be known as the"Truth in Lending Act."Sec. 2. Declaration of Policy. It ishereby declared to be the policy of theState to protect its citizens from a lack ofawareness of the true cost of credit to theuser by assuring a full disclosure of suchcost with a view of preventing theuninformed use of credit to the detrimentof the national economy.xxxx xxxx xxxxSec. 3. As used in this Act, the term -xxxx xxxx xxxx(3) "Finance charge" includesinterest, fees, service charges, discounts,and such other charges incident to theextension of credit as the Board may byregulation prescribe.xxxx xxxx xxxxSec. 4. Any creditor shall furnish to eachperson to whom credit is extended, priorto the consummation of the transaction, aclear statement in writing setting forth, tothe extent applicable and in accordancewith rules and regulations prescribed bythe Board, the following information:(1) the cash price or delivered priceof the property or service to be acquired;(2) the amounts, if any, to be creditedas down payment and/or trade-in;(3) the difference between theamounts set forth under clauses (1) and(2);(4) the charges, individuallyitemized, which are paid or to be paidby such person in connection with thetransaction but which are not incident tothe extension of credit;(5) the total amount to be financed;(6) the finance charge expressed interms of pesos and centavos; and(7) the percentage that the financecharge bears to the total amount to befinanced expressed as a simple annual rateon the outstanding unpaid balance of theobligation.xxxx xxxx xxxxSec. 6. (a) Any creditor who inconnection with any credit transaction failsto disclose to any person any informationin violation of this Act or any regulationissued thereunder shall be liable to suchperson in the amount of P100 or in anamount equal to twice the finance chargerequired by such creditor in connectionwith such transaction, whichever is thegreater, except that such liability shall notexceed P2,000 on any credit transaction.xxxx xxxx xxxx(c) Any person who willfully violatesany provision of this Act or any regulationissued thereunder shall be fined by not lessthan P1,000 nor more than P5,000 orimprisonment for not less than 6 monthsnor more than one year or both.xxxx xxxx xxxx(d) Any final judgment hereafterrendered in any criminal proceeding underthis Act to the effect that a defendant haswillfully violated this Act shall be primafacie evidence against such defendant inan action or proceeding brought by anyother party against such defendant underthis Act as to all matters respecting whichsaid judgment would be an estoppel asbetween the parties thereto.Sec. 7. This Act shall become effectiveupon approval.Approved, 22 June 1963.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-12 - Page 1

AGREEMENT FOR THE ENHANCED INTERBANK CALL LOANFUNDS TRANSFER SYSTEM[Appendix to Subsecs. 4343Q.1 and 4601Q.3 (2008 - 4376Q.1 and 4601Q.1)]APP. Q-1308.12.31(As superseded by the agreement for PhilPaSS between the BSP and BAP/CTB/RBAP/IHAP and MMAP)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-13 - Page 1

APP. Q-13a08.12.31SETTLEMENT PROCEDURES FOR INTERBANK LOAN TRANSACTIONS ANDPURCHASE AND SALE OF GOVERNMENT SECURITIESUNDER REPURCHASE AGREEMENTS WITH THE BANGKO SENTRAL[Appendix to Subsecs. 4343Q.3 and 4601Q.3 (2008 - 4376Q.4 and 4601Q.1)](As superseded by the agreement for PhilPaSS between the BSP and BAP/CTB/RBAP/IHAP and MMAP)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-13a - Page 1

APP. Q-13b08.12.31ENHANCED INTRADAY LIQUIDITY FACILITY[Appendix to Subsecs. 4343Q.1 and 4601Q.3 (2008 - 4376Q.1 and 4601Q.1)]Given the increasing volume of PhilPaSStransactions as well as concerns of havingtemporary gridlocks in the PhilPaSS, thecurrent features of the Intraday LiquidityFacility (ILF) had been enhanced, specificallyon the following areas:a. Flexibility in changing thesecurities that will be used for the ILF;b. Availment of the facility on an “asthe need arises” basis; andc. Removal of commitment feesThe revised features of the ILF aredescribed below.A. Access to ILFGovernment securities (GS) held by anEligible Participant QB in its RegularPrincipal Securities Account that will beused for ILF purposes shall be deliveredto a sub-account under the BSP-ILFSecurities Account with the Bureau of theTreasury’s (BTr) Registry of ScriplessSecurities (RoSS). The delivered GS to beused for ILF purposes shall be recordedby RoSS in a sub-account (the “ClientSecurities Account (CSA)”-ILF) under theBSP-ILF Securities Account in the name ofthe Eligible Participant QB.QBs without RoSS securities accountswho intend/desire to avail of the ILF shall berequired to open/maintain a SecuritiesAccount with the RoSS. The documentationrequirements for RoSS membership shall beprescribed by the BTr.QBs desiring to avail of the ILF shall befurther required to open a sub-account underthe BSP-ILF Securities Account with the BTr’sRoSS by accomplishing an application letteraddressed to the Treasurer of the Philippines,Attn: The Director, Liability ManagementService and the Chief, Scripless SecuritiesRegistration Division. The application lettershall be in the form of Annex 1 hereto.B. TimelineFrom 9:00 am to 9:30 am of each bankingday, an Eligible Participant QB shallelectronically instruct the BTr to move/transfer from its Principal Securities Accountwith the BTr’s ROSS to the CSA-ILF underthe name of the Eligible Participant QB, thepool of peso-denominated GS to be set asidefor the ILF purpose. The Eligible ParticipantQB hereby confirms to the BTr that pursuantto an ILF availment, it has authorized thetransfer without consideration unto the CSA-ILF the pool of GS to be used for ILF purposes.From 9:30 am to 10:00 am, the BTrRoSS shall electronically submit aconsolidated report to BSP showing thedetails of the GS that were transferred tothe BSP-ILF Securities Account.From 10:00 am to 4:00 pm, EligibleParticipant QBs with insufficient balancesin its Demand Deposit Account No.2(PhilPaSS Account) may avail of the ILF.Eligible Participant QBs may avail of theILF as necessary to fund pending paymentinstructions. Thus, when the ILF systemdetects queued transactions in the PhilPaSS-Central Accounting System, the EligibleParticipant QB with insufficient balance in itsPhilPaSS Account will automatically sell tothe BSP-Treasury the GS in the CSA-ILF poolcorresponding to the amount which may beneeded to cover any pending paymentinstruction, and the proceeds of the sale ofsecurities shall be immediately credited tothe bank’s PhilPaSS Account. There may bemore than one availment during the day.Until a sale to the BSP or an Overnight Repo(O/N-RP) transaction with the BSP isManual of Regulations for Non-Bank Financial InstitutionsQ-RegulationsAppendix Q-13b - Page 1

APP. Q-13b08.12.31executed, the beneficial ownership of theGS that have been transferred to the CSA-ILF still belongs to the QBs.At 5:00 pm, the BSP shall sell back tothe Eligible Participant QB the GS at thesame price as the original BSP purchase.Partial repayment of a particular availmentwill not be allowed.In case the PhilPaSS Account balanceof the participating QB is not sufficient tocover the afternoon repayment transaction,the BSP and the participating QB mayagree on the following:a. BSP shall extend to the Eligibleparticipant QB an O/N-RP at 600 basispoints over the BSP’s regular overnightlending rate for the day. The O/N-RP shallbe paid not later than 11:00 am on maturitydate. Unpaid O/N-RP shall be automaticallyconverted into an absolute sale to the BSPof the subject GS earlier delivered/transferred to the CSA-ILF, pursuant to anILF availment by the Eligible Participant QB,in which case, BSP shall issue an instructionto BTr to deliver/transfer the subject GS fromthe BSP-ILF Securities Account to the BSPregular Principal Securities Account. The saleshall be evidenced by the issue ofConfirmation of Sale by the EligibleParticipant QB (Annex 2) and theConfirmation of Purchase by the BSPTreasury Department (Annex 3), or,b. Only in extreme cases, the BSPshall sell back to the participating QBs GSup to the extent of the PhilPaSS Accountbalance. The BSP shall issue an instructionto the BTr to transfer the remaining GSamounting to the unpaid ILF availmentfrom the BSP-ILF Securities Account to theBSP’s Regular Principal Securities Account.At the end of the day and after BSP’ssell-back of the GS to ILF participants,normally by 5:45 pm, the BSP TreasuryDepartment shall electronically instructRoSS, using the ILF RoSS system developedfor herein purpose, to return/deliver from theCSA-ILF of the participating QBs to theirrespective Regular Principal SecuritiesAccounts with the RoSS all unused/unencumbered GS. GS used for O/N-RPshall remain in the CSA-ILF until repaymentof subject O/N-RP or conversion to outrightsale the following day.Upon receipt of BSP’s electronicinstruction for the return of GS back to theparticipating QBs’ regular PrincipalSecurities Accounts, the BTr shall updatetheir database after which participating QBsmay request/download statements ofsecurities accounts for their verification.C. Eligible SecuritiesPeso-denominated scripless securitiesof the National Government that are freeand unencumbered and with remainingmaturity of eleven (11) days to ten (10) yearsshall be eligible for the ILF. GS that will beused for ILF purposes would be reclassifiedwith due consideration to the originalbooking of the security, as follows:Original Booking of GSTo be reclassified toa. Held for Trading Held for Trading – ILFb. Designated Fair Value Designated Fair ValueThrough Profit or Loss Through Profit or Loss - ILFc. Available for Sale Available for Sale - ILFd. Held to Maturity Held to Maturity - ILFD. Valuation of SecuritiesThe GS subject of an ILF transactionshall be valued based on the 11:16 amfixing rates of the previous business day,from the applicable Reuters PDEX pagesor any other valuation benchmark as maybe prescribed by the BSP.Q-RegulationsAppendix Q-13b - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-13b08.12.31E. MarginsMargins shall be applied based onprevailing policies of the BSP TreasuryDepartment.F. Transaction FeeThe BTr shall collect a monthlymaintenance fee of One Thousand Pesos(P1,000.00) from each Eligible Participant QBfor the use of the CSA-ILF Securities Account.The maintenance fees herein required to bepaid by each Eligible Participant QB shall beseparate from and exclusive of any other feesbeing assessed and collected by BTr formembership in the RoSS. For this purpose,the Eligible Participant QB shall issue to theBTr an autodebit instruction to authorize theBTr to debit its DDA with BSP for the abovementionedmonthly maintenance fee. TheBTr will inform the Eligible Participant QBsof any change in fee at least fifteen (15) daysprior to implementation.G. DDA Statements/Transaction DetailsEligible Participating QBs will be ableto verify the status of their accounts byinitiating the SWIFT/PPS-Front-end Systeminquiry request.Availability of ServiceThe ILF is covered by a Memorandumof Agreement (MOA) dated 25 March 2008by and among the BSP, the BTr, theBankers Association of the Philippines (forBAP members) and the Money MarketAssociation of the Philippines (for non-BAPmembers). Participating QBs shall signindividual participation agreements. Theservices outlined in the MOA shall beavailable at the BSP and the BTr at a fixedhour on all banking days. Banking daysrefer to the days banking institutions areopen for business, Mondays thru Fridaysas authorized by the BSP.(CL-2008-036 dated 20 June 2008)Manual of Regulations for Non-Bank Financial InstitutionsQ-RegulationsAppendix Q-13b - Page 3

APP. Q-13b08.12.31PARTICIPATION AGREEMENTBangko Sentral ng PilipinasA. Mabini corner P. Ocampo Sr. Streets,ManilaDateBureau of the TreasuryPalacio del GobernadorIntramuros, ManilaBankers Association of the Philippines11 th Floor, Sagittarius BuildingH. V. dela Costa Street, Salcedo VillageMakati CityMoney Market Association of the PhilippinesPenthouse, PDCP Bank CenterHerrera corner L. P. Leviste Streets, Salcedo VillageMakati CityGentlemen:Please be advised that we agree to participate in the Agreement for the Establishment of Intraday LiquidityFacility to support the Philippine Payment and Settlement System (the “System”) which is covered bythe Memorandum of Agreement dated _____ (the “Agreement”) among yourselves and its subsequentamendments of revisions as may be agreed upon by the parties thereto from time to time.We agree to be bound by all the terms and conditions of the Agreement and adopt it as an integral partof this Participation Agreement, including the authority of the BSP to execute payment instructionsand the authority of the Bureau of the Treasury (BTr) to execute our instructions on transfer to/from,credit and debit to/against our Securities Account. Further, we agree to comply with all our obligationsas participating bank/financial institution as provided in the Agreement. Lastly, we agree to keepyourselves free and harmless from any claim or liability arising from, or in connection with, ourtransactions transmitted through the System in accordance with the provisions of the Agreement.This participation will become effective upon your conformity hereto and your notification of thesame to us, the BSP and the BTr.Very truly yours,Participating Bank/Financial InstitutionsAPPROVED:Bangko Sentral ng PilipinasBureau of the TreasuryBankers Association of the PhilippinesMoney Market Association of the PhilippinesBy:By:By:By:Q-RegulationsAppendix Q-13b - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-13b08.12.31Annex 1(LETTERHEAD OF THE APPLICANT)The Treasurer of the PhilippinesPalacio del GobernadorIntramuros, ManilaSir:The undersigned hereby makes an application to open a Client Securities Accountunder the BSP-ILF RoSS Account in the Registry of Scripless Securities (RoSS) operated andmaintained by the Bureau of the Treasury (BTr).The undersigned will pay to BTr an additional monthly fee of P1,000.00 for theClient Securities Account opened payable on the first business day of each month. The BTrwill inform the undersigned of any change in fee at least fifteen (15) days prior toimplementation.Please debit/credit our Regular Demand Deposit Account No. ______ with theBSP for the payment of said monthly fee.(Date)Manila, Philippines(Name of Applicant)(Signature of Authorized Signatory)(Designation)Manual of Regulations for Non-Bank Financial InstitutionsQ-RegulationsAppendix Q-13b - Page 5

APP. Q-13b08.12.31Annex 2LETTERHEAD OF THE SELLERTransaction No. ________Value Date ________CONFIRMATION OF SALE OF GOVERNMENT SECURITIESThe _______________, does hereby CONFIRM that it has SOLD, TRANSFERREDAND CONVEYED unto _______________, pursuant to the Memorandum of Agreementfor Intraday Liquidity Facility and the Participation Agreement executed on ______ and, respectively, all of its rights, titles and interests over the following describedGovernment Securities, held by the Bureau of the Treasury under the Registry of ScriplessSecurities System.ISIN TERM ISSUE MATURITY FACEDATE DATE AMOUNT(Code) (Account Number)(Name of GSED)(Signature of Authorized Signatory)(Designation)Q-RegulationsAppendix Q-13b - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-13b08.12.31Annex 3Transaction No.Value Date________________CONFIRMATION OF PURCHASE OF GOVERNMENT SECURITIESThe _____________, does hereby CONFIRM that it has PURCHASED from______________, pursuant to the Memorandum of Agreement for Intraday Liquidity Facilityand the Participation Agreement executed on ______ and ______, respectively, all of itsrights, titles and interests over the following described Government Securities, held bythe Bureau of the Treasury under its Registry of Scripless Securities System.ISIN TERM ISSUE MATURITY FACEDATE DATE AMOUNT(Code) (Account Number)(Name of GSED)(Signature of Authorized Signatory)(Designation)Manual of Regulations for Non-Bank Financial InstitutionsQ-RegulationsAppendix Q-13b - Page 7

APP. Q-1408.12.31SAMPLE INVESTMENT MANAGEMENT AGREEMENT(Appendix to Subsec. 4411Q.1)IMA No. (Prenumbered)INVESTMENT MANAGEMENT AGREEMENTKNOW ALL MEN BY THESE PRESENTS:This AGREEMENT, made and executed this day of at, Philippines by and between:(Hereinafter referred to as the "PRINCIPAL")and, an institution authorized to performtrust functions, organized and existing under and by virtue of the lawsof the Philippines, with principal office and place of businessat , , Philippines.(Hereinafter referred to as the "INVESTMENT MANAGER")WITNESSETH: THAT -WHEREAS, the Principal desires to avail of the services of the Investment Managerrelative to the management and investment of Principal's investible funds.WHEREAS, the Investment Manager is willing to render the services required bythe Principal relative to the management and investment of Principal's investible funds,subject to the terms and conditions hereinafter stipulated;NOW, THEREFORE, for and in consideration of the foregoing and of the mutualconditions stipulated hereunder, the parties hereto hereby agree and bind themselves tothe following terms and conditions:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-14 - Page 1

APP. Q-1408.12.31INVESTMENT PORTFOLIO1. Delivery of the Fund - Upon execution of this Agreement, the Principal shalldeliver to the Investment Manager the amount of PHILIPPINE PESOS:(P ).2. Composition - The cash which the Principal has delivered to the Investment Manageras well as such securities in which said sums are invested, the proceeds, interest, dividendsand income or profits realized from the management, investment and reinvestment thereof,shall constitute the managed funds and shall hereafter be designated and referred to as thePortfolio. For purposes of this Agreement, the term securities shall be deemed to includecommercial papers, shares of stock and other financial instruments.3. Delivery of Additional Funds - At any time hereafter and from time to time at thediscretion of the Principal, the latter may deliver additional funds to the Investment Managerwhich shall form part of the Portfolio and shall be subject to the same terms and conditionsof this Agreement. No formalities other than a letter from the Principal and physical deliveryto the Investment Manager of cash will be required for any addition to the Portfolio.4. Nature of Agreement - THIS AGREEMENT IS AN AGENCY AND NOT A TRUSTAGREEMENT. AS SUCH, THE CLIENT SHALL AT ALL TIMES RETAIN LEGAL TITLE TOFUNDS AND PROPERTIES SUBJECT OF THIS ARRANGEMENT.THIS AGREEMENT IS FOR FINANCIAL RETURN AND FOR THE APPRECIATION OFASSETS OF THE ACCOUNT. THIS AGREEMENT DOES NOT GUARANTEE A YIELD,RETURN OR INCOME BY THE INVESTMENT MANAGER. AS SUCH, PASTPERFORMANCE OF THE ACCOUNT IS NOT A GUARANTY OF FUTUREPERFORMANCE AND THE INCOME OF INVESTMENTS CAN FALL AS WELL AS RISEDEPENDING ON PREVAILING MARKET CONDITIONS.IT IS UNDERSTOOD THAT THIS INVESTMENT MANAGEMENT AGREEMENT IS NOTCOVERED BY THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC) ANDTHAT LOSSES, IF ANY, SHALL BE FOR THE ACCOUNT OF THE PRINCIPAL.POWERS5. Powers of the Investment Manager - The Investment Manager is hereby conferredthe following powers:a. To invest or reinvest the Portfolio in (1) Evidences of indebtedness of the Republicof the Philippines and of the Bangko Sentral ng Pilipinas, and any other evidences ofindebtedness or obligations the servicing and repayment of which are fullyguaranteed by the Republic of the Philippines or loans against such governmentsecurities; (2) Loans fully guaranteed by the government as to the payment ofprincipal and interest; (3) Loans fully secured by hold-out on, assignment or pledgeof, deposits or of deposit substitutes, or mortgage and chattel mortgage bonds;Q RegulationsAppendix Q-14 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1408.12.31(4) Loans fully secured by real estate and chattels in accordance with Sec. 78 of R.A.No. 337, as amended, and subject to the requirements of Secs. 75, 76 and 77 of R.A.No. 337, as amended; and (5) Such other investments or loans as may be directedor authorized by the Principal in a separate written instrument which shall form partof this Agreement: Provided, That said written instrument shall contain the followingminimum information: (a) The transaction to be entered into; (b) The amount involved;and (c) The name of the issuer, in case of securities and/or the name of the borrowerand nature of security, in the case of loans;b. To endorse, sign or execute any and all securities, documents or contracts necessaryfor or connected with the exercise of the powers hereby conferred or the performanceof the acts hereby authorized;c. To cause any property of the Portfolio to be issued, held, or registered in the nameof the Principal or of the Investment Manager: Provided, That in case of the latter,the instrument shall indicate that the Investment Manager is acting in a representativecapacity and that the Principal's name is disclosed thereat;d. To open and maintain savings and/or checking accounts as may be considerednecessary from time to time in the performance of the agency and the authorityherein conferred upon the Investment Manager;e. To collect and receive matured securities, dividends, profits, interest and all othersums accruing to or due to the Portfolio;f. To pay such taxes as may be due in respect of or on account of the Portfolio or inrespect of any profit, income or gains derived from the sale or disposition of securitiesor other properties constituting part of the Portfolio;g. To pay out of the Portfolio all costs, charges and expenses incurred in connectionwith the investments or the administration and management of the Portfolio includingthe compensation of the Investment Manager for its services relative to the Portfolio;andh. To perform such other acts or make, execute and deliver all instruments necessaryor proper for the exercise of any of the powers conferred herein, or to accomplishany of the purposes hereof.LIABILITY OF INVESTMENT MANAGER6. Exemption from Liability - In the absence of fraud, bad faith, or gross or willfulnegligence on the part of the Investment Manager or any person acting in its behalf, theInvestment Manager shall not be liable for any loss or damage to the Portfolio arising out ofor in connection with any act done or performed or caused to be done or performed by theInvestment Manager pursuant to the terms and conditions herein agreed, to carry out thepowers, duties and purposes for which this Agreement is executed.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-14 - Page 3

APP. Q-1408.12.317. Advice of Counsel - The Investment Manager may seek the advice of lawyers. Anyaction taken or suffered in good faith by the Investment Manager as a consequence of theopinion of the said lawyers shall be conclusive and binding upon the Principal, and theInvestment Manager shall be fully protected from any liability suffered or caused to besuffered by the Principal by virtue hereof.ACCOUNTING AND REPORTING8. The Investment Manager shall keep and maintain books of accounts and otheraccounting records as required by law. The Principal or the authorized representative ofthe Principal shall have access to and may inspect such books of accounts and all otherrecords related to the Portfolio, including the securities held in custody by the InvestmentManager for the Portfolio.9. Reporting Requirements - The Investment Manager shall prepare and submit to thePrincipal the following reports within : (a) BalanceSheet; (b) Income Statement; (c) Schedule of Earning Assets; (d) Investment ActivityReport; and (e) (such other reports as may be required by the Principal).INVESTMENT MANAGER'S FEE10. Investment Fee - The Investment Manager, in addition to the reimbursement of itsexpenses and disbursements in the administration and management of the Portfolio includingcounsel fees, shall be entitled to receive as compensation for its services a managementfee of (Specify amount or rate) .WITHDRAWALS FROM THE PORTFOLIO11. Withdrawal of Income/Principal - Subject to availability of funds and the nondiminutionof the Portfolio below P1 million, the Principal may withdraw the income/principal of the Portfolio or portion thereof upon written instruction or order given to theInvestment Manager. The Investment Manager shall not be required to see as to theapplication of the income/principal so withdrawn from the Portfolio. Any income of thePortfolio not withdrawn shall be accumulated and added to the principal of the Portfolio forfurther investment and reinvestment.12. Non-alienation of Encumbrance of the Portfolio or Income - During the effectivity ofthis Agreement, the Principal shall not assign or encumber the Portfolio or its income orany portion thereof in any manner whatsoever to any person without the prior writtenconsent of the Investment Manager.Q RegulationsAppendix Q-14 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1408.12.31EFFECTIVITY AND TERMINATION13. Term - This Agreement shall take effect from the date of signing hereof and shall bein full force and effect until terminated by either party by giving written notice thereof tothe other at least _______(__) days prior to the termination date.14. Powers upon Liquidation - The powers, duties and discretion conferred upon theInvestment Manager by virtue of this Agreement shall continue for the purpose of liquidationand return of the Portfolio, after the notice of termination of this Agreement has been servedin writing, until final delivery of the Portfolio to the Principal.15. Accounting of Transaction - Within (__) days after the termination of thisAgreement, the Investment Manager shall submit to the Principal an accounting of alltransactions effected by it since the last report up to the date of termination. Upon theexpiration of the ________ (__) days from the date of submission, the Investment Managershall forever be released and discharged from all liability and accountability to anyonewith respect to the Portfolio or to the propriety of its acts and transactions shown in suchaccounting, except with respect to those objected to in writing by the Principal within the__________ (__) day period.16. Remittance of Net Assets of the Portfolio - Upon termination of the Agreement, theInvestment Manager shall turn over all assets of the Portfolio which may or may not be incash to the Principal less the payment of the fees provided in this Agreement in carryingout its functions or in the exercise of its powers and authorities.This Agreement or any specific amendments hereto constitute the entire agreementbetween the parties, and the Investment Manager shall not be bound by any representation,agreement, stipulations or promise, written or otherwise, not contained in this Agreementor incorporated herein by reference, except pertinent laws, circulars or regulations approvedby the Government or its agencies. No amendment, novation, modification or supplementof this Agreement shall be valid or binding unless in writing and signed by the partieshereto.IN WITNESS WHEREOF, the parties have hereunto set their hands on the date and atthe place first above set forth.(PRINCIPAL) (INVESTMENT MANAGER)By:SIGNED IN THE PRESENCE OF:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-14 - Page 5

APP. Q-1509.12.31RISK MANAGEMENT GUIDELINES FOR DERIVATIVES[Appendix to Sec. 4611Q (2008-4603Q)]I. IntroductionThis appendix, together with theGuidelines on Supervision by Risk(Appendix Q-42) and other BSP issuanceson management of the different risksattendant to FI activities, provides aframework on which an FI can establish itsrisk management activities. Accordingly,this set of risk management guidelines forderivatives should be read and used inconjunction with all related BSP issuanceson risk management.An FI, in using these guidelines toevaluate the propriety and adequacy of itsrisk management, must consider thefollowing principles:a. No single risk managementsystem for derivatives is expected to workfor all FIs considering that the structureand level of derivatives activities will varyfrom one FI to another. Each FI shouldapply the principles set in these guidelinesin a manner appropriate to its needs andcircumstances. The BSP shall evaluate thequality of an FI’s risk management systembased on the principles and minimumrequirements of these guidelines, scaledto the derivatives activities beingundertaken.b. The requirements prescribed inthese guidelines are merely minimumstandards and therefore, should not be takenas the “be-all” for all FI’s risk management.The Board of Directors (“BOD”) has theresponsibility of ensuring that an FI’s riskmanagement system appropriately capturesits risk exposures and affords propermanagement of these.II. Risks associated with derivativesWhile derivatives primarily helpmanage existing and anticipated risks,derivatives themselves are exposed to therisks they are designed to manage.Moreover, simple derivatives, whencombined with other financial instruments,may result in a structure that exposes an FIto complicated risks. Thus, derivatives canaggravate the risks of FIs and ofcounterparties if derivatives are not clearlyunderstood and properly managed.A single derivatives product may exposean FI to multiple risks as enumerated underSection III of Appendix Q-42. Thesecategories are not mutually exclusive ofeach other. Hence, derivatives activitiesmust be managed with consideration of allof these risks.III. Risk management process forderivativesThe management of derivatives activitiesshould be integrated into an FI’s overall riskmanagement system using a conceptualframework common to the FI’s otherbusinesses. For example, price risk exposurearising from derivatives transactions shouldbe assessed in a manner comparable to andaggregated with all other price riskexposures. Risk consolidation is particularlyimportant because the various riskscontained in derivatives and other marketactivities can be interconnected and maytranscend specific markets.At a minimum, the risk managementprocess for derivatives should be able to:a. Identify the risks arising from itsderivatives activities in whatever capacityit deals with the same. An FI must likewiseidentify the impact of its derivatives activitieson its overall risk profile. To properlyidentify risks, an FI must understand thederivatives products with which it istransacting and the factors that affect them.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 1

APP. Q-1509.12.31Considering that changes in the value ofderivatives are highly influenced by changesin market factors, risk identification shouldbe a continuing process and should occurat both a transaction and portfolio level.b. Measure the risks arising from itsderivatives activities. An FI must havemeasurement models or tools to quantifythe risks identified. These measurementtools should be suitable to the nature andvolume of an FI’s derivatives activities. Asthe complexity and volume of the derivativesactivity increases, the measurement toolsshould correspondingly be moresophisticated. The primary criteria for thepropriety of the measurement tools areaccuracy, timeliness, efficiency andcomprehensiveness with which these toolscan capture the risks involved and theircontribution to the decision-making processof FI management.c. Monitor the risks arising from itsderivatives activities. Derivatives productsare very sensitive to market factors, whichcontinually change. Thus, an FI should havea mechanism to monitor the responsivenessof derivatives to market factors to enable itto review and assess its risk positions. Inorder to effectively monitor the risks, reportsmust be timely generated in order to aidmanagement in determining whether thereis need to adjust the FI’s derivativespositions.d. Control the risks arising from itsderivatives activities. An FI must establishlimits to its derivatives exposure. Theselimits should be comprehensive and alignedwith an FI’s overall risk tolerance. An FI’spolicies and procedures on control shouldprovide for contingencies when limits arebreached. An FI must allot lead time andhave a mechanism that enablesmanagement to act in time to controlunacceptable or undesired exposures. AnFI must also establish a system thatseparates functions susceptible to conflictsof interest.IV. Sound risk management practices forderivativesConsistent with the criteria for soundrisk management practices in Section V ofAppendices Q-43 and Q-44, the BSP shallassess the propriety and adequacy of an FI’srisk management system for its derivativesactivities in accordance with the followingbasic principles.a. Active and appropriate board andsenior management oversightAn FI’s BOD must set the general policyor the policy direction relating to themanagement of an FI’s risks, including thosearising from its derivatives activities. Thispolicy should be consistent with the FI’sbusiness strategies, capital strength,management expertise and risk profile.Accordingly, the BOD must understand thenature and purpose of the FI’s derivativesactivities and the role derivatives play in theFI’s overall business strategy. Passive BODapproval is not acceptable. There must beverifiable evidence of the BOD approvalprocesses and that senior managementexerted effort to explain the nature andpurpose of the derivatives activities to theBOD (e.g. minutes of BOD meetingsdocumenting presentations and reports tothe BOD and the approval processes).The BOD must review and pre-approvenew derivatives products as well assignificant related policies and procedures.Central to the approval of new products isdefining when a product or activity is newin order to ensure that variations on existingproducts receive the proper review andauthorization. Policies should also detailauthorized activities (e.g., at what stagesapprovals should be obtained, from whomapprovals should be obtained), those thatrequire on-time approval and those that areconsidered inappropriate.The BOD must be apprised of the FI’sderivatives exposures on a timely basis inorder to enable the BOD to act on suchexposures accordingly. Consequently, thereQ RegulationsAppendix Q-15 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1509.12.31should be an established reportingmethodology to ensure that the BODreceives, on a continuing basis, detailedinformation regarding the FI’s risk exposuresfrom derivatives, including the impact to theFI’s overall risk profile, earnings and capital.These reports should include both normaland stress scenarios.Pursuant to the general policy or policydirection on risk management set by theBOD, senior management must adoptadequate policies and procedures forconducting the FI’s derivatives activities onboth a long-range and day-to-day basis.Policies should clearly delineateresponsibility for managing risk, and provideeffective internal controls and acomprehensive risk-reporting process.Policies must also keep pace with thechanging nature of derivatives products andmarkets and therefore must be reviewed onan on-going basis. Senior managementshould ensure that the various componentsof an FI’s risk management process areregularly reviewed and evaluated. Internalevaluations may be supplemented byexternal auditors or other qualified outsideparties.The quality of oversight provided by theBOD and senior management to an FI’sderivatives activities will be reflected in theoverall risk management process, theadequacy of resources (financial, technicalexpertise, and systems technology) devotedto handle derivatives activities and its useof the monitoring reports. The BOD andsenior management shall be responsible forensuring that FI personnel comply withprescribed risk management standards andsales and marketing guidelines.b. Adequate risk managementpolicies and proceduresAn FI must establish policies andprocedures to guide its personnel inconducting derivatives activities. These riskmanagement policies must be reflective ofan FI’s current strategy and practice.An FI should not issue policies andprocedures for derivatives in isolation. Allaspects of the risk management processfor derivatives activities should beintegrated into the FI’s over-all riskmanagement system to the fullest extentpossible using a conceptual frameworkcommon to the FI’s other activities. Riskmanagement policies should becomprehensive, covering all activities ofthe FI. The BSP will evaluate the degreeto which controls covering derivativesactivities have been integrated in otherissuances of the FI covering aggregate risktakingactivities.For FIs that conduct derivativestransactions with subsidiaries and affiliates,there should be policies and procedures thatdescribe the nature, pricing, monitoring, andreporting of acceptable related-partytransactions.All risk management policies andprocedures must be written, wellcommunicatedto all personnel involved inthe derivatives activities and readily availablein user-friendly form, whether the same is ahard or soft copy thereof. An FI must alsoput up systems and procedures to ensurean audit trail evidencing the disseminationprocess for new and amended policies andprocedures.At a minimum, an FI is expected to have:(1) Comprehensive, updated andrelevant risk policy manual(s);(2) Operations manual(s) or similardocuments that describe the flow oftransactions among and between therelevant units and personnel in an FI’streasury (front office, back office andaccounting) and risk management unit;(3) Approved product manual(s) thatincludes product definition, benefits andrisks, pricing mechanisms, risk managementprocesses, capital allocation guidelines, taximplications and other operatingprocedures and controls for the FI’sderivatives activities.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 3

APP. Q-1509.12.31c. Appropriate risk measurementmethodologies, limits structure, monitoringand management information systemThe process of measuring, monitoringand controlling risk should be carried outindependently from individuals conductingderivatives activities. An independent systemof reporting exposures to both senior levelmanagement and to the BOD is critical tothe effectiveness of the process.(1) Measurement methodologiesAn FI must be able not only toaccurately quantify the multiple riskexposures arising from its derivativesactivities but also aggregate similar risksacross the different activities of the FI to thefullest extent possible. An FI must developa risk measurement model appropriate toits portfolio. Accordingly, an FI mustevaluate the assumptions used,computational requirements, procedures forcomputing the risk metric, sourcing of inputsused in the measurement process, includingthe theoretical reasons for a particular inputchoice, and how these concepts apply tothe FI’s portfolio.The risk measurement system should bestructured to enable management to initiateprompt remedial action, facilitate stresstesting,and assess the potential impact ofvarious changes in market factors onearnings and capital. A risk measurementsystem is considered sound if it is capableof comprehensively capturing risks from: (a)the FI’s on and off-balance sheet exposure;(b) all relevant market factors; and (c) normalcircumstances and stress events. Sound riskmeasurement practice includes identifyingpossible events or changes in marketbehavior that could have unfavorable effectson the FI and assessing the ability of the FIto withstand these events or changes. Thestress testing should include not onlyquantitative exercises that computepotential gains or losses but also qualitativeanalyses of actions that management mighttake under particular scenarios.An FI’s risk measurement systemshould provide appropriate pricing andvaluation procedures to ensure bestexecution for both proprietary trading andthose undertaken for clients and a mark-tomarket/model(MTM) methodology forderivatives instruments that followsestablished MTM regulations and PhilippineAccounting Standards (PAS 39).New measurement models, whetherdeveloped internally or purchased fromvendors, should be subject to an initialvalidation before it is used. Internallydeveloped models require more intensiveevaluation where they have not beenmarket-tested by external parties. Thevalidation process should consist of a reviewof the logic, mathematical or statisticaltheories, assumptions, internal processesand overall reliability of an FI’s measurementmodels, including the compatibility of themeasurement model with the FI’stechnology and systems. The validationmust be undertaken by a technical expertindependent from the unit that developedthe model. For example, pricing systemsdeveloped by a trader is required to beindependently validated by a correspondingtechnical expert from the FI’s riskmanagement unit. If no such personnel fromthe risk management unit exists, anindependent validation may be performedby internal audit provided that internal audithas the necessary expertise. An FI may alsoavail of the services of an independentoutside expert. Thereafter, the frequencyand extent to which models are validateddepends on changes that affect pricing, riskpresentation or the existing controlenvironment. Changes in market conditionsthat affect pricing and risk conventions,which model performance, should triggeradditional validation review.Risk management policies shouldclearly address the scope of the validationprocess, the frequency of validations,documentation requirements, andQ RegulationsAppendix Q-15 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1509.12.31management responses. At a minimum,policies should require the evaluation ofsignificant underlying algorithms andassumptions before the model is put inregular use, and as market conditionswarrant thereafter. Such internal evaluationshould be conducted by parties who, wherepracticable, are independent of the businesssector using or developing the model. Theevaluation may, if necessary, be conductedor supplemented with reviews by qualifiedoutside parties, such as experts in highlytechnical models and risk managementtechniques.(2) Limits structureAn FI must specify individual limits forall types of risks involved in an FI’sderivatives activities. An FI should use avariety of limits to adequately capture therange of risks or to address risks that themeasurement system does not capture.These limits should be integrated into theFI-wide limit structure to ensure consistencywith the BOD-approved risk appetite andbusiness strategy.The limit structure should be realistictaking into consideration the target budget,level of earnings and capital. Limits must bedocumented and promptly communicated toall relevant personnel. Limits must be reviewedat least annually or more frequently, ifcircumstances warrant, in order to ensure thatlimits reflect the FI’s past performance andcurrent position.Limits should be continually analyzedas regards its impact on target income,earnings and capital. These analyses shouldbe submitted/reported to the BOD. Anyexcess over the limit must be approved onlyby authorized personnel and immediatelyreported to senior management anddepending on the seriousness, also to theBOD. The seriousness of limit exceptionsdepends upon management’s approachtowards setting limits and on the actual sizeof individual and organizational limitsrelative to the FI’s capacity to take risks. AnFI with relatively conservative limits mayencounter more exceptions to those limitsthan that with less restrictive limits. Theremust also be mechanisms for the correctionof breach of these limits.An FI’s limit structure should addressthe following:(a) Definition of a credit exposure;(b) Maximum credit exposure to anindividual counterparty;(c) Credit concentrations;(d) Maximum nominal exposure:(i) Per trader and per transaction; and(ii) Position limits(e) Approved credit risk mitigationtechniques; and(f) Appropriate loss exposure triggers:(i) Loss alert;(ii) Stop loss;(iii) Value-at-risk; and(iv) Earnings-at-risk(3) MonitoringMonitoring of risk exposures, marketconditions, and trading positions should bedone at least daily. Derivatives instrumentsare highly influenced by movements inmarket factors. Thus, an FI must have amechanism that can track and analyze theeffect of market movements on its derivativesexposures. To ensure proper monitoring ofrisks, an FI is expected to have technologyand systems that can (a) track movementsin reference variables (underlying) and othermarket factors affecting the value of thederivatives instruments, such as triggerevents; and (b) incorporate observed marketmovements into the pricing and valuationof derivatives instruments.While monitoring is undertakenindependently from the personnel conductingderivatives activities, FI traders are expectedto actively monitor their positions to ensurethat they do not breach their limits. FI tradersshould not wait until a limit is breached toalert senior management and risk controlunits. Instead, traders should promptly reportunanticipated changes and progressivelyManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 5

APP. Q-1509.12.31deteriorating positions, as well as othersignificant issues arising from theirpositions, to the risk control function andresponsible management.(4) Management information systemAn FI must institute an informationsystem that generates accurate and incisivereports to ensure that management and theBOD are timely and regularly apprised ofthe FI’s derivatives exposures. An FI isexpected to have policies and procedurespertaining to the derivatives reportingspecifying, among others, the types ofderivatives reports to be generated, thepurpose and contents thereof, responsibleunits that will generate the reports, frequencyand deadlines of reports, recipients/users ofreports, and the type of action expected fromthe users of the report. At a minimum,management reports should contain thefollowing: outstanding derivatives positions,compliance with or status of positions asagainst limits, analysis of derivatives positions,along with other FI exposures, in relation tothe impact to earnings and capital, monitoringof trigger events, and deviations fromestablished policies and procedures andjustifications thereof.The management information systemmust be able to translate the measured risksfrom derivatives activities from a technicaland quantitative format to one that can easilybe read and understood by senior managersand directors, who may not have specializedand technical knowledge of derivativesproducts. Such a system enablesmanagement and the BOD to judge thechanging nature of the FI’s risk exposures.The electronic data processing capabilitymust be commensurate to the volume andcomplexity of the FI’s derivatives activitiesto facilitate the generation of needed reports.The frequency and content of BOD andmanagement reporting will ultimatelydepend upon the nature and significance ofderivatives activities. Where applicable,BOD and management reports shouldconsolidate information across functionsand divisions. BOD and managementreporting should be tailored to the intendedaudience, providing summary informationto senior management and the BOD andmore detailed information to FI traders.Management reports should begenerated by control departmentsindependent of the risk-takers. When risktakersprovide information (e.g., valuationsor volatilities on thinly traded derivativescontracts) for management reports, seniormanagement should be informed ofpossible weaknesses in the data, and thesepositions should be audited frequently.d. Comprehensive internal controlsand independents audits.A sound system of internal controlspromotes effective and efficient operations,reliable financial and regulatory reporting, andcompliance with relevant laws, regulationsand policies of the FI. In determining whetheran FI’s internal controls meet these objectives,the BSP will consider the overall controlenvironment of the FI, particularly, the processof identifying, measuring, analyzing andmanaging risk, the adequacy of managementinformation systems, and degree of adherenceto control activities such as approvals,confirmations and reconciliations. Control ofthe reconciliation process is particularlyimportant where there are differences in thevaluation methodologies or systems used bythe front and back offices.(1) Risk controlAn FI should have an independent riskcontrol unit responsible for the design andimplementation of the FI’s risk managementsystem. A strong risk control function is akey element in fulfilling the oversightresponsibilities of BOD members and seniormanagers. This unit must be independentfrom business trading units and shouldreport directly to the BOD. The role andstructure of risk control function should becommensurate to the nature, complexityand extent of an FI’s derivatives activities.Q RegulationsAppendix Q-15 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1509.12.31A risk control unit should regularlyevaluate risk-taking activities by assessing risklevels and the adequacy of risk managementprocesses. It should also monitor thedevelopment and implementation of controlpolicies and risk measurement systems. Itshould analyze daily reports produced by theFI’s risk measurement model, including anevaluation of the relationship betweenmeasures of risk exposure and trading limits.Risk control personnel staff should periodicallycommunicate their observations to seniormanagement and the BOD.An FI’s control structure shall beconsidered sound if all the followingelements are present:(a) Formal approval process for newproductsAn FI should have an effective processto evaluate and review risks involved inproducts that are either new to the FI or newto the market and of potential interest to theFI. An FI that desires to engage in newproducts and transactions must first subjectthese products and transactions to a rigorousreview and approval process. This willensure that all FI personnel involved in theactivity have sufficient knowledge of theproduct or transaction, and that theensuing risk exposures can be identified,measured and analyzed. The process mustbe contained in a BOD-approved policythat is fully documented and must beimplemented consistently and withintegrity.Before initiating a new derivativesactivity, all relevant personnel shouldunderstand the product. Risks arising fromthe new product should be integrated intothe FI’s risk measurement and controlsystems. The new product approval processshould include a sign-off by all relevantareas such as risk control, operations,accounting, legal, audit, and seniormanagement and trading operations.Defining a product or activity as “new”is central to ensuring that variations onexisting products receive the proper reviewand authorization. Factors that should beconsidered in classifying a product/activityas “new” include: capacity changes(e.g., end-user to dealer), structure variations(e.g., non-amortizing swap versusamortizing interest rate swap), productswhich require a new pricing methodology,legal or regulatory considerations, or marketcharacteristics (e.g., foreign exchangeforwards in major currencies as opposedto emerging market currencies).An FI should introduce new productsin a manner that adequately limits potentiallosses and permits the testing of internalsystems.(b) Segregation of functions/unitssubject to conflict of interestAn FI must separate the business unitconducting the derivatives activities fromthe unit/s tasked with the checking,accounting, reporting and control functionsof its derivatives activities.An FI should have policies andprocedures addressing conflicts ofinterest, particularly among the followingfunctions: proprietary trading, sales ormarketing desks/units, personal trading,and asset management.An FI that conducts derivatives activitieswith its subsidiaries and/or affiliates mustestablish policies and procedures to avoidactual, or even the appearance of a conflictof interest. Off-market rates between relatedparties should generally be forbidden.An FI should avoid dealing intransactions conducted at off-market rates.An FI should have internal policies definingwhat constitutes “market rates” and identifythe range of deviation from the benchmarkrates which could still be considered as“market rates”. The FI’s monitoring systemshould be able to alert management of anybreaches in the rate tolerance levels and theappropriate action that should be taken. AnFI must be able to justify any off-markettransaction.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-15 - Page 7

APP. Q-1509.12.31(c) Competent and adequate personnelwho are properly supervisedThe increased complexity of derivativesactivities requires highly skilled staffparticularly in the risk-taking, risk control,and operational functions. Managementshould regularly review the knowledge,skills and number of people needed toengage in the FI’s derivatives activities. Thestaff must be appropriately balanced amongthe different areas involved in derivativesactivities such that no area is understaffedin terms of number or skill.Staff turnover can create seriousproblems, especially if knowledge isconcentrated in a few individuals. Theimpact of staff turnover can be particularlyacute in specialized trading markets whereFI traders are in high demand and are oftenrecruited in teams.To mitigate business continuity andsuccession risk arising from a high staffturnover, an FI should devise a system ofbuilding technical expertise across involvedpersonnel through continuous technicaltraining, periodic rotation and cross-trainingof staff members performing key functionsand developing understudies.The BOD should ensure that the powerand control delegated to these expertpersonnel are not abused. Therefore, theBOD must establish appropriate controlsover their activities.(d) Independent control functions or unitsThe risk control and audit units shouldpossess the authority, independence, andcorporate stature to enable them to identifyand report their findings, unimpeded by FItraders. It is equally important to employindividuals with sufficient experience andtechnical expertise to be credible to thebusiness line they monitor and seniorexecutives to whom they report.(2) AuditAudit should be conducted by qualifiedprofessionals who are independent of thebusiness line being audited. Audits shouldsupplement, and not be substitute for riskcontrol function.The scope of audit coverage should becommensurate with the level of risk andvolume of derivatives activity. The audit shouldinclude an appraisal of the effectiveness andindependence of the FI’s risk managementprocess; the adequacy of operations,compliance, accounting and reportingsystems; propriety of risk measurementmodels; and the effectiveness of internalcontrols. Auditors should test compliance withthe FI’s policies, including limits.The level of auditor expertise should beconsistent with the level and complexity ofactivities and degree of risk assumed. An FImay choose to outsource audit coverage toensure that the professionals performing thework possess sufficient knowledge andexperience.Procedures should be in place to ensurethat auditors are informed of significantchanges in product lines, risk managementmethods, risk limits, operating systems, andinternal controls so that the auditors canupdate their scope and proceduresaccordingly. Auditors should periodicallyreview and analyze performance and riskmanagement reports to ensure that areasshowing significant changes are givenappropriate attention.The audit function must have the supportof management and the BOD in order to beeffective. Management should respondpromptly to audit findings by investigatingidentified system and internal controlweaknesses and implementing correctiveaction. Thereafter, management shouldperiodically monitor newly implementedsystems and controls to ensure they areworking appropriately. The BOD, ordesignated committee, should receivereports tracking management’s actions toaddress identified deficiencies.(As amended by Circular No. 668 dated 02 October 2009)Q RegulationsAppendix Q-15 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1609.12.31SALES AND MARKETING GUIDELINES FOR DERIVATIVES[Appendix to Sec. 4611Q (2008 - 4603Q)]I. General principleAn FI, dealing with its clients, shouldalways act with honesty, fairness and inpursuance of the best interests of its clients.Due to the complex nature of derivativesand the increasingly sophisticated productsintroduced into the market, an FI acting asdealer or broker must have appropriatecontrols and procedures to ensure thesuitability of the transactions to its clients.An FI should ensure that (1) a clientunderstands the nature of the transactionand the risks involved and (2) the transactionmeets the client’s financial objectives andrisk tolerance. An FI should also disclosesufficient, accurate and comprehensibleinformation about derivatives products,including inherent risks, in a clear andbalanced presentation in order to enable itsclients to make informed investmentdecisions.These guidelines prescribe theminimum standards for sales and marketingprocedures for FIs acting as dealers orbrokers of derivatives.II. Client suitability guidelinesAn FI should ensure that the derivativesproducts it offers to a client are appropriatefor that client through a client suitabilityprocess which involves obtaining clientinformation, classifying a client accordingto his/its financial sophistication andconducting a suitability review.a. Client informationAn FI, at the inception of a possiblebusiness relationship with a client, shouldobtain from said client information abouthis/its financial situation, experience, andfinancial objectives relevant to his/its desiredproducts/services. An FI should ensure thatthe client’s risk and return objectives areclearly identified. This can be done throughquestionnaires and interviews. An FI maydesign and use its own system for obtainingclient information that would be responsiveto its client suitability process.At a minimum, client information,including client classification, should bereviewed and updated annually or earlier,in cases of material changes in the client’sfinancial situation or goals.b. Client classificationBased on the information obtained froma client, an FI should be able to ascertain,at a minimum, a client’s classificationaccording to financial sophistication asembodied in Section 4611Q and itsSubsections 1 and his/its risk tolerance. Theclient classification should serve as basis foran FI product/service offerings and level ofdisclosures required.In dealing with corporate clients, an FIshould determine whether the client isspecifically authorized to enter into all orspecific kinds of derivatives transactions andthe person/s authorized to act in its behalf.An FI should also determine if a corporateclient has competent/qualified personnel tohandle the proposed derivatives activities.If a corporate client seeks to participate inhighly sophisticated/more complexproducts, an FI should obtain writtenconfirmation from the client that it hassophisticated risk management techniquesand appropriate systems to manage andmonitor the risks it will take.In determining an individual client’sclassification, an FI should consider thefollowing:(1) The client’s knowledge andunderstanding of derivatives transactions,related investments and the risks involvedtherein, including the derivatives markets;1An FI, however, may adopt its own sub-classification for its own purposes.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-16 - Page 1

APP. Q-1609.12.31(2) The length of time the client has beenactively dealing with investment and/orderivative products, the frequency ofdealings and the extent to which he hasrelied on the investment advice of an FI orany financial advisor, if any;(3) The size and nature of investmenttransactions that have been undertaken bythe client; and(4) The client’s financial standing,which may include an assessment of his networth or the value of his portfolio.An FI must make a record of theclassification under which each client iscategorized, including sufficient informationto support the categorization.Only banks with Type 1 authority or FIswith Type 2 authority may originate ordistribute authorized derivatives products tonon-sophisticated end-users for investmentpurposes. Non-sophisticated end-usersshould be provided greatest protectioncompared to all other client types.c. Suitability reviewBefore presenting, proposing orrecommending a particular derivativesproduct to a client, a dealer shoulddetermine that the derivatives product issuitable to the client’s financial situation andconsistent with the clients’ mandates,financial objectives and constraints.At a minimum, an FI should considerthe following in choosing the derivativesproducts/services offerings to its clients:(1) Investment amount or investiblefunds;(2) Concentration ratio (i.e., assetallocation of the client’s investible funds);(3) Purpose for transacting inderivatives transaction (e.g., hedging vs.investment; long-term buy and hold asopposed to short-term active trading);(4) Holding period or investmenthorizon;(5) Client’s regulatory and legalcircumstances;(6) Liquidity needs;(7) Returns objectives (e.g., income,growth in principal, maintenance ofpurchasing power);(8) Risk tolerance; and(9) Client’s understanding of the risks.An FI should maintain a record of allthe information as bases of its suitabilityassessment. It is highly recommended thatan FI requires a client to sign its conformityto the suitability assessment (including theinformation basis of the assessment) in orderto avoid disputes with the client on itssuitability assessment.For non-sophisticated clients, an FIshould adopt a suitability statementexplaining simply and clearly why theproduct offered is viewed suitable,considering the client’s needs andpreferences. To ensure the statement willbe effective, an FI should consider thefollowing features:(1) Simple and plain language: whentechnical terms need to be incorporated,they should be explained if the client isunlikely to understand their meaning; and(2) Concise and clear messages:lengthy explanations and extensivestatements are likely to reduce theeffectiveness of the statement and make theclient less likely to read the statementproperly.Ideally, each suitability letter fornon-sophisticated clients will be different,reflecting the approach taken by the FIrepresentative in obtaining clientinformation, the derivatives productpresentation, the client’s profile andconsiderations on which the investmentproposal was based, all of which involveprofessional judgment. An FI, however, canapply a degree of standardization to aidquality control. An FI should clearly link itsproposed or recommended derivativesproduct to the client’s own needs, prioritiesand attitude toward risk. An FI may mentionalternative products suitable for the client.The suitability letter should be signed by theQ RegulationsAppendix Q-16 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1609.12.31client and the officer authorized by the FI toadvise/sell/propose the recommendedproduct.An FI does not need to comply with therequirement of suitability review in caseswhere the client is classified as a marketcounterparty, considering its recognizedsophistication. However, an FI should beable to provide sufficient support for itsclassification.III. DisclosuresAn FI should always be mindful of itsstatements regarding its products/services,whether the statements pertain topromotion, marketing or sale thereof or inthe course of making the requireddisclosures. An FI must institute measuresto ensure that its clients understand thenature and risks in a derivatives transaction.These procedures may vary with thesophistication of its client. An FI can tailorfitinformation, marketing and salespresentations/materials in accordance withthe client classification under Sec. 4611Qand its Subsections. An FI should takefurther steps to adequately disclose theattendant risks of specific types oftransactions when dealing with anunsophisticated client, either generally orwith respect to a particular derivativestransaction (e.g., non-sophisticated client orsophisticated client with respect to complexproduct types). An FI should adopt standardsfor its publications/materials/disclosurestatements and review the aforementioneddocuments regularly to ensure that theymeet the standards.An FI, when providing information toits clients, including potential clients, mustnot knowingly misrepresent or give a falseimpression in any of its advertisements,electronic communications, writtenmaterials (whether publicly disseminated ornot) or oral representations regarding thefinancial derivatives offered. Amisrepresentation is any statement thatdeviates from the truth or omits a materialfact or even tends to mislead the recipients.a. Financial promotion (marketing andsales)An FI embarking on a financialpromotion, whether through a direct offeror information/sales publications, shouldensure it gives sufficient information toenable a client to make an informedassessment of the derivatives transaction,including its underlying. An FI mustprominently indicate its name in all itspromotional materials and must specify itsrole or capacity in the transaction (e.g., asissuer, dealer/distributor, broker).A financial promotion is consideredclear, fair and not misleading if all thefollowing requisites are present:(1) Any statement of fact, promise orprediction is clear, fair and not misleading.A statement should disclose relevantassumptions;(2) A client, by himself, can discernfrom the presentation whether the statementis a fact, promise or prediction.(3) The accuracy of all materialstatements of fact can be substantiated.(4) Any comparison or contrast of aproduct offered should be with anotherinvestment intended to meet the same needsor to serve the same purpose. The facts onwhich any comparison or contrast is madeare verified, or alternatively, that relevantassumptions are disclosed. The comparisonor contrast should be presented in a fair andbalanced way and includes all factors whichare relevant to the comparison or contrast.(5) The design, content or format of anypresentation does not disguise, obscure ordiminish the significance of any statement,warning or other matter which thepresentation should contain;(6) Disclosures on risks and warningsshould not be less prominent than any otherinformation on performance;(7) No reference to an approval by aregulatory body or its officials shall be made,Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-16 - Page 3

APP. Q-1609.12.31unless a written approval was actuallyobtained;(8) A recommendation to consult/referto a financial advisor, if the client has doubtson suitability of derivatives product; and(9) It does not omit any information, theomission of which causes a material fact tobe misleading, unclear or unfair;An FI should consider the client’sknowledge of the transaction to which agiven information relates. An FI should notassume that clients/recipients necessarilyhave an understanding of the derivativesproduct being promoted. An FI should assessits usage of terms, especially those whichare technical. If promotional or marketingmaterials are specially designed for a targetedclient base reasonably believed to haveparticular knowledge of the investment, thisshould be made clear in the materials.b. Product disclosuresAn FI must endeavor to explain thederivatives products it offers to its client toenable the latter make an informedinvestment decision. Product disclosuresshould present an adequate description ofat least (a) the nature of the derivativesproduct, including the underlying, (b) theamount of investment required and (c) therisks involved. The adequacy of descriptiondepends on the target client classificationand type of product offered. In general,disclosure should always be presented in abalanced manner where the potentialbenefits of an investment are tempered by afair indication of the risks involved.A product disclosure, which includesan illustration of past or future performanceof the derivatives product or its underlying,must comply with the following:(1) When using past performance of aderivatives instrument, or its underlying, toillustrate possible returns, the disclosureshould state that past performance is notnecessarily indicative of future performance.This should be presented in the main text ofpresentation material. Past performancemust be culled from a sufficient time frameto provide a fair and balanced indication ofperformance; and(2) When using any forecast on theeconomy, stock market, bond market andeconomic trends of markets, the disclosureshould state that such forecast is notnecessarily indicative of the likely or futureperformance of the instruments; and(3) Illustrations of returns shouldinclude worst case scenarios (i.e., not justthe likely or best scenarios). Benefits shownin headline rates (pro-forma returnshighlighted) should be realistic andachievable, and not based on unreasonablyoptimistic view of events;Product disclosures for derivativesproducts with some form of guarantee orprotection must highlight which benefits areguaranteed/protected and those which arenot. In case of structured deposit products,an FI must ensure that any representationor claim of the Philippine Deposit InsuranceCorporation (“PDIC”) guarantee shouldhave been pre-cleared with the PDIC. Ininstances where the guarantee or protectioninvolves a cost to the client, the FI mustdisclose the fee or charge for the same. AnFI should also disclose the counterparty(e.g., issuer/guarantor) risk involved toclients so that they are not misled about thecapital security/principal protection. An FI,when applicable, should state if theguaranteed or protected amount is payableonly at the end of the term.Product disclosures for leveragedproducts/transactions 1 should emphasizethat while these types of products/strategiesamplify the potential gain from aninvestment, they also increase the potentialloss thereof. A client who intends to engagein margin buying, a means of applyingleverage in investing, must be cautioned onpossible loss exceeding the margin or initialcash outlay.1Leverage or gearing can be employed in a structured product to be able to offer high yields.Q RegulationsAppendix Q-16 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1609.12.31c. Minimum required disclosuresThe minimum required disclosureshould always be in writing. Except for amarket counterparty, an FI should requireits client to sign or initial the disclosurestatement as affirmation of the client’sreceipt and understanding of thedisclosure statement. An FI may opt todraft individual and separate suitabilityassessment and disclosure statement to itsclient or consolidate the same into aseparate document or incorporate thesewith the main derivatives transactionagreement/contract.Product-specific minimum disclosureshould include:(1) The nature of the derivativesproduct, including the underlying financialinstruments and how these instrumentswork;(2) Investment horizon or tenor offinancial derivatives;(3) Fees and charges, whetherembedded in the structure or not;(4) Details on the issuing entity in casethe dealing FI is not the issuing institution,(i.e., the FI acts as a broker/dealer, marketmaker);(5) Returns or benefits likely to bederived from the instrument, the amountand timing thereof and whether the benefitsare guaranteed or not.(6) All risk factors that may result in theclient receiving returns less than theillustrated returns and factors affecting therecoverable amount by the client;(7) Details of conflicts of interest, if any(8) All termination clauses, whenappropriate, including charges andrestrictions 1 .(9) Any warning, exclusion ordisclaimer in relation to the product,including, but not limited, to the following:(a) The derivatives products carryhigher risks than those associated withordinary FI savings or time deposits.(b) The transactions are risky and maynot be appropriate if client is not willingor able to accept the risk of adversemovements in the underlying securities/reference rates.(c) Past performance of the underlyingreference is not a guarantee of futureperformance.When applicable, an FI should draw theattention of the client to the following:(i) The effect of early redemption of aproduct on the return (e.g., penalties and apoor return);(ii) The availability of maximumbenefits advertised after a specified period;(iii) The pre-requisite conditions for theadvertised growth rate of income;Complex products must carry astandard warning that they are not suitablefor all clients, and are intended forexperienced and sophisticated investors.Complex products should carry appropriatewarnings on the high economic risks ofcomplex derivatives transactions, such as:(i) Loss of all or a substantial portionof the investment due to leveraging or othersophisticated practices;(ii) Volatility of returns;(iii) Lack of liquidity considering thatthere may be no secondary market for theinstrument;(iv) Restrictions on transferring interests;and(v) Absence of information regardingvaluation and pricing.Appendix Q-16A contains sampledisclosure statements which an FI mayadopt in accordance with the features of thederivatives product offered.IV. Sales and marketing personnelAny informational or promotionalpresentation regarding derivatives productsshould be undertaken only by personnel whoare knowledgeable on derivatives productsinvolved. An FI, in assessing its personnel’s1For instance, for a structured deposit, the FI should ensure that the customer is fully aware of the tenor of the deposit andthat the principal amount is only guaranteed if held to maturity.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-16 - Page 5

APP. Q-1609.12.31knowledge in derivatives transactions, mayconsider the personnel’s educationalbackground, relevant training, professionalexperience in rendering investment advice,making presentations regarding derivativesproducts or assessing the propriety ofinvestment products for a client. Personnelinvolved in derivatives transaction mustlikewise be familiar with all relevant laws,applicable rules and regulations and mustensure compliance therewith.At a minimum, an FI should establishqualification standards for personnelinvolved in derivatives activities as well ascomply with certification requirementsprescribed by existing securities laws, rulesand regulations. In addition, an FI shouldimplement, and maintain a reasonablycomprehensive system of training ofpersonnel geared at enhancing technicalknowledge of its personnel to enable themto understand, explain the nature and risksof an FI’s derivatives products and ensureclient suitability.The FI’s BOD and senior managementshall be liable to its clients for the actsperformed and representations made bysales and marketing personnel in theirofficial capacity. Notwithstanding theforegoing, an FI’s BOD and seniormanagement are not precluded from filingthe necessary action against the erring salesand marketing personnel.In order to avoid client confusionbetween FI deposit products and derivativestransactions, an FI should physicallyseparate the frontline personnel andpremises involved for traditional FI productsfrom derivatives transactions.(As amended by Circular No. 668 dated 02 October 2009)Q RegulationsAppendix Q-16 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-16-a09.12.31SAMPLE RISK DISCLOSURE STATEMENT FOR DERIVATIVES ACTIVITIES[Appendix to Sec. 4611Q (2008 - 4603Q)]While derivatives instruments areutilized for hedging or managing investmentrisk, derivatives instruments themselvesinvolve a variety of significant risks.Considering the complexity of derivativesproducts, these products are generallyunsuitable for non-sophisticated investors.You should not deal in derivativesproducts unless you understand their natureand the extent of your exposure to theattendant risks. And even assuming that youunderstand derivatives transactions, youshould not deal with the same unless theproduct is suitable for you in the light ofyour circumstances, experience, financialposition and operational resources.As in any financial transaction, youshould ensure that you understand andcomply with the regulatory requirementsapplicable to you and/or limitations set byyour BOD or other governing body. Youshould also consider the legal, tax andaccounting implications of entering into anyderivatives transaction.This product generally carries higherrisks than those associated with ordinary FIinvestments and therefore not a suitablesubstitute for savings or time deposits. Thesetransactions are risky and may not beappropriate if you are not willing or able toaccept the risk of adverse movements in theunderlying securities/reference rates.This transaction does not guarantee ayield, return or income. Past performance ofthe reference rate or similar instruments is nota guarantee of future performance. The incomefrom the transaction may or may not fluctuatedepending on prevailing market conditions.(An FI need not adopt all the followingenumerated statements. It only has toincorporate those statements that may beapplicable to the derivatives products ortransactions).(1) This transaction may be used for hedgingpurposes. If you are entering into the transactionfor hedging purposes, this product may notmatch your exposure perfectly. You may beunder or over hedged or may be subject toother exposures as a result of the transaction.(2) These are over-the-counter derivativeswhich may pose liquidity risks to you. Theseare generally not liquid because there is noexchange or secondary trading marketthrough which you can dispose thederivative. Bid and offer prices for theseinstrument may not be quoted. Bid and offerquotes, if any, are established by the dealersin the instruments and consequently fairprice may be difficult to establish.(3) While you may terminate thistransaction prior to the specified terminationdate, the cost of early termination may besubstantial. Pre-termination may reduce theexpected return or the investment amount,even in the case of principal protectedstructured products.Product specific disclosures(1) This transaction can be subject to therisk of loss of the entire principal/notionalamount of the transaction. You may losesome or all of your investment.(2) (For principal protected structuredproducts) While the principal for structureddeposits may be protected and carries PDICguarantee, returns are variable and oftencontingent on the performance of complexfinancial instruments that an average customermay not fully understand. There is still apotential loss of the principal amount investedif the structured deposit is not held to maturity,i.e., there is an early redemption fee.(3) (For leveraged products/transactions)If the derivatives transactions require you toput up a margin, you may sustain a loss of theentire margin you deposited with the FI toManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-16-a - Page 1

APP. Q-16-a09.12.31establish or maintain your position. If themarket moves against you (i.e., unfavorably),you may even be called upon to payadditional margin (known as margin call) atshort notice to maintain the position. If youfail to do so within the time required, yourposition may be liquidated at a loss and youwill be responsible for the resulting deficit.(4) (For non-readily realizableinvestments) You may have difficulty sellingthis investment at a reasonable price and, insome circumstances, it may be difficult to sellit at any price. Do not invest in this unlessyou have carefully thought about whether youcan afford it and whether it is right for you.(5) These instruments often involve ahigh degree of gearing or leverage, so that arelatively small movement in the price ofthe underlying asset or variable can resultin a much larger movement, unfavorable orfavorable, in the price of the instrument. Theprice of the instrument can therefore bevolatile.(6) In buying options, the maximumloss can be limited to the premium (plusany commission or transaction charges)when the price of the underlying assetmoves against you because you can simplyallow the option to lapse. However, if youbuy a call option on another derivativesinstrument, e.g., futures contract, theexercise of the option may expose you tothe risks for that particular derivatives.(7) If you write an option, the risks areconsiderably greater. You may be liable formargin (i.e., minimum level of collateral) tomaintain your position and a loss may besustained well in excess of the premiumreceived. By writing an option, you areaccepting a legal obligation to purchase orsell the underlying asset if the option isexercised against you, however far theexercise price may have moved from themarket price of the underlying asset. If youalready own the underlying asset (knownas covered call option), the risk is reduced.However, if you do not own the underlyingasset, the risk can be unlimited. Onlyexperienced persons should contemplatewriting uncovered options, and then onlyafter securing full details of the applicableconditions and potential risk exposure.Any scenario analysis is being providedfor illustrative purposes only. It does notrepresent actual prices that may be availableto you. It does not present all possibleoutcomes or describe all factors that mayaffect the value of the transaction.No advice on investments has beengiven. If you have any doubt about thesuitability of the product, you should contacta financial advisor or carefully considerwhether the product is suitable for you.In entering into any derivatives activitywith or arranged by us, you should understandthat we are not acting in the capacity of yourfinancial adviser due to the inherent conflictsof interests in simultaneously acting as dealerand financial adviser. Notwithstanding theconflict of interest, we may act as your financialadviser only if you have so agreed in writingand only to the extent so provided.THIS STATEMENT DOES NOTPURPORT TO DISCLOSE ALL OF THERISKS OR RELEVANT CONSIDERATIONSIN ENTERING INTO DERIVATIVESTRANSACTIONS. YOU SHOULDREFRAIN FROM ENTERING INTO ANYSUCH ACTIVITY UNLESS YOU FULLYUNDERSTAND ALL SUCH RISKS ANDHAVE INDEPENDENTLY DETERMINEDTHAT THE ACTIVITY IS SUITABLE FORYOU.[Name of FI]I/We have read and understood the riskwarning set out above.Date[Signature of Customer](Circular No. 668 dated 02 October 2009)Q RegulationsAppendix Q-16-a - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1708.12.31(RESERVED)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-17 - Page 1

APP. Q-1808.12.31SECURITIES AND EXCHANGE COMMISSION BASIC RULES ANDREGULATIONS TO IMPLEMENT THE PROVISIONS OF PRESIDENTIAL DECREENO. 129, OTHERWISE KNOWN AS "THE INVESTMENT HOUSES LAW"[Appendix to Secs. 4903Q and 4106Q (2008 - 4604Q and 4656Q)]To effectively carry out the provisionsof Presidential Decree (P.D.) No. 129,otherwise known as "The InvestmentHouses Law", the Commission, pursuantto the powers vested in it by said Decree,and by R.A. Nos. 1143 and 5050, herebypromulgates the following rules andregulations for the information andguidance of the public:Section 1. Scope of Applicability. Theserules and regulations shall apply to anyenterprise which engages or purports toengage in the underwriting of securities.Sec. 2. Definitions. The followingterms as used in P.D. No. 129 and theserules shall be understood to mean asfollows:a) Investment House (IH) is anyenterprise which engages or purports toengage, whether regularly or on anisolated basis, in the underwriting ofsecurities of another person or enterprise,including securities of the Governmentand its instrumentalities.b) Underwriting of securities is theact or process of guaranteeing thedistribution and sale within the Philippinesof securities issued by another person orenterprise, including securities of theGovernment or its instrumentalities. Thedistribution and sale may be on a publicor private placement basis.c) Securities are written evidencesof ownership, interest or participation, inany enterprise, or written evidences ofindebtedness of a person or enterprise. Itincludes, but is not limited to, theinstruments enumerated in Section 2 ofthe Securities Act.d) Guarantee is any commitmentand/or undertaking made by a person, firmor entity to an issuer or holder of securitiesto raise funds for said issuer or holder, bythe distribution of such securities for sale,resale, or subscription, either through anoutright purchase or through acorresponding commitment to purchasethe balance not subscribed or sold.e) Private placement refers to theunderwritten sale of securities to less than20 persons or enterprises.f) Public distribution refers to theunderwritten sale of securities to at least20 persons or enterprises.g) Voting stock is that portion of theauthorized capital stock of an IH, as aresubscribed and entitled to vote.h) Paid-in capital are all payments onsubscriptions to the authorized capital of anIH, including premiums paid in excess of par.i) Officer shall be understood tomean a senior officer of an IH or bank,which includes the president, executivevice-president, general manager, vicepresident,assistant vice-president,corporate secretary, head of an operatingdepartment and branch manager and suchother officers as the Commission, inconsultation with the BSP, shall determine.j) Organizers are persons whoundertake to form an IH, amongthemselves and others, and who areindicated in the articles of incorporation asthe incorporators and the incorporatingdirectors.k) Managerial staff are the officersof an IH. Where an IH is under amanagement contract the terms shall beunderstood to include the officers of themanagement firm.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-18 - Page 1

APP. Q-1808.12.31l) Unimpaired capital and surplusmeans the total of the unimpaired paid-incapital, surplus, and undivided profits netof such valuation reserves as may berequired by the Commission provided thatthe Commission may include such otheritems as it may deem appropriate.m) Quasi-banking functions shall referto the functions defined as such by law andappropriate implementing rules andregulations.n) Commission shall mean theSecurities and Exchange Commission.Sec. 3. Organization and RegistrationA. Investment Houses shall beorganized in the form of stock corporationsin accordance with the provisions of theCorporation Law, subject to the followingrequirements:1) At least a majority of the voting stockof the corporation shall be owned by citizensof the Philippines. In determining thepercentage of foreign-owned voting stocksin an IH, the basis of the computation shallbe the citizenship of each stockholder, and,with respect to corporate owners of votingstock, the citizenship of the individualowners of voting stock in the corporationholding shares in the IH;2) The majority of the members of theBoard shall be citizens of the Philippines;3) Foreign equity participation shallbe registered or reported with the Boardof Investment in accordance with the rulesand regulations of that Office, prior to orsimultaneous with the registration with theCommission;4) The corporation shall have aminimum initial paid-in capital of P20.0million at the time of incorporation;5) Resident foreign directors ortechnicians of an IH, if any, shall register withthe Bureau of Immigration and Deportation;6) In no event shall an officer of an IH beat the same time an officer of a bank, as definedin Section 3 of R.A. No. 337, as amended;7) No director or officer of an IH shallat the same time be a director of a bank,and no director of an IH shall at the sametime be an officer of a bank, except as maybe authorized as an exception by theMonetary Board of the BSP.B. Procedure - The organizers shallfile with the Commission, a swornapplication for registration in accordancewith the prescribed form, together with thefollowing documents:(1) All documents required forregistration as a stock corporation;(2) An information sheet of theregistrant corporation; [SEC Form 129-2](3) A statement under oath by theorganizers and the proposed managerialstaff, of their educational background andwork experience, as well as informationon any position currently held by them inbanking and other FIs, if any (SEC Form129-3);(4) A one-year projected statement ofassets and liabilities of the proposed IH;(5) A tentative program of operationfor one year, including its investmentdirection and volume, its expected sourcesand intended uses of funds and its quasibankingfunctions, if any.C. Hearing on Application - TheCommission shall conduct a hearing todetermine whether the establishment ofthe proposed IH will promote publicinterest and economic growth. The BSP shallbe officially notified.The SEC Commissionershall not register any articles ofincorporation unless his Office shall haveconsulted the BSP and is satisfied on thebasis of the evidence submitted that:(1) All the requirements of P.D. No.129 and of existing laws relative to theorganization of an IH have been compliedwith;(2) Public interest and economicgrowth are promoted;(3) The amount of capital, theproposed organization, direction andQ RegulationsAppendix Q-18 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1808.12.31administration, as well as the integrity,experience and expertise of the organizersand the proposed managerial staff, providereasonable assurance that the enterprisewill be conducted with financial prudence.D. Issuance of Certificate ofIncorporation - Upon compliance with allthe requirements of law and implementingrules, and the Commission is satisfied thatthe formation of the IH will promote publicinterest and economic growth, a Certificateof Incorporation will be issued to it. Alicense to operate shall also be granted afterit shall have adopted its by-laws, electedits directors and appointed its officers.E. Annual Fees - On or before thefifteenth day of January of each year, andfor as long as its license to operate remainsin effect, each IH shall pay a fee of P200.At the time of payment, the Commissionmay require the licensee to appear andinform the Commission of the results of itsoperations.F. Branch Operations - No IH shallopen, maintain or operate a branch oragency without first securing from theCommission a license to operate a branchin a particular locality. All applications fora license to operate a branch shall be actedupon by the Commission within ninety (90)days after submission of such documentsas may be required by the Commission insupport of such application.G. Use of the Term "InvestmentHouse" - No person, association,partnership or corporation other than thoseduly licensed as an IH in accordance withthese rules and regulations, shall advertiseor hold itself out as being engaged in thebusiness of an IH.Sec. 4. Underwriting RequirementsUnderwriting agreements entered into byan IH, with respect to public distribution ofsecurities, including the fees to be chargedin connection therewith, shall be subjectto the approval of the Commission, it beingunderstood that no public distribution ofsecurities shall be made without suchapproval. The Commission may imposesuch terms and conditions as may benecessary in the public interest and for theprotection of investors; and it may requirethe submission of such documents as maybe necessary to ascertain compliance withsuch standards of operation as it mayestablish. Transactions which constitutequasi-banking functions shall be subject toBSP regulation.As a gesture of faith in the issue, an IHmay take for its own account a portion ofthe securities it underwrites but shall sellsuch securities to the public.Sec. 5. Management of Funds. TheCommission, by circular, shall providelimitations on investments of discretionaryaccounts under the management of an IH.Should the IH engage in themanagement of funds, it must at all timesadhere to the prudent man's rule. The IHshall ensure that the interest of the fundsmanaged is promoted and that theoperation of the funds is undertaken on anarms' length basis.The Commission may require suchdocuments and reports as may benecessary, in order to determine ifprudence and safety of the principal havebeen paramount in the decision of the IH.Sec. 6. Underwriting Fees. Except inhighly meritorious cases, as approved bythe Commission, an IH shall not collectunderwriting fees in excess of five percent(5%) of the amount generated by theunderwriter for the issuer.Sec. 7. Contingency Reserves. An IHshall provide annually a reserve forcontingencies in such reasonable amountas may be required by the Commission.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-18 - Page 3

APP. Q-1808.12.31Sec. 8. Prohibitions(1) No IH shall undertake underwritingcommitments for its own account in anaggregate outstanding amount exceedingtwenty (20) times its unimpaired capitaland surplus.(2) An IH shall not at any time allowits unimpaired capital and surplus to fallbelow P20.0 million; otherwise, it shall beprohibited from underwriting securities forso long as such deficiency remains.(3) Whenever an IH is engaged in themanagement of funds, its officers and otherpersonnel directly involved in themanagement of funds are prohibited fromsimultaneously or concurrently buying orselling the shares of stock of the same firmthat the funds are buying or selling.(4) No advance to directors, officersand stockholders owning at least 10% ofthe outstanding capital of an IH shall beallowed, unless sufficiently collateralized.Sec. 9. Reporting Requirements. Everyregistered IH shall file with the Commissionthe following periodic reports in triplicate:A. Progress Reports - a quarterly reportof the results of its underwriting operationsand activities of funds managed on allcommitments entered into in such form asmay be provided for the purpose, withinfifteen (15) days from the end of each quarter.B. Semi-Annual Financial Statementsigned under oath by its chief accountantand verified by the president, within aperiod of sixty (60) days after the end ofeach semester containing such data, andin such form as the Commission shallrequire. A copy shall be filed with the BSP.C. Annual Report concerning itsoperational activities for the year justended, signed by its president (SEC Form129-1) within the month of March of eachyear. A copy shall be filed with the BSP.D. A Report on the composition of theboard of directors or any resignation,dismissal, suspension, or filling ofvacancies therein, or of any officers ormanagerial staff, signed under oath by thesecretary, within fifteen (15) days afteroccurrence of the event.Every registered IH shall maintain andpreserve such records and documents asthe Commission may prescribe by way ofcirculars. Such circulars shall provide for areasonable degree of uniformity inaccounting policies and principles to befollowed by IHs in maintaining theiraccounting records and in preparingstatements as required by these rules.Sec. 10. Transitory ProvisionsA. All existing enterprises which havebeen operating as Investment Houses,prior to 15 February 1973, shall:(1) Within six (6) months from15 February 1973 file an information sheetwith the Commission in such form andcontaining such data as may be required,pay the required fee under Sec. 3-E of theserules, and the Commission in consultationwith the Monetary Board, after determiningcompliance with the requirements ofP.D. No. 129 and of these Rules, shall issuea License to Operate an IH.(2) Within one (1) Year from15 February 1973 comply with therequirement of a minimum paid-in capitalof P20.0 million, citizenship requirements,and the prohibition on interlockingdirectorate or officership.Sec. 11. Stockbrokerage or DealershipFunctions. If an IH engages in the businessof a stockbroker or dealer pursuant toP.D. No. 129, it shall comply with theprovisions of C.A. No. 83, otherwise knownas the Securities Act, and the rules andregulations of the Commission promulgatedpursuant thereto: Provided, however, that anIHe need not obtain a separate license underSection 14 of the Securities Act.Q RegulationsAppendix Q-18 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1808.12.31Sec. 12. Bangko Sentral Rules. IHs shallalso be subject to the rules and regulationspromulgated by the BSP for non-bankfinancial intermediaries as provided by law.Sec. 13. Visitorial Power. TheCommission may, at its discretion, makesuch investigations as it deems necessaryto determine whether or not an IH iscomplying with any of the provisions ofP.D. No. 129 or of any applicable laws,rules and regulations. It shall determineall the facts and circumstances concerningthe matter to be investigated for theimposition of sanctions/penalties orremedial or preventive measures.Sec. 14. General Exemption PowerThe Commission may, upon properpetition and payment of a fee of P100, grantan exemption from compliance with anyrequirements of these rules as may beconsistent with public interest and theprotection of investors.Sec. 15. Penalties. Any violation of P.D.No. 129 or of these rules and regulations,shall be penalized by suspension orrevocation of the License to Operate, afterproper notice and hearing. In appropriatecases, a fine not exceeding P200 per dayfor every day during which such violationcontinues, shall be imposed upon the IHand the officer or director who ordered orauthorized the violation, without prejudiceto the criminal liabilities provided inthe second paragraph of Section 16 ofP. D. No. 129.In the exercise of its regulatory powersunder Section 12 of P.D. No. 129, theMonetary Board may issue a cease-anddesistorder upon an IH which is notcomplying with BSP rules and regulationspertaining to non-bank financialintermediaries or, in appropriate cases,rules governing quasi-banking functions ofIHs. Failure to comply with the cease-anddesistorder shall subject an IH to a fine tobe imposed by the Monetary Board.Sec. 16. Effectivity. These rules shalltake effect immediately. They shall bepublished in a newspaper of generalcirculation in the Philippines and in theOfficial Gazette.Manila, Philippines, 09 July 1973.(SGD.) ARCADIO E. YABYABINSecurities and Exchange CommissionerAPPROVED:(SGD.) TROADIO T. QUIAZON, JR.Acting Secretary of TradeDate: 13 July 1973Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-18 - Page 5

APP. Q-1908.12.31Republic of the PhilippinesDepartment of FinanceSECURITIES AND EXCHANGE COMMISSIONSEC Building, EDSA, GreenhillsMandaluyong, Metro ManilaNEW RULES AND REGULATIONS TO IMPLEMENT THE PROVISIONS OFREPUBLIC ACT (R.A.) NO. 5980 (THE FINANCING COMPANY ACT),AS AMENDED[Appendix to Sec. 4106Q (2008 - 4656Q)]To effectively carry out the provisionsof R.A. No. 5980 (The Financing CompanyAct), as amended, the Securities andExchange Commission, pursuant to thepowers vested in it under said Act, R.A.No. 1143 and Presidential Decree No.902-A, as amended, hereby promulgatesthe following rules and regulations:Section 1. Definition of Terms. Thefollowing definition of terms shall apply forpurposes of these Rules:a. FINANCING COMPANIES arecorporations or partnerships, except thosesupervised by the Central Bank of thePhilippines, Office of the InsuranceCommissioner and the Bureau ofCooperatives Development, which areprimarily organized for the purpose ofextending credit facilities to consumers andto industrial, commercial, or agriculturalenterprises: by discounting or factoringcommercial papers or accounts receivable;by buying and selling contracts, leases,chattel mortgages, or other evidences ofindebtedness; or by leasing of motorvehicles, heavy equipment and industrialmachinery, business and office machinesand equipment, appliances and othermovable property.b. PRIMARILY ORGANIZED shallmean organized for the primary purposeof operating as a financing company andthat more than 50% of its funds shall beused or invested in financing companyactivities, Provided, That in thecomputation thereof direct loans andtemporary investments in governmentsecurities shall be taken into account.c. FUNDS as used herein shall meantotal assets inclusive of allowance fordoubtful accounts and deferred income lessinvestment in real estate, shares of stockin a real estate development corporationand real estate based projects which shallnot exceed 25% of networth of theinvesting company, leasehold rights andimprovements, fixed assets inclusive ofappraisal surplus, foreclosed properties andprepayments.d. COMMISSION shall mean theSecurities and Exchange Commission.e. CREDIT shall mean any loan,mortgage, deed of trust, advance ordiscount, any conditional sales contract, anycontract to sell, or sale or contract of sale ofproperty or service, either for present orfuture delivery, under which, part or all ofthe price is payable subsequent to themaking of such sale or contract, anyrental-purchase contract, any option,demand, lien, pledge, or other claimagainst, or for the delivery of, propertyor money, any purchase, or otheracquisition of or any credit upon thesecurity of any obligation or claim arisingout of the foregoing; and any transactionshaving a similar purpose or effect.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-19 - Page 1

APP. Q-1908.12.31f. PURCHASE DISCOUNT is thedifference between the value of thereceivables purchased or credit assigned, andthe net amount paid by the finance companyfor such purchase or assignment, exclusiveof fees, service charges, interest and othercharges incident to the extension of credit.g. RECEIVABLES FINANCING is amode of extending credit through thepurchase by, or assignment to, a financingcompany of evidences of indebtedness oropen accounts by the discounting orfactoring.h. DISCOUNTING is a type ofreceivables financing whereby evidencesof indebtedness of a third party, such asinstallments contracts, promissory notes,and similar instruments, are purchased by,or assigned to, a financing company in anamount or for a consideration less than theirface value.i. FACTORING is a type ofreceivables financing whereby openaccounts, not evidenced by a writtenpromise to pay supported by documentssuch as but not limited to invoices ofmanufacturers and suppliers, deliveryreceipts and similar documents, arepurchased by, or assigned to, a financingcompany in an amount or for aconsideration less than the outstandingbalance of the open accounts.j. LEASING shall refer to the financialleasing which is a mode of extending creditthrough a non-cancellable contract underwhich the lessor purchases or acquires atthe instance of the lessee heavyequipment, motor vehicles, industrialmachinery, appliances, business and officemachines, and other movable property inconsideration of the periodic payment bythe lessee of a fixed amount of moneysufficient to amortize at least 70% of thepurchase price or acquisition cost, includingany incidental expenses and a margin ofprofit, over the lease period. The contractshall extend over an obligatory periodduring which the lessee has the right tohold and use the leased property and shallbear the cost of repairs, maintenance,insurance and preservation thereof, butwith no obligation or option to the part ofthe lessee to purchase the leased propertyat the end of the lease contract.k. PAID-UP CAPITAL refers to theamount paid for the subscription of stockin a corporation including the amount paidin excess of par value, while CAPITALCONTRIBUTION refers to the totalcontributions of the partners in apartnership.l. NETWORTH is the excess of assetsover liabilities, net of appraisal surplus, andbooked valuation reserves, capitaladjustments, overstatement of assets andunrecorded liabilities.Sec. 2. Form of Organization. Financingcompanies shall be organized in the formof: stock corporations in accordance withthe provisions of the Corporation Codeof the Philippines (Batas Pambansa Blg.68) or general partnerships pursuant tothe provisions of the New Civil Code ofthe Philippines and subject to thefollowing:a. At least sixty percentum (60%) of theoutstanding capital stock of the corporation,and in case of a partnership, at least sixtypercentum (60%) of the total capitalcontributions of the partners, shall be ownedby citizens of the Philippines.b. A minimum paid-up capital, in caseof corporations, and capital contribution incase of partnerships, that shall maintaintheir principal offices in the areas hereunderspecified, shall be made in cash or inproperty of at least:1) P10,000,000 - Metro Manila Area2) 5,000,000 - First Class Cities outsideMetro Manila3) 2,500,000 - Second Class Citiesand First ClassMunicipalitiesQ RegulationsAppendix Q-19 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1908.12.314) 1,000,000 - Third Class Cities andSecond ClassMunicipalities5) 500,000 - Fourth Class Cities,Third ClassMunicipalities andbelowIn case the area where the principaloffice of a financing company is located hasbeen upgraded, the corresponding increasein capitalization requirement shall beundertaken within such period as theCommission shall fix.Unless otherwise authorized by theCommission, all financing companies witha paid-up capital or capital contribution lessthan that mentioned above shall be givenfive (5) years within which to build up theircapital requirement according to thefollowing schedule:3rd Class1st Class 2nd Class Cities &Metro Cities Out Cities & 1st 2nd ClassManila side Metro Class Muni- Munici-Area Manila cipalities palities6-30-92 2,000,000 1,000,000 500,000 500,0006-30-93 4,000,000 2,000,000 1,000,000 625,0006-30-94 6,000,000 3,000,000 1,500,000 750,0006-30-95 8,000,000 4,000,000 2,000,000 875,0006-30-96 10,000,000 5,000,000 2,500,000 1,000,000Any existing and/or new branch,agency, extension office or unit mayoperate subject to the provision of Section5 thereof.c. At least two-thirds of all themembers of the board of directors in thecase of a corporation and all the managingpartners in case of a partnership shall becitizens and residents of the Philippines.Any change in the membership in, orcomposition of, the board of directors,officers from the rank of VP and up or theirequivalent, branch manager, cashier andadministrative officer, or in the managingpartners, as the case may be, shall bereported to the Commission within seven(7) working days thereafter, and therequirement prescribed under Section 3.a.4and 7 and Section 5.a.3. and 4 hereof, shallbe submitted within thirty (30) workingdays from date of the aforesaid change..d. The corporate/partnership name offinancing companies shall contain the term"financing company","finance company",or "finance and investment company" orother title or word(s) descriptive of itsoperations and activities as a financingcompany.Sec. 3. Requirements for Registrationa. Registration papers to besubmitted to the Commission - Anycorporation or partnership may beregistered as a financing company by filingwith the Commission in five (5) copies anapplication to operate as a financingcompany under R.A. No. 5980, as amended,signed under oath by its President/ManagingPartner, together with the followingdocuments in the prescribed forms:1) All documents required forregistration as a corporation or partnership;2) By-laws;3) Information Sheet of registrantcompany;4) Personal Information Sheet of eachof the directors, officers with the rank ofVice-President and up or their equivalentor managing partners;5) Answers to the questionnaire of theCommission;6) Projected balance sheet, incomestatement and cash flow statement for three(3) years, together with a schedule ofdiscounting, factoring, leasing and otherfinancing activities and all related incometherefrom.7) Documents required of eachdirector, officer to be appointed from therank of Vice-President and up or theirequivalent, or managing partner such as thefollowing:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-19 - Page 3

APP. Q-1908.12.31a) Police clearance from local police ofthe city or municipality of which he is aresident;b) NBI clearance;c) Certificate of good moral characterto be executed under oath by at least two(2) reputable and disinterested persons inthe community;d) Bank credit information to beissued by his depository or creditor bank(s),if any; and8) Such other documents as may berequired by the Commission whenever itdeems necessary.b. Publication and Posting of Noticeand Order for Registration - Upon receiptof the above registration papers of aproposed financing company, theCommission shall cause the notice andorder to be published by the applicantcompany at its expense in a newspaper ofgeneral circulation in the Philippines oncea week for two (2) consecutive weeks, andthe notice shall simultaneously be postedin a public and conspicuous place wherethe principal office of the company will belocated and in the Office of the Commissionfor the same period.The notice shall state, among others,the name of the proposed financingcompany, the capital structure in case of acorporation or the total capital contributionin case of a partnership, and the names andresidences of its directors or managingpartners.c. Opposition to Registration, if any -Any interested party may oppose theregistration of a financing company inwriting, personally or through counsel,within fifteen (15) days after the last date ofthe publication of the notice. If after thehearing, the Commission finds that therequirements of R. A. No. 5980, asamended, its implementing rules andregulations and other pertinent laws havebeen complied with and that no validreason exists for the disapproval of theapplication, the Commission shall takeappropriate action on said application.Sec. 4. Issuance of Certificate of Filing ofArticles of Incorporation and By-Laws;Certificate of Authority; Conditions forCommencement of Operationsa. The Commission, in consultationwith the Central Bank, shall register thearticles of incorporation and by-laws orarticles of partnership of, and issue theCertificate of Authority to Operate to, anyproposed financing company if it is satisfiedthat the establishment of such company willpromote public interest and convenience,and on the basis of the documents and/orevidences submitted, that;1) All the requirements of R. A. No.5980, as amended, other existing laws, andapplicable rules and regulations to engagein the business for which the applicant isproposed to be incorporated, or organized,have been complied with;2) The organization, direction andadministration of the applicant, as well asthe integrity and responsibility of theorganizers and administrators, presumablyassure the protection of the interest of thegeneral public; and3) Proof of the publication and postingof the notice and order for registration is inaccordance with Sec. 3.b. hereof.b. A corporation or partnership whichhas been duly registered, and granted aCertificate of Authority to Operate as afinancing company in accordance with thelaw and these Rules, shall commenceoperations within ninety (90) days fromdate of grant of such certificate. Failure tooperate within the prescribed ninety (90)days period shall subject the financingcompany to a fine of not less than OneThousand (P1,000.00) Pesos unless its nonoperationis reasonably justified, asdetermined by the Commission.c. The financing company may begranted a grace period of another ninetyQ RegulationsAppendix Q-19 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1908.12.31(90) days from the expiry date of the firstninety (90) days within which tocommence operations notwithstanding itsfailure to operate as aforestated. Failureto operate within the extended periodshall empower the Commission, afternotice and hearing, to revoke itsCertificate of Authority.Sec. 5. Branches, Agencies, ExtensionOffices or Unitsa. Certificate of Authority - Nofinancing company shall establish oroperate a branch, agency, extension officeor unit without a prior certificate ofauthority to be issued by the Commission.The application for authority filed underthis section shall be accompanied by thefollowing documents:1) Information Sheet of the proposedbranch;2) Answer to SEC questionnaire;3) Police clearance of the manager,cashier, and administrative officer of theproposed branch;4) NBI clearance of the branchmanager, cashier and administrativeofficer of the proposed branch;5) Copy of the proposed personnelchart; and6) Such other documents as may berequired by the Commission whenever itdeems necessary.The above application shall bepublished in accordance with theprovisions of Sec. 3.b. of these Rules.However, the Notice and Order shall beposted in a public and conspicuous placewhere the aforesaid branch, agency,extension office or unit shall beestablished.b. Evaluation Guideposts - Thenumber of branches, agencies, extensionoffices or units to be established shalldepend upon the capacity of the companyto conduct expanded operations and/orupon the capacity of the area wherein theproposed branch, extension office, agencyor unit will be established, to absorb newentities engaged in financing, as may bedetermined by the Commission.c. Additional Capital Requirement - Afinancing company may be required to putup additional capital for branches, agencies,extension offices or units in an amount tobe determined by the Commission.d. Prescribed Period to Operate -Such branch, agency, extension office orunit shall operate within ninety (90) daysfrom the issuance of the certificate ofauthority and failure to operate within suchperiod shall subject said branch, agency,extension office or unit to a fine of not lessthan One Thousand (P1,000) Pesos orrevocation of the certificate of authority,after due hearing at the discretion of theCommission, unless its non-operation isreasonably justified as determined by theCommission.e. Term of Authority to Operate - Thecertificate of authority to operate a branch,agency, extension office or unit shall be coterminuswith that of the head office.Sec. 6. Applicability of Central BankRegulations - Financing companies dulylicensed to operate as such, their branches,agencies, extension offices or units shallalso be subject to applicable Central Bankregulations.Sec. 7. Licensing Fees - A fee of 1/10 of 1%of the minimum paid-up capital or capitalcontribution required under Section 2.b.shall be charged for the issuance of theCertificate of Authority to Operate as afinancing company.A fee of one-tenth of one percent (1/10of 1%) of the additional required capitalunder Sec. 5.c., but in no case less thanP250.00 shall be charged likewise for theissuance of original Certificate of Authorityof each branch, agency, extension officeor unit of such financing company.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-19 - Page 5

APP. Q-1908.12.31Sec. 8. Loans and Investmentsa. Financing companies mayengage in direct lending if authorized bythe secondary purposes in its articles ofincorporation and in accordance withSection 42 of the Corporation Code of thePhilippines (B.P. 68).b. Unless otherwise authorized by theCommission, the total investment in realestate and in shares of stock in a real estatedevelopment corporation and other realestate based projects shall not at any timeexceed twenty-five (25%) per cent of thenet worth of the investing financingcompany.Sec. 9. Conveyance of Evidences ofIndebtedness and Financed Receivablesa. The negotiation, sale or assignmentby financing companies of evidences ofindebtedness shall be in accordance withthe rules of the Commission on registrationof commercial papers.b. Accounts which have been factoredor discounted by, the lease receivables of,and other evidences of indebtedness (notcovered in Item a. above) issued ornegotiated to, a financing company shallnot be sold, assigned or transferred in anymanner except to banks including their trustaccounts, trust companies, QBs,investment houses including their trustaccounts, financing companies, investmentcompanies, NSSLAs, insurance companies,government FIs, pension and retirementfunds approved by the Bureau of InternalRevenue, educational assistance fundsestablished by the National Government;Provided, That the negotiation of evidenceof indebtedness to pension funds oreducational assistance funds shall be on arecourse basis.Sec. 10. Other Activitiesa. Financing companies not dulyauthorized to perform quasi-bankingfunctions shall not act as dealers incommercial papers but may act as dealersin other securities provided they are dulylicensed by the Commission as such.b. Financing companies shall not actas dealers of certificates of time deposit.c. Except in cases of issuances toprimary institutional lenders, financingcompanies without quasi-banking licenseshall not issue instruments other thanpromissory notes, to cover placementswith, or borrowing by, them.Sec. 11. Purchase Discount/Fees/Serviceand Other Charges - The purchasediscounts, fees, service and other chargesof financing companies on assignments ofcredit, purchases of installment papers,accounts receivable or other evidences ofindebtedness, factoring of accountsreceivable or other evidences ofindebtedness, or leasing transactions shall be inaccordance with the rules prescribed bythe Monetary Board, in consultation withthe Commission, pursuant to the provisionsof Section 5 of R.A. No. 5980, as amendedby P.D. No. 1454.Sec. 12. Networth for OperatingFinancing Companies - The company'snetworth shall be maintained at an amountnot less than that required under Sections2.b. and 5.c. hereof.Sec. 13. Prohibitionsa. No corporation shall be allowed toinclude financing activities as hereindefined as one of its secondary purposes.b. No person, association, partnershipor corporation shall do or hold itself out asdoing business as a financing company orfinance and investment company or underany other title or name tending to give thepublic the impression that it is a financingcompany unless so authorized underR. A. No. 5980, as amended.Q RegulationsAppendix Q-19 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-1908.12.31Sec. 14. Periodic Reports - Every financingcompany shall file with the Commission thefollowing quarterly reports: a) Statement ofCondition and Statement of Income andExpenses, together with the schedule ofaging of receivables (indicating thematurity pattern of the aforesaid receivablesunder due within 1 year, due over 1 yearto be applicable to long term receivablesonly, past due accounts to subdividedfurther to past due accounts within 1 year,over 1 year and litigation items), payable(indicating likewise the same maturingpattern of within 1 year and over 1 year)and off-balance sheet items; Provided,however, That respective collateral/s (ifany) for past due accounts over 1 year andlitigation items shall be adequatelydisclosed in the aforementioned Schedulesand b) list of officers, directors, andstockholders. These reports shall be signedunder oath by the company's principalexecutive officer and principal financialofficer and shall be submitted within thirty(30) calendar days after the end of eachquarter. They shall, likewise, file four (4)copies of their audited financial statementswithin 120 days after the end of their fiscalyears and such other reports as may berequired by the Commission.Sec. 15. Administrative Sanctions - If theCommission finds that there is a violationof these Rules and Regulations and theirimplementing circulars or any of the termsand conditions of the Certificate of Authorityto operate as a financing company, or anyCommission order, decision or ruling, orrefuses to have its books of accountsaudited, or continuously fail to comply withSEC requirements, the Commission shall, inits discretion, impose any or all of thefollowing sanctions:a. Suspension or revocation of thecertificate of authority to operate as afinancing company after proper notice andhearing;b. A fine in accordance with theguidelines that the Commission shall issuefrom time to time;c. Other sanctions within the powerof the Commission and the Central Bankunder existing laws.The imposition of the foregoingadministrative sanctions shall not precludethe institution of appropriate action againstthe officers and directors of the financingcompany or any person who might haveparticipated therein, directly or indirectly,in violation of R. A. No. 5980, as amended,and these Rules and Regulations.Sec. 16. Cease and Desist Order - TheCommission may, on its own motion orupon verified complaint of any aggrievedparty, issue a Cease and Desist Orderex-parte, if the violation(s) mentioned in thepreceding sections may cause grave orirreparable injury to the public or mayamount to culpable fraud or violation ofthese Rules and Regulations, implementingcirculars, certificates of authority issued bythe Commission, or of any order, decisionor ruling thereof.The issuance of such Cease and DesistOrder automatically suspends the authorityto operate as a financing company.Immediately upon the issuance of anex-parte Cease and Desist Order, theCommission shall notify the partiesinvolved and schedule a hearing onwhether to lift such order or to imposeadministrative sanctions provided for inSection 16 not later than fifteen (15) daysafter service of notice.Sec. 17. Transitory Provision - Anycorporation/partnership at the time of theeffectivity of these Rules has beenregistered and licensed by the Commissionto operate as a financing company, shallbe considered as registered and licensedunder the provisions of these Rules, subjectto the terms and conditions of the license,Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-19 - Page 7

APP. Q-1908.12.31and shall be governed by the provisionshereof; Provided, however, That financingcompanies with existing certificate ofauthority shall surrender the same to theCommission upon payment of the annualfee pursuant to Section 7 hereof to bereplaced by new certificate of authority and,Provided, That where such corporation/partnership is affected by the newprovisions hereof, said corporation/partnership shall, unless otherwise hereinprovided, be given a period of not more thanone (1) year from the effectivity of these Ruleswithin which to comply with the same.Sec. 18. Effectivity - These Rules andRegulations shall take effect fifteen (15)days after publication in two (2)newspapers of general circulation in thePhilippines.Mandaluyong, Metro Manila, Philippines16 October 1991.(SGD.) ROSARIO N. LOPEZChairmanSecurities and Exchange CommissionQ RegulationsAppendix Q-19 - Page 8Manual of Regulations for Non-Bank Financial Institutions

CLASSIFICATION, ACCOUNTING PROCEDURES, VALUATION ANDSALES AND TRANSFERS OF INVESTMENTS IN DEBT SECURITIESAND MARKETABLE EQUITY SECURITIES[Appendix to Subsec. 4388Q.5 (2008 - 4391Q.3)]APP. Q-2011.12.31Section 1. Statement of Policy. It is thepolicy of the BSP to promote fulltransparency of the financial statements ofbanks and other supervised institutions inorder to strengthen market discipline,encourage sound risk managementpractices, and stimulate the domestic capitalmarket. Towards these ends, the BSPdesires to align local financial accountingstandards with international accountingstandards as prescribed by the InternationalAccounting Standards Board (IASB) to thegreatest extent possible.Sec. 2. Scope. This Appendix coversaccounting for investments in debt andequity securities except:a. those that are part of hedgingrelationship;b. those that are hybrid financialinstruments;c. those financial liabilities that areheld for trading;d. those financial assets and financialliabilities which, upon initial recognition,are designated by the FIs as at fair valuethrough profit or loss; ande. those that are classified as loans andreceivables.It also does not include accounting forderivatives and non-derivative financialinstruments other than debt and equitysecurities. The foregoing exceptions andexclusions shall be covered by separateregulations.Sec. 3. Investments in Debt and EquitySecurities. Depending on the intent,investments in debt and equity securitiesshall be classified into one (1) of four (4)categories and accounted for as follows 1 :a. Held to Maturity (HTM) Securities- These are debt securities with fixed ordeterminable payments and fixed maturitythat an FI has the positive intention andability to hold to maturity other than:(1) those that meet the definition ofSecurities at Fair Value Through Profit orLoss; and(2) those that the FI designates as ASS.An FI shall not classify any debt securityas HTM if the FI has, during the currentfinancial year or during the two (2)preceding financial years, sold orreclassified more than an insignificantamount of HTM investments before maturity(more than insignificant in relation to thetotal amount of HTM investments) otherthan sales or reclassifications that:(a) are so close to maturity or thesecurity’s call date (i.e., less than three (3)months before maturity) that changes inthe market rate of interest would not havea significant effect on the security’s fairvalue;(b) occur after the FI has substantiallycollected all [i.e., at least eighty-five percent(85%)] of the security’s original principalthrough scheduled payments orprepayments; or(c) are attributable to an isolated eventthat is beyond the FI’s control, isnon-recurring and could not have beenreasonably anticipated by the FI.For this purpose, the phrase “more thanan insignificant amount” refers to sales orreclassification of one percent (1%) or moreof the outstanding balance of the HTMportfolio: Provided, however, That sales orreclassifications of less than one percent1Reclassification allowed until 30 November 2005 as per MAB dated 23 November 2005Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20 - Page 1

APP. Q-2011.12.31(1%) shall be evaluated on case-to-casebasis.Sales or reclassifications before maturitythat do not meet any of the conditionsprescribed in this Appendix shall require theentire HTM portfolio to be reclassified toASS. Further, the FI shall be prohibited fromusing the HTM account during the reportingyear of the date of sales or reclassificationsand for the succeeding two (2) full financialyears. Failure to reclassify the HTM portfolioto ASS on the date of sales orreclassifications, shall subject the FI andconcerned officers to penalties and sanctionsprovided under 4388Q.5. This provisionshall be applied prospectively, i.e., onprohibited sales or reclassificationsoccurring from 13 March 2005 (effectivitydate of Circular No. 476 dated 16 February2005) and thereafter.Securities held in compliance with BSPregulations, e.g., securities held as liquidityreserves and for the faithful performance oftrust duties, may be classified either as HTM,Securities Held for Trading (HFT) or ASS:Provided, That the provision of Item (4) ofparagraph 2 of Section 3.a.1 shall not applyto sales or reclassifications of the saidsecurities booked under HTM.a.1.Positive intention and ability to holdinvestments in HTM securities to maturity -An FI does not have a positive intention tohold to maturity an HTM security if:(a) the FI intends to hold the securityfor an undefined period;(b) the FI stands ready to sell thesecurity (other than if a situation arises thatis non-recurring and could not have beenreasonably anticipated by the FI) in responseto changes in market interest rates or risks,liquidity needs, changes in the availabilityof and the yield on alternative investments,changes in financing sources and terms orchanges in foreign currency risk; or(c) the issuer has a right to settle thesecurity at an amount significantly belowits amortized cost.Sales before maturity could satisfy thecondition of HTM classification andtherefore need not raise a question aboutthe FI’s intention to hold other HTMsecurities to maturity if they are attributableto any of the following:(i) A significant deterioration in theissuer’s creditworthiness; for example, a salefollowing a downgrade in a credit rating byan external rating agency would notnecessarily raise a question about the FI’sintention to hold other investments tomaturity if the downgrade provides evidenceof a significant deterioration in the issuer’screditworthiness judged by reference to thecredit rating at initial recognition. Similarly,if an FI uses internal ratings for assessingexposures, changes in those internal ratingsmay help to identify issuers for which therehas been a significant deterioration increditworthiness, provided the FI’sapproach to assigning internal ratings andchanges in those ratings give a consistent,reliable and objective measure of the creditquality of the issuers. If there is evidencethat an instrument is impaired, thedeterioration in creditworthiness is oftenregarded as significant.(ii) A change in tax law that eliminatesor significantly reduces the tax-exemptstatus of interest on the HTM security (butnot a change in tax law that revises themarginal tax rates applicable to interestincome);(iii) A major business combination ormajor disposition (such as sale of a segment)that necessitates the sale or transfer of HTMsecurities to maintain the FI’s existinginterest rate risk position or credit riskpolicy: Provided, That the sale or transferof HTM security shall be done only onceand within a period of six (6) months fromthe date of the business combination orQ RegulationsAppendix Q-20 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2011.12.31major disposition: Provided, further, Thatprior BSP approval is required for sales ortransfers occurring after the prescribed six(6)-month time frame. In this case, FIs shallsubmit to the appropriate department of theSES, a plan stating the reason for theextension and the proposed schedule for thedisposition of the HTM security.(iv) A change in statutory or regulatoryrequirements significantly modifying eitherwhat constitutes a permissible investmentor the maximum level of particular types ofinvestments, thereby causing an FI todispose of an HTM security;(v) A significant increase in theindustry’s regulatory capital requirementsthat causes the FI to downsize by sellingHTM securities; or(vi) A significant increase in the riskweights of HTM securities used forregulatory risk-based capital purposes.An FI does not have a demonstratedability to hold to maturity an investment inHTM security if:(aa) it does not have the financialresources available to continue to financethe investment until maturity; or(bb)it is subject to an existing legal orother constraint that could frustrate itsintention to hold the security to maturity.Sales before maturity due to events thatare non-recurring and could not have beenreasonably anticipated by the FI such as arun on a bank, likewise satisfy the conditionof HTM classification and therefore neednot raise a question about the FI’s intentionand ability to hold other HTM investmentsto maturity.An FI assesses its intention and abilityto hold its investment in HTM securities tomaturity not only when those securities areinitially recognized, but also at each timethat the FI prepares its financial statements.a.2. HTM securities shall be measuredupon initial recognition at their fair valueplus transaction costs that are directlyattributable to the acquisition of thesecurities.For this purpose, transactions costsinclude fees and commissions paid to agents(including employees acting as sellingagents), advisers, brokers and dealers, leviesby regulatory agencies and securitiesexchanges, and transfer taxes and duties.Transaction costs do not include debtpremiums or discounts, financing costs orinternal administrative or holding costs.After initial recognition, an FI shallmeasure HTM securities at their amortizedcost using the effective interest method.For this purpose, the effective interestmethod is a method of calculating theamortized cost of a security (or group ofsecurities) and of allocating the interestincome over the relevant period using theeffective interest rate. The effective interestrate shall refer to the rate that exactlydiscounts the estimated future cash receiptsthrough the expected life of the security orwhen appropriate, a shorter period to thenet carrying amount of the security. Whencalculating the effective interest rate, an FIshall estimate cash flows considering allcontractual terms of the security (forexample, prepayment, call and similaroptions) but shall not consider future creditlosses. The calculation includes all fees andpoints paid to the other party to the contractthat are an integral part of the effectiveinterest rate, transaction costs, and all otherpremiums or discounts. There is apresumption that the cash flows and theexpected life of a group of similar securitiescan be estimated reliably. However, in thoserare cases when it is not possible to estimatereliably the cash flows or the expected lifeof a security (or group of securities), the FIshall use the contractual cash flows over thefull contractual terms of the security.A gain or loss arising from the changeManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20 - Page 3

APP. Q-2011.12.31in the fair value of the HTM security shallbe recognized in profit or loss when thesecurity is derecognized or impaired, andthrough the amortization process.An FI shall assess at each time itprepares its financial statements whetherthere is any objective evidence that an HTMsecurity is impaired.If there is objective evidence that animpairment loss on HTM securities has beenincurred, the amount of the loss is measuredas the difference between the security’scarrying amount and the present value ofestimated future cash flows (excluding futurecredit losses that have not been incurred)discounted at the security’s original effectiveinterest rate (i.e. the effective interest ratecomputed at initial recognition). The carryingamount of the security shall be reducedthrough the use of an allowance account.The amount of the loss shall be recognizedin profit or loss.As a practical expedient, a creditor maymeasure impairment of HTM securities onthe basis of an instrument’s fair value usingan observable market price.An FI first assesses whether objectiveevidence of impairment exists individually forHTM securities that are individually significant,and individually or collectively for HTMsecurities that are not individually significant.If an entity determines that no objectiveevidence of impairment exists for anindividually assessed HTM security, whethersignificant or not, it includes the asset in agroup of HTM securities with similar creditrisk characteristics and collectively assessesthem for impairment. HTM securities that areindividually assessed for impairment and forwhich an impairment loss is or continues tobe recognized are not included in a collectiveassessment of impairment.If, in a subsequent period, the amountof the impairment loss decreases and thedecrease can be related objectively to anevent occurring after the impairment wasrecognized (such as an improvement in thedebtor’s credit rating), the previouslyrecognized impairment loss shall bereversed by adjusting the allowanceaccount. The reversal shall not result in acarrying amount of the security that exceedswhat the amortized cost would have beenhad the impairment not been recognized atthe date the impairment is reversed. Theamount of the reversal shall be recognizedin profit or loss.b. Securities at Fair Value throughProfit or Loss - These consist initially of HFTsecurities. HFT are debt and equitysecurities that are:(1) acquired principally for the purposeof selling or repurchasing them in the nearterm; or(2) part of a portfolio of identifiedsecurities that are managed together and forwhich there is evidence of a recent actualpattern of short-term profit-taking.For this purpose, an FI shall adopt itsown definition of short-term which shall bewithin a (twelve) 12-month period. Saiddefinition which shall be included in itsmanual of operations, shall be applied andused consistently.b.1 HFT securities shall be measuredupon initial recognition at their fair value.Transaction costs incurred at the acquisitionof HFT securities shall be recognizeddirectly in profit or loss. After initialrecognition, an FI shall measure HFTsecurities at their fair values without anydeduction for transaction costs that it mayincur on sale or other disposal. A gain orloss arising from a change in the fair valueof HFT securities shall be recognized inprofit or loss under the account “TradingGain/(Loss)”.c. ASS. These are debt or equitysecurities that are designated as Availablefor-Sale or are not classified/designated asQ RegulationsAppendix Q-20 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2011.12.31(a) HTM, (b) Securities at Fair Value throughProfit or Loss, or (c) Investment in Non-Marketable Equity Securities (INMES).c.1 ASS shall be measured upon initialrecognition at their fair value plustransaction costs that are directlyattributable to the acquisition of thesecurities. After initial recognition, an FIshall measure ASS at their fair values,without any deduction for transaction costsit may incur on sale or other disposal.A gain or loss arising from a change in thefair value of an ASS shall be recognizeddirectly in equity under the account “NetUnrealized Gains/(Losses) on SecuritiesAvailable-for-Sale” and reflected in thestatement of changes in equity, except forimpairment losses and FX gains and losses,until the security is derecognized, at whichtime the cumulative gain or loss previouslyrecognized in equity shall be recognizedin profit or loss. However, interestcalculated using the effective interestmethod is recognized in profit or loss.Dividends on an Available- for- Sale equitysecurity are recognized in profit or losswhen the FI’s right to receive payment isestablished.For the purpose of recognizing foreignexchange gains and losses on a monetaryASS that is denominated in a foreigncurrency, it shall be treated as if it werecarried at amortized cost in the foreigncurrency. Accordingly, for such an ASS,exchange differences resulting from changesin amortized cost are recognized in profitor loss and other changes in carryingamount are recognized directly in equity.For ASS that are not monetary items (forexample, equity instruments), the gain orloss that is recognized directly in equityincludes any related foreign exchangecomponent.An FI shall assess at each time itprepares its financial statements whetherthere is any objective evidence that an ASSis impaired.When a decline in the fair value of anASS has been recognized directly in equityand there is objective evidence that the assetis impaired, the cumulative loss that hadbeen recognized directly in equity shall beremoved from equity and recognized inprofit or loss even though the security hasnot been derecognized.The amount of the cumulative loss thatis removed from equity and recognized inprofit or loss shall be the difference betweenthe acquisition cost (net of any principalrepayment and amortization) and currentfair value, less any impairment loss on thatsecurity previously recognized in profit orloss.Impairment losses recognized in profitor loss for an investment in an equityinstrument classified as Available-for-Saleshall not be reversed through profit or loss.If, in a subsequent period, the fair valueof a debt instrument classified as Availablefor-Saleincreases and the increase can beobjectively related to an event occurringafter the impairment loss was recognizedin profit or loss, the impairment loss shallbe reversed, with the amount of thereversal recognized in profit or loss.c.2. Underwriting Accounts (UA) shallbe a sub-account under Available-for-Sale.These are debt and equity securitiespurchased which have remained unsold/locked-in from underwriting ventures ona firm basis. UA account is applicable onlyto UBs and IHs.d. INMES - These are equityinstruments that do not have a quotedmarket price in an active market, and whosefair value cannot be reliably measured.INMES shall be measured upon initialrecognition at its fair value plus transactioncosts that are directly attributable to theacquisition of the security. After initialManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20 - Page 5

APP. Q-2011.12.31recognition, an FI shall measure INMES atcost. A gain or loss arising from the changein fair value of the INMES shall berecognized in profit or loss when the securityis derecognized or impaired.An FI shall assess each time it preparesits financial statements whether there is anyobjective evidence that an INMES isimpaired.If there is objective evidence that animpairment loss has been incurred on anINMES, the amount of impairment loss ismeasured as the difference between thecarrying amount of the security and theestimated future cash flows discounted atthe current market rate of return for a similarfinancial instrument. Such impairment lossshall not be reversed.For Securities at Fair Value through Profitor Loss and Available-for-Sale, an FI isrequired to book the mark-to-marketvaluation on a daily basis. However, an FImay opt to book the mark-to-marketvaluation every end of the month:Provided, That an adequate mechanism isin place to determine the daily fair valuesof securities.An FI shall recognize an investment indebt or equity security on its balance sheetwhen, and only when, the FI becomes aparty to the contractual provisions of thefinancial instrument. A regular way purchaseor sale of financial assets shall berecognized and derecognized, as applicableusing trade date accounting or settlementdate accounting. The method used isapplied consistently for all purchases andsale of financial assets that belong to thesame category.Sec. 4. Reclassifications 1a. An FI shall not reclassify a securityinto or out of the Fair Value through ProfitLoss category while it is held.b. If, as a result of a change in intentionor ability, it is no longer appropriate toclassify a debt security as HTM, it shall bereclassified as Available-for-Sale andremeasured at fair value, and the differencebetween its carrying amount and fair valueshall be accounted for in accordance withSection 3.c.1.c. Whenever sales or reclassificationsof more than an insignificant amount ofHTM investments do not meet any of theconditions in Section 3.a, any remainingHTM investments shall be reclassified asAvailable-for-Sale. On such reclassification,the difference between the carrying amountand fair value shall be accounted for inaccordance with Section 3.c.1.d. If a reliable measure becomesavailable for an INMES, it shall bereclassified as Available-for-Sale andremeasured at fair value, and the differencebetween its carrying amount and the fairvalue shall be accounted for in accordancewith Section 3.c.1.e. If, as a result of a change in intentionor ability, or because the two (2) precedingfinancial years’ referred to in Section 3.ahave passed, it becomes appropriate to carrythe debt security at amortized cost(i.e, HTM) rather than at fair value(i.e, Available-for-Sale), the fair valuecarrying amount of the security on that datebecomes its new amortized cost. Anyprevious gain or loss on that debt securitythat has been recognized directly inequity in accordance with Section 3.c.1shall be amortized to profit or loss overthe remaining life of the HTM using theeffective interest method. Any differencebetween the new amortized cost andmaturity amount shall also be amortizedover the remaining life of the security usingthe effective interest method, similar to theamortization of a premium and a discount.If the security is subsequently impaired, anygain or loss that has been recognized1The guidelines governing the reclassification of financial assets between categories in accordance with the provisions of theOctober 2008 amendments to PAS39 and PFRS7 are shown in Annex A.Q RegulationsAppendix Q-20 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2011.12.31directly in equity is recognized in profit orloss in accordance with Section 3.c.1.f. If, in the rare circumstance that areliable measure of fair value is no longeravailable, it becomes appropriate to carrythe equity security at cost (i.e, INMES) ratherthan at fair value (i.e, Available-for-Sale), thefair value carrying amount of the securityon that date becomes its new cost. Anyprevious gain or loss on that equity securitythat has been recognized directly in equityin accordance with Section 3.c.1 shallremain in equity until the security is soldor otherwise disposed of, when it shall berecognized in profit or loss. If the financialasset is subsequently impaired, any previousgain or loss that has been recognizeddirectly in equity is recognized in profit orloss in accordance with Section 3.c.1.g. The following securities bookedunder the HTM category, shall be exemptedfrom the “tainting” provision for prudentialreporting purposes which prohibits FIs fromusing the HTM category and requiresreclassification of the entire HTM portfolioto the Available-for-Sale category during thereporting year and for the succeeding two(2) full financial years whenever an FI sellsor reclassifies more than an insignificantamount of HTM investments beforematurity, other than for reasons specifiedin Items “a(a)” to “a(c)” of Section 3 of thisAppendix: Provided, That securities rejectedunder Items “i” and “ii”, shall continue tobe booked under the HTM category:i. Securities offered and accepted intender offers pursuant to liabilitymanagement transactions of the Republicof the Philippines, Provided: That Flsmaintain appropriate documentation onsuch transactions;ii. Securities offered and accepted indebt exchange offerings of GOCCs whichcarry the guarantee of the PhilippineNational Government, andiii. Foreign currency denominated NG/BSP bonds/debt securities, outstanding asof 10 February 2007, which werereclassified from the HTM category in viewof the increased risk-weights of saidsecurities under Appendix Q-46 withinthirty (30) calendar days after 10 February2007. The subject securities oncereclassified shall be accounted for inaccordance with the measurementrequirements of their new category (i.e.,Available-for-Sale securities).Sec. 5. Impairment. A debt or equitysecurity is impaired and impairment lossesare incurred if, and only if, there is objectiveevidence of impairment as a result of eventthat occurred after the initial recognition ofthe security (a “loss event”) and that lossevent has impact on the estimated futurecash flows of the securities. Losses expectedas a result of future events, no matter howlikely, are not recognized. Objectiveevidence that the security is impairedincludes observable data that comes to theattention of the holder of the security aboutthe following loss events:a. significant financial difficulty of theissuer or obligor;b. a breach of contract, such as adefault or delinquency in interest orprincipal payments;c. the FI, for economic or legal reasonsrelating to the issuer’s financial difficulty,granting to the issuer a concession that theFI would not otherwise consider;d. it becoming probable that the issuerwill enter bankruptcy or other financialreorganization;e. the disappearance of an activemarket for that security because of financialdifficulties; orf. observable data indicating that thereis a measurable decrease in the estimatedfuture cash flows from a portfolio ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20 - Page 7

APP. Q-2011.12.31securities since the initial recognition ofthose assets, although the decrease cannotyet be identified with the individualsecurities in the portfolio, including:(1) adverse change in the paymentstatus of issuers in the portfolio; or(2) national or local economicconditions that correlate with defaults on thesecurities in the portfolio.The disappearance of an active marketbecause an FI’s held securities are no longerpublicly traded is not evidence ofimpairment. A downgrade of an issuer’scredit rating is not, of itself, evidence ofimpairment, although it may be evidence ofimpairment when considered with otheravailable information. A decline in the fairvalue of a security below its cost oramortized cost is not necessarily evidenceof impairment (for example, a decline in fairvalue of an investment in debt security thatresults from an increase in the risk freeinterest rate).In addition to the types of eventsenumerated in Items “a” to “f” in this Section,objective evidence of impairment for aninvestment in an equity instrument includesinformation about significant changes withan adverse effect that have taken place inthe technological, market, economic or legalenvironment in which the issuer operatesand indicates that the cost of the investmentin the equity instrument may not berecovered. A significant or prolongeddecline in the fair value of an investment inan equity security below its cost is alsoobjective evidence of impairment.Sec. 6. Operations Manual. The FI shallmaintain an operations manual for bookingand valuation of HTM, Securities at FairValue through Profit or Loss, Available forSale and INMES.These guidelines shall no longer beapplicable when an FI adopts PFRS 9 underAppendix Q-56.(As amended by Circular Nos. 738 dated 11 October 2011, 670dated 18 November 2009, 733 dated 05 August 2011, 708 dated10 January 2011, 628 dated 31 October 2008, 626 dated 23October 2008, 558 dated 22 January 2007, 546 dated 21 September2006 and 509 dated 01 February 2006)Q RegulationsAppendix Q-20 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2008.12.31Annex ARECLASSIFICATION OF FINANCIAL ASSETS BETWEEN CATEGORIESThe following quidelines govern thereclassification of investments in debt andequity securities between categories:Section I. Conditions for ReclassificationsFIs shall be allowed to reclassify theirinvestments in debt and equity securitiesfrom the Held for Trading (HFT) orAvailable for Sale (AFS) categories to theHeld to Maturity (HTM) or Unquoted DebtSecurities Classified as Loans (UDSCL)categories, subject to the followingconditions:(1) The reclassification shall be donein accordance with the provisions of theOctober 2008 amendments to theInternational Accounting Standards (IAS)39: Financial Instruments: Recognition andMeasurements and International FinancialReporting Standards (IFRS) 7: FinancialInstruments: Disclosures;(a) Only non-derivative financialassets may be reclassified from HFT to AFS,HTM or UDSCL. This shall howeverexclude those that are Designated at FairValue through Profit or Loss (DFVPL).(b) A financial asset may bereclassified out of HFT into AFS/HTM/UDSCL only in rare circumstances and ifthere is a change in intention (i.e., thefinancial asset is no longer held for thepurpose of selling or repurchasing it in thenear term). The financial assets shall bereclassified at their fair values on theeffective date of reclassification all at thesame time. Any gain or loss alreadyrecognized in profit or loss shall not bereversed. The fair value of a financial asseton the effective date of reclassificationbecomes its new cost or amortized cost,as applicable.For this purpose, FIs may reclassify allor a portion of its financial assets for HFT toAFS/HTM/UDSCL as of the same datewhich shall be any day from 01 July 2008to 14 November 2008. For example, an FImay choose to reclassify all financial assetsbooked under HFT to AFS/HTM/UDSCL asof 01 July 2008 using their fair values as of01 July 2008. Another FI may chooseto reclassify all financial assets bookedunder HFT to AFS/HTM/UDSCL as of14 November 2008 using their fair valuesas of 14 November 2008. Thereafter, FIsshall not be allowed to "retrospectively"reclassify HFT to AFS/HTM/UDSCL. Anyreclassification on or after 15 November2008 shall take effect only from the datewhen the reclassification is made.(c) A financial asset booked under HFTthat would have also met the definition onUDSCL if the financial asset had not beenrequired to be classified as HFT at initialrecognition, may be reclassified from HFTto UDSCL if the entity has the intention andability to hold the financial asset for theforeseeable future or until maturity.(d) The financial assets shall bereclassified at their fair values on theeffective date of reclassification, notnecessarily all at the same time. Any gainor loss already recognized in profit or lossshall not be reversed. The fair value of afinancial asset on the effective date ofreclassification becomes its new cost oramortized cost, as applicable.For this purpose, FIs may reclassifysaid financial assets from HFT to UDSCLas of any date from 01 July 2008 to14 November 2008. Thereafter, FIs shallnot be allowed to retrospectively reclassifyHFT to UDSCL. Any reclassification on orManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20 - Page 9

APP. Q-2008.12.31after 15 November 2008 shall take effectonly from the date when the reclassificationis made.(e) The financial asset reclassified inaccordance with Items "(b)", "(c)" or "(d)"above shall thereafter be treated inaccordance with the guidelines providedin Appendix 20: Provided, however, Thatif an FI subsequently increases itsestimates of future cash receipts as a resultof increased recoverability of those cashreceipts, the effect of that increase shall berecognized as an adjustment to theeffective interest rate from the date of thechange in estimate rather than as anadjustment to the carrying amount of theasset at the date of the change in estimate.(f) FIs that shall reclassify based on theprovision of this Annex shall comply withthe disclosure requirements under theAmendments to IAS 39 and IFRS 7 inpreparing their audited financial statements.(2) Financial assets that arereclassified from HFT/AFS to HTM/UDSCL shall thereafter be treated inaccordance with the guidelines providedunder Appendix 33;(3) Reclassification from the AFS to theHTM category shall only be allowed ifthere was a change in intention forholding the debt instrument, and thefinancial institution has the ability to holdit until maturity; and(4) FIs may reclassify from HFT/AFS toAFS/HTM/UDSCL effective 01 July 2008:Provided, That any reclassification madein periods beginning on or after15 November 2008 shall take effect fromthe date when the reclassification is made.Sec. II. Alternative accounting treatmentfor prudential reporting purposes. Thefollowing may be adopted for purposes ofprudential reports:(1) A financial asset booked under AFSmay be reclassified from AFS to HTM/UDSCL if the FI has the intention and abilityto hold the financial assets for theforeseeable future or until the maturityusing the fair value carrying amount ofthe financial assets as of the effective dateof reclassification.For this purpose, FIs may reclassifysaid financial assets from AFS to HTM/UDSCL as of any day from 01 July 2008to 14 November 2008. Thereafter, FIs shallnot be allowed to retrospectively reclassifyAFS to HTM/UDSCL. Any reclassificationon or after 15 November 2008 shall takeeffect only from the date when therreclassification is made.(2) Financial assets that are bookedunder AFS category because of the taintingof the HTM portfolio may be reclassifiedto HTM or UDSCL using the fair valuecarrying amount of the financial assets asof the effective date of reclassification.For this purpose, FIs may reclassifysaid financial assets from AFS to HTM/UDSCL as of any day from 01 July 2008to 14 November 2008.(3) Hybrid financial assets (other thanCLNs) may be included among thefinancial assets that may be reclassified outof the HFT and into the AFS/HTM/UDSCLin accordance with Items "(1)(b)" and"(1)(c)" in Sec. I by, first, bifurcating theembedded derivative from the hostinstrument and booking the derivativesunder Derivatives with Positive/NegativeFair Value; and second, reclassifying thehost contract to AFS/HTM/UDSCL.(4) CLNs and other similar instrumentsthat are linked to ROPs, on the other hand,may be included among the financial assetsthat may be reclassified (i) out of the HFTinto AFS/HTM/UDSCL in accordance withItems "(1)(b)" and "(1)(c)"; or (ii) from AFSto UDSCL or HTM in accordance with Item"(1)(d)" all in Sec. I and Item "1" above,without bifurcating the embeddedderivatives from the host instrument:Provided, That this shall only apply forCLNs that are outstanding as of the effectiveQ RegulationsAppendix Q-20 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2008.12.31date of reclassification, which shall not beon or later than 15 November 2008.Sec. III. Applicability to Trust InstitutionsThe guidelines shall likewise apply to trustinstitutions except for the followingaccounts:(a) UIT Funds; and(b) Pre-need, escrow and otheraccounts whose investments are regulatedby or require approval from otherregulatory agencies: Provided, That priorto the reclassification, the approval/consentand reflect the change in client'sinvestment profile in the revisedInvestment Policy Statement as providedin Appendix 83: Provided, further, That inthe case of managed retirement funds/employee benefit trust accounts, suchreclassification shall be aligned with theliquidity requirements resulting from thelatest actuarial valuation of the fund/account.Sec. IV. Reportorial Requirements. FIs thatreclassify financial assets out of the HFT/AFS categories shall submit a report onReclassification of Financial Assetsbetween Categories to the SupervisoryData Center, Supervision and ExaminationSector on or before 30 November 2008.(Circular No. 626 dated 23 October 2008 as amended by CircularNo. 628 dated 31 October 2008)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20 - Page 11

APP. Q-20a08.12.31ESTABLISHING THE MARKET BENCHMARKS/REFERENCE PRICES ANDCOMPUTATION METHOD USED TO MARK-TO-MARKET DEBTAND MARKETABLE EQUITY SECURITIES(Appendix to Subsec. 4388Q.5 (2008 - 4391Q.3)General PrincipleAs a general rule, to the extent a credible market pricing mechanism as determined bythe BSP exists for a given security, that market price shall be the basis of marking-tomarket.However, in the absence of a market price, a calculated price shall be used asprescribed herein.Marking-to-Market GuidelinesTo ensure consistency, the following shall be used as bases in marking-to-marketdebt and equity securities:Type of SecurityMarket Price BasisA. Equity Securities Listed in the Stock Exchange1. Traded in the Philippines Same day closing price as quoted at the PhilippineStock Exchange. In case of halt trading/suspension or holidays, use the lastavailable closing price.2. Traded Abroad Latest available closing price from the exchangewhere the securities are traded.B. Foreign Currency-Denominated Debt Securities Quoted in Major Information Systems(e.g., Bloomberg, Reuters)1. US Treasuries Price as of end of day, Manila time.2. US Agency papers such as Latest available price for the day, Manila time. InFannie Maes, Freddie Macs, the absence of a price, use average quotes of atGinnie Maes, Municipal papers least three (3) regular brokers/market makers.*3. Brady Bonds Same as B.2.4. For all US$-denominated Same as B.2.government and corporatesecurities5. Other foreign-currency securities Same as B.2.* Based on done rates if available. If done rates are not available, use the mid rate between bid and offer. If no mid ratesare available, use the bid rate.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20a - Page 1

APP. Q-20a08.12.31C. Foreign Currency Denominated DebtSecurities Traded in a Local RegisteredExchange or MarketThe basis for marking-to-market foreigncurrency-denominated debt securitiestraded in a local registered exchange ormarket shall be the same as those used inPeso-Denominated GS in Section D below.D. Peso-Denominated GSThe benchmark or reference pricesshall be based on the weighted averageof done or executed deals in a tradingmarket registered with the SEC. In theabsence of done deals, the best firm bidper benchmark tenor shall be used incalculating the benchmark: Provided, Thatthe best firm offer per benchmark tenorshall likewise be included as soon aspermissible under securities laws andregulations.The benchmark or reference rateshall be computed and published inaccordance with prescribed guidelineson the computation of reference ratesby a Calculation Agent which isrecognized by the BAP: Provided, Thatboth the Calculation Agent and itsmethod of computation are acceptableto the BSP.To ensure the integrity of thebenchmark or reference prices, theCalculation Agent shall perform thefollowing:1. Monitor the quality of thecontributed source rates for thebenchmark;2. Monitor the data contributorsand replace participants, uponconsultation with the BAP, that fail tomeet commitments to the benchmark;3. Monitor the activities of theparticipants to ensure compliance withtheir commitments and for possiblemarket manipulation and enforcesanctions on errant participants andimmediately inform BAP and the BSPthereon; and4. Review and upgrade thebenchmark setting methodology uponconsultation with BAP on a continuingbasis, including documentation andpublications thereof.Accordingly, all data on done andfirm bids/offers must be credible andverifiable and preferably sourced fromtrade executions and reporting systemsthat are part of a regulated andorganized market duly licensed by theSEC where the data contributors arebound to uphold the principles oftransparency, fair trading and bestexecution.E. Peso-Denominated Private DebtSecuritiesThe basis for marking-to-marketpeso-denominated debt securitiestraded in an organized market shall bethe same as those used in Peso-Denominated Government Securitiesin Section D above.For private debt securities which arenot traded in an organized market, themarked to market value shall be basedon the corresponding governmentsecurity benchmark plus risk premium.The corresponding government securitybenchmark shall be determinedaccording to Section D above. Indetermining the risk premium, thecredit risk rating of the securitiesinvolved given by a BSP-recognizedcredit risk rating agency shall beestablished and taken into accountwhenever available. In the absence ofsuch credit risk rating, alternativeanalyses may be used: Provided, Thatthese are well-justified by sound riskanalysis principles.Q RegulationsAppendix Q-20a - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-20a08.12.31Other GuidelinesFor the market valuation ofsecurities with odd tenors,interpolated yields derived from thebenchmark or reference rates inaccordance with the BSP - approvedguidelines for computation ofreference rates in Section D aboveshall be used.Penalties and SanctionsFIs and the concerned officers found tohave violated the provisions of theseregulations shall be subject to the penaltiesprescribed under Subsec. 4388Q.5:Provided, That non-compliance with theabove guidelines may be a basis for a findingof unsafe and unsound banking practice.(As amended by M-2007-006 dated 28 February 2007)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-20a - Page 3

APP. Q-2108.12.31GUIDELINES ON THE USE OF SCRIPLESS (RoSS) SECURITIES AS SECURITYDEPOSIT FOR THE FAITHFUL PERFORMANCE OF TRUST DUTIES(Appendix to Sec. 4405Q and Sec. 4415Q)Definition of Terms and AcronymsScripless securities and RoSS securitiesrefers to uncertificated securities issuedby the Bureau of the Treasury (BTr) that areunder the BTr’s Registry of ScriplessSecuritiesTrust institution - refers to an entity thatis authorized to engage in trust businessBTr - Bureau of the TreasuryRoSS - Registry of Scripless SecuritiesBSP - Bangko Sentral ng PilipinasBSP-SES - Supervision and ExaminationSector of BSPSRSO - Supervisory Reports andStudies Office of BSP-SESBSP-Accounting - Accounting Departmentof BSPGSED - Government Securities EligibleDealer of the BTrDDA - refers to the regular demanddeposit account of a bank/QB withBSP-AccountingMOR - Manual of Regulations for Non-Bank Financial InstitutionsAppropriate supervising andexamining department or responsiblesupervising and examining department -refers to the Department of Thrift Banksand Non-Bank Financial InstitutionsA. Basic Requirements1. The BSP-SES shall file with BTr anapplication to open a RoSS PrincipalSecurities Account where RoSS securitiesof trust institutions used as security depositfor trust duties shall be held. BSP-SES shalluse Annex 1 for this purpose.2. Using Annex 1-A, BSP-SES shallalso apply for a Client Securities Account(sub-account) for each trust institution underits RoSS Principal Securities Account toenable BSP-SES to keep track of thesecurity deposit. BTr shall maintain ClientSecurities Accounts for P1,000 eachmonth per account.3. A trust institution which has a DDAwith BSP-Accounting shall act as its ownsettlement bank.A trust institution which does not havea DDA with the BSP-Accounting shalldesignate a settlement bank which will actas conduit for transferring securities for trustduties to the BSP-SES account and forpaying interest, interest coupons andredemption proceeds. The trust institutionshall inform the appropriate department ofthe SES of the designation of a settlementbank.4. Each trust institution shallaccomplish an “Autodebit/AutocreditAuthorization” for its client securitiesaccount under the BSP-SES RoSS account.The document will authorize the BTr andthe BSP to credit the DDA of the trustinstitution with BSP-Accounting forcoupons/interest payments on securitiesin the BSP-SES RoSS accounts and to debitthe DDA for the monthly fees payable toBTr for maintaining its client securitiesaccounts with BSP-SES. It will also authorizeManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 1

APP. Q-2108.12.31the BTR and BSP to credit the depositaccount of BSP-SES with BSP-Accountingfor the redemption proceeds of securitiesthat mature while in the BSP-SES RoSSaccount.A trust institution with a DDA with BSP-Accounting shall use Annex 2-A while a trustinstitution with a settlement arrangementshall use Annex 2-B.5. BSP-SES shall open a depositaccount with BSP-Accounting where theredemption value of securities shall becredited, in the event such securitiesmature while lodged in the RoSS accountof BSP-SES.6. SRSO shall be responsible forkeeping track of the deposit and withdrawalof securities held under the BSP-SESPrincipal Securities Account and the ClientSecurities Accounts of the trust institutions.SRSO shall instruct BTr to transfer securitiesout of the BSP-SES account and thecorresponding client securities accounts oftrust institutions only after receivingauthorization from the Director (or in hisabsence, the designated alternate officer)of the appropriate department of the SES.SRSO shall also be responsible forkeeping track of the BSP-SES depositaccount with the BSP-Accountingrepresenting credits for the redemptionvalue of security deposit of trust institutionsthat have matured while in the RoSSaccount of BSP-SES. SRSO shall maintainsub-accounts for each trust institution for thepurpose. SRSO shall instruct BSP-Accounting to transfer balances out of thedeposit account and the corresponding subaccountof the trust institution only afterreceiving authorization from the Director(or in his absence, the designated alternateofficer) of the appropriate department of theSES.7. BSP-SES shall subscribe to theTelerate electronic trading system whichis linked to BTr’s RoSS and cause theinstallation of a Telerate terminal at SRSO.Trust institutions may be required toreimburse BSP-SES for whatever expensesthat may be incurred in connection withthe subscription.8. Every trust institution must ensurethat it has adequate security deposit for trustduties pursuant to the provisions of Subsecs.4405Q.1, 4405Q.2, 4405Q.3 and 4405Q.4of the MOR.9. BTr shall provide BSP-SES with theend-of-day transaction report whenever atransaction in any client securities accountis made. BTr shall also provide BSP-SES amonthly report of balances of each clientsecurities account.10. Every quarter, the responsible SEDof BSP-SES shall determine, based on theReport of Trust and Other FiduciaryBusiness and Investment ManagementActivities (BSP 7-26-23) submitted by thetrust institution, whether or not the trustinstitution’s security deposit for trust dutiesis sufficient pursuant to the provisions ofthe MOR mentioned above. In case ofdeficiency, the department shallrecommend the imposition of sanctionsand/or any other appropriate action tohigher authorities.B. Procedures for Assigning RoSSSecurities as Security Deposit for TrustDuties1. The trust institution shall advise theappropriate BSP-SES department that it willtransfer RoSS securities to BSP-SES. Theadvice should be received by the BSP-SESat least two (2) business days before the dateof transfer using the prescribed form (Annex3) and checking Box “b” of said form. (Box“a” shall be checked by a new trust institutionthat is making an initial security depositpursuant to Subsec. 4404Q.4 of the MOR.)The advice should be sent by cc mail or byfax to be followed by an official letter dulysigned by an authorized trust officer.2. The trust institution shallelectronically instruct BTr to transferQ RegulationsAppendix Q-21 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2108.12.31securities from its own RoSS accounts tothe BSP-SES RoSS and its correspondingClient Securities Account on the specifieddate. In the case of a trust institution witha settlement arrangement, the instructionshall be coursed through the settlementbank and the securities shall come fromthe RoSS account of the same bank.3. BTr shall effect the transfer uponverification of RoSS balances. At the endof the day, BTr shall transmit a transactionreport to SRSO containing the transfer.4. SRSO shall provide theappropriate BSP-SES department a copyof the report.5. The BSP-SES departmentconcerned shall check from the reportwhether BTr effected the transferindicated in the advice (Annex 3) sentearlier by the trust institution.C. Procedures for Replacing RoSSSecurities1. The trust institution shall advisethe appropriate deparment of the SES thatit will replace existing RoSS securitiesassigned as security deposit. The adviceshould be received by the BSP-SES at leasttwo (2) business days before the date ofreplacement using the prescribed form(Annex 3). The trust institution shall checkBox “c” of the form and indicate thedetails of the securities to be withdrawn.The advice should be sent by cc mail orby fax to be followed by an official letterduly signed by an authorized trust officer.2. The responsible BSP-SESdepartment shall verify whether thesecurities to be replaced are in the RoSSaccount of BSP-SES and the sub-accountof the trust institution and whether thebook value of the securities to bedeposited is equal to or greater than thoseto be withdrawn. The departmentconcerned shall immediatelycommunicate with the trust institution incase of a discrepancy.3. The trust institution shallelectronically instruct BTr to transfersecurities from its own RoSS account tothe BSP-SES RoSS accounts and itscorresponding Client Securities Accounton the specified date. In the case of a trustinstitution with a settlement arrangement,the instruction shall be coursed throughthe settlement bank and the securities shallcome from the RoSS account of the samebank.4. BTr shall effect the transfer uponverification of RoSS balances. At the endof the day, BTr shall transmit a transactionreport to SRSO containing the transfer.5. SRSO shall immediately providethe appropriate BSP-SES department a copyof the report.6. The BSP-SES departmentconcerned shall immediately check fromthe report whether the securitiestransferred to the BSP-SES account are thesame securities described in the advice(Annex 3) sent earlier. If in order, theDirector (or in his absence, thedesignated alternate officer) of thedepartment concerned shall authorizeSRSO to instruct BTr to transfer thesecurities specified to be withdrawn fromthe BSP-SES account to the trust institution’s(or the settlement bank’s) RoSS account. TheDepartment concerned shall use Annex 5and check Boxes “a” and “d”. Should therebe any discrepancy, the department shallinform the trust institution immediately. Theauthority to allow the withdrawal should betransmitted to SRSO not later than the dayafter the replacement securities weretransferred to the BSP-SES account.The BSP-SES department concernedshall also advise the trust institution that ithas approved the replacement of securitydeposit by using Annex 6 and checkingBoxes “a” and “d” and the appropriate boxunder “d” depending on whether or notthe trust institution has a settlementarrangement.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 3

APP. Q-2108.12.317. On the same day, SRSO shallinstruct BTr to transfer the securitiesspecified to be withdrawn from the BSP-SES account to the RoSS account of the trustinstitution (or its settlement bank).8. BTr shall effect the transfer/withdrawal. At the end of the day, BTr shallsend a report to SRSO containing thetransfer/withdrawal.9. SRSO shall provide the appropriateBSP-SES department a copy of the report.10. The responsible BSP-SESdepartment shall check from the reportwhether BTr effected the transfer/withdrawal.D. Procedures for Withdrawing RoSSSecurities1. The trust institution shall advise theappropriate BSP-SES department that it willwithdraw existing RoSS securities assignedas security deposit. The advice should bereceived by the BSP-SES at least two (2)banking days before the date of withdrawalusing the prescribed form (Annex 4) andindicating therein details of the securitiesto be withdrawn. The advice should besent by cc mail or by fax to be followedby an official letter duly signed by anauthorized trust officer.2. The responsible BSP-SESdepartment shall verify whether thesecurities to be withdrawn are in the RoSSaccount of BSP-SES and the ClientSecurities Account of the trust institution.The department shall also determinewhether the amount of remaining securitydeposit will still be adequate in spite of theproposed withdrawal. If in order, theDirector (or in his absence, the designatedalternate officer) of the departmentconcerned shall authorize SRSO to instructBTr to transfer the securities specified tobe withdrawn from the BSP-SES accountto the trust institution’s own RoSS account(or its settlement bank). The Departmentconcerned shall use Annex 5 and checkBoxes “b” and “d”. Should there be anydiscrepancy, the department shall inform thetrust institution immediately. The authorityto allow the withdrawal should betransmitted to SRSO not later than the dateof the withdrawal indicated in the advice(Annex 4) sent earlier by the trust institution.The BSP-SES department concernedshall also advise the trust institution that ithas approved the withdrawal of securitydeposit by using Annex 6 and checkingBoxes “b” and “d” and the appropriate boxunder “d” depending on whether or not thetrust institution has a settlement arrangement.3. On the same date, SRSO shallinstruct BTr to transfer the securitiesspecified to be withdrawn from the BSP-SES account to the RoSS account of the trustinstitution (or its settlement bank).4. BTr shall effect the transfer/withdrawal. At the end of the day, BTrshall send to SRSO a report which containsthe transfer/withdrawal.5. SRSO shall provide the appropriateBSP-SES department a copy of the report.6. The BSP-SES departmentconcerned shall check from the reportwhether BTr effected the withdrawal statedin the advice (Annex 4) sent earlier by thetrust institution.E. Procedures for Crediting InterestCoupon Payments. On coupon or interestpayment date, BTr shall instruct BSP-Accounting to credit the DDA of trustinstitutions or their designated settlementbanks for coupon/interest payment ofsecurities held under the RoSS account ofBSP-SES.F. Procedures for Crediting andWithdrawing the Redemption Value ofMatured Securities that are in the BSP-SES RoSS Account1. On maturity date, BTr shall instructBSP-Accounting to credit the depositaccount of BSP-SES with BSP-AccountingQ RegulationsAppendix Q-21 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2108.12.31for the redemption value of securitiesthat mature while held as security depositin the RoSS account of BSP-SES.2. BTr shall send to SRSO a copy ofthe credit advice.3. SRSO shall immediately providethe appropriate BSP-SES department acopy of the credit advice.4. The responsible BSP-SESdepartment shall immediately informthe trust institution concerned of thecash credit and shall inquire whether thetrust institution intends to transfersecurities to the RoSS account of the BSP-SES to replace the matured securities.5. The trust institution shall advise theappropriate BSP-SES department that it willtransfer RoSS securities to BSP-SES inplace of the cash credited to the depositaccount of BSP-SES with BSP-Accounting for matured securities. Thetrust institution shall check Box “d” of theprescribed form (Annex 3). The concerneddepartment shall determine if the bookvalue of the securities to be transferred isequal to or greater than the cash credit.6. The trust institution shallelectronically instruct BTr to transfersecurities from its own RoSS accountsto the BSP-SES RoSS account and itscorresponding Client Securities Accounton the specified date. In the case of a trustinstitution with a settlement arrangement,the instruction shall be coursed throughthe settlement bank and the securitiesshall come from the RoSS account of thesame bank.7. BTr shall effect the transfer uponverification of RoSS balances. At the endof the day, BTr shall send a report to SRSOcontaining the transfer.8. SRSO shall provide theappropriate BSP-SES department a copyof the report.9. The BSP-SES departmentconcerned shall immediately check fromthe report whether the securitiestransferred to the BSP-SES account are thesame securities described in the advice(Annex 3) sent earlier by the trustinstitution. If in order, the Director (or inhis absence, the designated alternateofficer) of the Department shall direct theSRSO to instruct BSP-AccountingDepartment to debit the BSP-SES depositaccount and transfer the funds to the DDAof the trust institution (or its designatedsettlement bank). The Departmentconcerned shall use Annex 5 and checkBoxes “c” and “e”.The BSP-SES department concernedshall also advise the trust institution that ithas approved the replacement of maturedsecurities by using Annex 6 and checkingBoxes “c” and “e” and the appropriate boxunder “e” depending on whether or notthe trust institution has a settlementarrangement.10. SRSO shall direct BSP-Accountingto debit the BSP-SES deposit account andcredit the same amount to the DDA ofthe trust institution (or its designatedsettlement bank) using Annex 7.11. BSP-Accounting shall effect thetransaction and send a copy of the debitadvice to SRSO and a copy of the creditadvice to the trust institution (or thedesignated settlement bank).Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 5

APP. Q-2108.12.31Annex 1SUPERVISION AND EXAMINATION SECTORDateTreasurer of the PhilippinesBureau of TreasuryPalacio del GobernadorIntramuros, ManilaAttention:Registry of Scripless Securities (RoSS)Dear :The Supervision and Examination Sector of the Bangko Sentral ng Pilipinas (BSP-SES) hereby makes an application to open a Principal Securities Account in the Registry ofScripless Securities (RoSS) for the purpose of holding the security deposit for the faithfulperformance of trust duties of institutions engaged in trust business pursuant to Section 65of R.A. No. 337, as amended.We understand that the Bureau of the Treasury shall maintain the Principal SecuritiesAccount of BSP-SES for free.Very truly yours,Deputy GovernorQ RegulationsAppendix Q-21 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2108.12.31Annex 1-ASUPERVISION AND EXAMINATION SECTORDateTreasurer of the PhilippinesBureau of TreasuryPalacio del GobernadorIntramuros, ManilaAttention:Registry of Scripless Securities (RoSS)Dear Ms.In connection with the Principal Securities Account of BSP-SES in the Registry ofScripless Securities (RoSS), please open Client Securities Account for the following trustinstitutions so we can keep track of their security deposit for the faithful performance oftrust duties. Please note that the settlement bank of the institution, if it is required, is alsoindicated.1.2.nName of Settlement Bank,Name of Trust Institution where requiredWe understand that the Bureau of the Treasury will maintain the Client SecuritiesAccount for P1,000 per month per account.Very truly yours,(Signature)Authorized SignatoryManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 7

APP. Q-2108.12.31Annex 2-ATo be used by a trust institution with own demand deposit account with BSP-AccountingLetterhead of Trust InstitutionAUTODEBIT/AUTOCREDIT AUTHORIZATIONThe (name of trust institution) hereby authorizes the Bureauof the Treasury (BTr) and the Bangko Sentral ng Pilipinas (BSP) to debit/credit ourdemand deposit account with BSP-Accounting for coupons/interest payment of our securitiesin the BSP-SES RoSS accounts; and to settle the payment of monthly maintenance fees toBTr of our client securities account under the BSP-SES RoSS account. We also authorizethe BTr and the BSP to credit the Account of BSP-SES with BSP-Accounting for theredemption proceeds of our securities in the event such securities mature while in theRoSS account of BSP-SES.This authorization will take effect on (indicate date) .(Signature)(Authorized Signatory)Q RegulationsAppendix Q-21 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2108.12.31Annex 2-BTo be used by a trust institution with settlement arrangement with a bankLetterhead of Trust InstitutionAUTODEBIT/AUTOCREDIT AUTHORIZATIONThe (name of settlement bank) for the account of (name oftrust institution) hereby authorizes the Bureau of the Treasury (BTr) and the BangkoSentral ng Pilipinas (BSP) to debit/credit our demand deposit account with BSP-Accountingfor coupons/interest payment of securities of the trust institution in the BSP-SES RoSSaccounts; for maturing securities of the trust institution held in our RoSS Principal SecuritiesAccount with BTr; and to settle the payment of monthly maintenance fees to BTr of ourclient securities account under the BSP-SES RoSS account.The (name of trust institution) also authorizes the BTr and the BSP to creditthe Account of BSP-SES with BSP-Accounting for the redemption proceeds of our securitiesin the event such securities mature while in the RoSS account of BSP-SES.This authorization will take effect on (indicate date) .(Signature)(Authorized Signatory of Settlement Bank)(Signature)(Authorized Signatory of Trust Institution)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 9

APP. Q-2108.12.31Annex 3Letterhead of Trust InstitutionDateThe DirectorDTBNBFIBangko Sentral ng PilipinasA. Mabini St., ManilaDear Sir:We are transferring on (indicate date of transfer) the following securities to your Principal SecuritiesAccount and our Client Securities Account (sub-account) as our security deposit for the faithfulperformance of trust duties pursuant to Section 65 of R.A. No. 337, as amended.Purchase Issue Due Remaining Face PurchaseType ISIN Date__ Date Date Tenor a/ Amount PriceWe are transferring the above securities:a. As our initial depositb. As an additional security depositc. To replace the following securities which we deposited on (date) .Purchase Issue Due Remaining Face PurchaseType ISIN Date Date Date Tenor a/ Amount Priced. To replace matured securities the redemption value of which P _________ iscredited to the deposit account of BSP-SES with BSP-Accounting.Very truly yours,(Signature)Name and Designation of Authorized Signatorya /Reckoned from actual date of transfer/withdrawalQ RegulationsAppendix Q-21 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2108.12.31Annex 4Letterhead of Trust InstitutionDate:The DirectorDTBNBFIBangko Sentral ng PilipinasA. Mabini St., ManilaDear Sir:We wish to withdraw on (indicate date of transfer) the following securities used as securitydeposit for the faithful performance of trust duties from the Principal Securities Account and from ourcorresponding Client Securities Account (sub-account).Purchase Issue Due Remaining Face PurchaseType ISIN Date Date Date Tenor a/ Amount Price_____ ______ ______ ______ _______ ________ ________Very truly yours,(Signature)Name and Designation of Authorized Signatorya /Reckoned from actual date of transfer/withdrawalManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 11

APP. Q-2108.12.31MEMORANDUMAnnex 5DTBNBFIF o r : The DirectorSupervisory Reports and Studies OfficeFrom : The DirectorSubject : Scripless Securities Used As Deposit for Trust DutiesDate :In connection with the request of (indicate name of trust institution) dated ______________to:a. Replace outstanding RoSS securitiesb. Withdraw RoSS securitiesc. Replace cash credit of matured securities with outstanding RoSS securities,you are hereby authorized to:d. Instruct the Bureau of Treasury to transfer the following securities out of the BSP-SES RoSS accounts to the RoSS Principal Securities Account of (indicate name oftrust institution or, where applicable, the name of its settlement bank)Purchase Issue Due Remaining Face PurchaseType ISIN Date Date Date Tenor a/ Amount Pricee. Instruct BSP-Accounting to debit the BSP-SES deposit account in the amount ofP________ and to transfer said amount to the demand deposit account of (indicatename of trust institution or, where applicable, the name of its designated settlementbank).(Signature)Authorized Signatorya /Reckoned from actual date of transfer/withdrawalQ RegulationsAppendix Q-21 - Page 12Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2108.12.31Annex 6DTBNBFIDate(Name of Trust Institution)(Address)Subject : Scripless Securities Used As Deposit for Trust DutiesDear Mr. ____________:We are pleased to inform you that we have approved your request dated _______________ to:a. Replace outstanding RoSS securitiesb. Withdraw RoSS securitiesc. Replace cash credit of matured securities with outstanding RoSS securities.Accordingly, we have authorized the Supervisory Reports and Studies Office to:d. Instruct the Bureau of Treasury to transfer the following securitiesout of the BSP-SES RoSS accounts to -the RoSS Principal Securities Accountyour settlement bank’s RoSS Principal Securities Account,the securities described in your request.e. Instruct BSP-Accounting to debit the BSP-SES deposit account in theamount of P_______ and to credit said amount to -your demand deposit account with BSP-Accountingyour settlement bank’s demand deposit account with BSP-AccountingVery truly yours,(Signature)Authorized SignatoryManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-21 - Page 13

APP. Q-2108.12.31Annex 7MEMORANDUMDTBNBFIF o r : The DirectorAccounting DepartmentFrom : The DirectorDate :Subject:Security Deposit for Trust DutiesYou are hereby instructed to debit our deposit account in the amount of P ___________and to credit said amount to the demand deposit account of (indicate name of trust institutionor, where applicable, the name of its settlement bank).The trust institution has transferred RoSS securities to the Principal Securities Account ofBSP-SES to replace the matured securities.(Signature)Authorized SignatoryQ RegulationsAppendix Q-21 - Page 14Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2209.12.31PROCEDURES ON COLLECTION OF FINES/PENALTIES FROM QUASI-BANKSAND/OR DIRECTORS/OFFICERS OF QUASI-BANKS[Appendix to Subsecs. 4902Q.2 (2008 - 4653Q.2)]For uniform implementation of theregulations on collection of fines/penaltiesfrom QBs and/or directors/officers of QBs,the following procedures shall be observed:1. Upon approval of the fines/penaltiesby the Governor/Monetary Board, theDepartment/Office concerned shall send theStatement of Account (SOA)/billing letter tothe QB with an advice that the penaltyshould be paid in full within fifteen (15)calendar days from receipt of SOA/billingletter. For entities which maintain demanddeposit account (DDA) with BSP, theamount of the penalty/ies shall beautomatically debited from the QB’s DDAwith the BSP after the lapse of the fifteen(15)-calendar day period. The QB shalllikewise be advised that penalty or portionthereof which remained unpaid after thelapse of said fifteen (15)-day period shall besubject to additional charge of six percent(6%) per annum reckoned from the businessday immediately following the end of thefifteen (15)-day period up to the day of actualpayment.2. On the business day immediatelyfollowing the end of said fifteen (15)-dayperiod, unpaid penalties shall beautomatically debited, without additionalcharge, against the QB’s DDA with the BSPby the Comptrollership Sub-sector (CoSS)based on the amount booked by theDepartment/Office concerned after firstconfirming with the CoSS the sufficiency ofthe QB’s DDA balance to cover the amountof the penalty.3. If, based on its confirmation with theCoSS, the Department/Office concernedreceived information that the QB’s DDAbalance is insufficient to cover the amountof the penalty, it shall accordingly adviseand request the bank to immediately fundits DDA.4. As soon as it is funded, the QB’sDDA shall be debited by the CoSS for theamount of the penalty, plus the six percent(6%) additional charge for late paymentof the penalty reckoned from the businessday immediately following the end of thefifteen (15)-day period up to the day ofactual payment, based on the amountbooked by the Department/Officeconcerned.5. Payment by QBs of penalty, plus theadditional charge if any by check or demanddraft shall be made directly to the BSP CashDepartment or to BSP Regional Cash Unitsin accordance with the provisions of Subsec.4902Q.4.6. In the case of penalty/ies imposedon QB directors/officers, said directors/officers shall be advised by theDepartment/Office concerned to paywithin fifteen (15) calendar days fromreceipt of the SOA/billing letter directlyto the BSP in the form of cash or checkand in accordance with the provisions ofSubsec. 4902Q.4. Penalty or portionthereof which remained unpaid after thelapse of said fifteen (15)-day period shallalso be subject to additional charge of sixpercent (6%) per annum reckoned fromthe banking day immediately followingthe end of the fifteen (15)-day period upto the day of actual payment.(As amended by Circular No. 662 dated 09 September 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-22 - Page 1

APP. Q-22-a09.12.31PROFORMA PAYMENT FORM[Appendix to Subsec. 4902Q.2 (2008 - 4653Q.2)]BANGKO SENTRAL NG PILIPINASManila(Name of Department/Office)FOR -The DirectorCash DepartmentPlease issue OFFICIAL RECEIPT to (name of payor) as payment of(nature of payment)and effect the following accounting entries:Account Code Account Title/Description DR/CR AmountAccountee Type/Code/NamePTotal DebitTotal Credit PApproved by:(Name of BSP Official/Position)Date:Received by:Date:Official Receipt No:Date:(As amended by Circular No. 662 dated 09 September 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-22-a - Page 1

APP. Q-2308.12.31(RESERVED)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23 - Page 1

APP. Q-23-a08.12.31CERTIFICATION OF COMPLIANCEWITH ANTI-MONEY LAUNDERING REGULATIONSC E R T I F I C A T I O NPursuant to the provisions of Section 2 of BSP Circular No. 279 dated 02 April 2001, wehereby certify:1. That we have monitored (Name of quasi-bank)’s compliance with R.A. No. 9160(Anti-Money Laundering Act of 2001) as well as with BSP Circular Nos. 251, 253,259 and 302;2. That the quasi-bank is complying with the required customer identification,documentation of all new clients, and continued monitoring of customer’s activities;3. That the quasi-bank is also complying with the requirement to record all transactionsand to maintain such records including the record of customer identification for atleast five (5) years;4. That the quasi-bank does not maintain anonymous or fictitious accounts; and5. That we conduct regular anti-money laundering training sessions for all quasi-bankofficers and selected staff members holding sensitive positions.(Name of President or officerof equivalent rank)(Name of ComplianceOfficer)SUBSCRIBED AND SWORN to before me, _____ this ____ day of ____________,affiant/s exhibiting to me their Community Tax Certificate No.(s) as follows:CommunityDate/PlaceName Tax Cert. No IssuedDoc. No. _________;Page No. _________;Book No. _________;Series of 20___Notary PublicManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-a - Page 1

APP. Q-23-b09.12.31Anti-Money Laundering Council No. 292RULES ON SUBMISSION OF COVERED TRANSACTION REPORTS ANDSUSPICIOUS TRANSACTION REPORTS BY COVERED INSTITUTIONS 11. All covered institutions are requiredto file Suspicious Transaction Reports (STRs)on transactions involving all kinds of monetaryinstruments or property.2. Banks shall file covered transactionreports (CTRs) on transactions involving allkinds of monetary instruments or property,i.e., in cash or non-cash, whether indomestic or foreign currency.3. Covered institutions, other thanbanks, shall file CTRs on transactions incash or foreign currency or other monetaryinstruments (other than checks) orproperties. Due to the nature of thetransactions in the stock exchange, only thebrokers-dealers shall be required to file CTRsand STRs. The PSE, PCD, SCCP and transferagents are exempt from filing CTRs. They,are however, required to file STRs when thetransactions that pass through them aredeemed to be suspicious.4. Where the covered institutionengages in bulk transactions with a bank,i.e., deposits of premium payments in bulkor settlements of trade, and the bulktransactions do not distinguish clients andtheir respective transaction amounts, saidcovered institutions shall be required to fileCTRs on its clients whose transactionsexceed P500,000 and are included in thebulk transactions.5. With respect to insurancecompanies, when the total amount of thepremiums for the entire year, regardless ofthe mode of payment (monthly, quarterly,semi-annually or annually), exceedsP500,000, such amount shall be reportedas a covered transaction, even if theamounts of the amortizations are less thanthe threshold amount. The CTR shall befiled upon payment of the first premiumamount, regardless of the mode of payment.Under this rule, the insurance companyshall file the CTR only once every year untilthe policy matures or rescinded, whichevercomes first.6. The submission of CTRs is deferreduntil the AMLC directs otherwise.Submission of STRs, however, are notdeferred and covered institutions aremandated to submit such STRs when thecircumstances so require.1a. The Anti-Money Laundering Council (AMLC), in the exercise of its authority under Sections 7(1) and 9 of RepublicAct No. 9160, otherwise known as the “Anti-Money Laundering Act of 2001”, as amended, and its Revised ImplementingRules and Regulations, resolved to:(1) Defer reporting by covered institutions to AMLC of the following “non-cash, no/low risk covered transactions:· Transactions between banks and the BSP;· Transactions between banks operating in the Philippines;· Internal operating expenses of the banks;· Transactions involving transfer of funds from one deposit account to another deposit account of the same personwithin the same bank;· Roll-overs of placements of time deposits; and· Loan interest/principal payment debited against borrower’s deposit account maintained with the lending bank.(2) Request the BSP-supervised institutions, through the Association of Bank Compliance Officers (ABCOMP), todetermine and report to AMLC the specific transactions falling within the purview of the aforesaid BSP-identified categories on“non-cash, no/low risk” covered transactions.b. All covered institutions should:(1) Submit corresponding electronic copy versions, in the required format, of those STRs previously submitted in hardcopy or the hard copy version of those submitted only in electronic form, as the case may be, retroactive to 05 January 2004;and(2) Re-submit in required electronic form, those CTRs that have been submitted previously in hard copy or in diskettenot in the required format, retroactive to 23 March 2003.(As amended by CL-2009-037 dated 04 May 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-b - Page 1

APP. Q-23-c08.12.31CUSTOMER DUE DILIGENCE FOR BANKS AND QUASI-BANKS1. Customer acceptance policyQBs should develop clear customeracceptance policies and procedures,including a description of the types ofcustomer that are unacceptable to QBmanagement. In preparing such policies,factors such as customers’ background,country of origin, public or high profileposition, business activities or other riskindicators should be considered. QBsshould develop graduated customeracceptance policies and procedures thatrequire more extensive due diligence forhigh risk customers. For example, thepolicies may require the most basicaccount-opening requirements for aworking individual with a small accountbalance, whereas quite extensive duediligence may be deemed essential for anindividual with a high net worth whosesource of funds is unclear. Decisions toenter into business relationships with highrisk customers, such as individuals holdingimportant/prominent positions, public orprivate (see below), should be takenexclusively at senior management level.2. Customer identificationCustomer identification is an essentialelement of KYC standards. A customer isdefined as any person or entity that keepsan account with a quasi-bank and anyperson or entity on whose behalf anaccount is maintained, as well as thebeneficiaries of transactions conducted byprofessional financial intermediaries.Specifically, a customer should include anaccount-holder and the beneficial ownerof an account. A customer should alsoinclude the beneficiary of a trust, aninvestment fund, a pension fund or acompany whose assets are managed by anasset manager, or the grantor of a trust.QBs should establish a systematicprocedure for verifying the identity of newcustomers and should never enter abusiness relationship until the identity of anew customer is satisfactorily established.QBs should “document and enforcepolicies for identification of customers andthose acting on their behalf” 1 . The bestdocuments for verifying the identity ofcustomers are those most difficult to obtainillicitly and to counterfeit, such as passport,driver’s license or alien certificate ofregistration. Special attention should beexercised in the case of non-residentcustomers and in no case should a QB shortcircuitidentity procedures just because thenew customer is unable to present himselffor interview. The QB should always askitself why the customer has chosen to openan account in a foreign jurisdiction.The customer identification processapplies naturally at the outset of therelationship, but there is also a need toapply KYC standards to existing customeraccounts. Where such standards havebeen introduced only recently and do notas yet apply fully to existing customers, arisk assessment exercise can beundertaken and priority given to obtainingnecessary information, where it isdeficient, in respect of the higher risk cases.An appropriate time to review theinformation available on existing customersis when a transaction of significance takesplace, or when there is a material changein the way that the account is operated.However, if a QB is aware that it lackssufficient information about an existinghigh-risk customer, it should take steps to1Core Principles Methodology, Essential Criterion 2.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-c - Page 1

APP. Q-23-c08.12.31ensure that all relevant information isobtained as quickly as possible. In addition,the supervisor needs to set an appropriatetarget date for completion of a KYC reviewand regularization of all existing accounts.In any event, a QB should undertakeregular reviews of its customer base toestablish that it has up-to-date informationand a proper understanding of its accountholders’ identity and of their business.QBs that offer private banking servicesare particularly exposed to reputationalrisk. Private quasi-banking by natureinvolves a large measure of confidentiality.Private quasi-banking accounts can beopened in the name of an individual, acommercial business, a trust, anintermediary or a personalized investmentcompany. In each case reputational riskmay arise if the QB does not diligentlyfollow established KYC procedures. In nocircumstances should private quasi-bankingoperations function autonomously, or as a“QB within a QB” 1 , and no part of the QBshould ever escape the requiredprocedures. This means that all new clientsand new accounts should be approved byat least one person other than the privatequasi-banking relationship manager. Ifparticular safeguards are put in placeinternally to protect confidentiality of privatequasi-banking customers and their business,QBs must still ensure that at least equivalentscrutiny and monitoring of these customersand their business can be conducted, e.g.,they must be open to review bycompliance officers and auditors.2.1 General identification requirementsQBs need to obtain all informationnecessary to establish to their fullsatisfaction the identity of each newcustomer and the purpose and intendednature of the business relationship. Theextent and nature of the informationdepends on the type of applicant (personal,corporate, etc.) and the expected size ofthe account. National supervisors areencouraged to provide guidance to assistQBs in their designing their ownidentification procedures. Examples of thetype of information that would beappropriate are set out in Annex Q-23-c-1.QBs should apply their full KYCprocedures to applicants that plan totransfer an opening balance from anotherFI, bearing in mind that the previousaccount manager may have asked for theaccount to be removed because of aconcern about dubious activities.QBs should never agree to open anaccount or conduct ongoing business witha customer who insists on anonymity or“bearer” status or who gives a fictitiousname. Nor should confidential numbered 2accounts function as anonymous accountsbut they should be subject to exactly thesame KYC procedures as all othercustomer accounts, even if the test is carriedout by selected staff. Whereas a numberedaccount can offer additional protection forthe identity of the account-holder, theidentity must be known to a sufficientnumber of staff to operate proper duediligence. Such accounts should in nocircumstances be used to hide thecustomer identity from a QB’s compliancefunction or from the supervisors.QBs need to be vigilant in preventingcorporate business entities from being usedby natural persons as a method of operatinganonymous accounts. Personal assetholding vehicles, such as internationalbusiness companies (IBCs), may makeproper identification of customers orbeneficial owners difficult. A QB shouldtake all steps necessary to satisfy itself thatit knows the true identity of the ultimateowner of all such entities.1Some QBs insulate their private quasi-banking functions or create Chinese walls as a means of providing additionalprotection for customer confidentiality.2In a numbered account, the name of the beneficial owner is known to the QB but is substituted by an account number orcode name in subsequent documentation.Q RegulationsAppendix Q-23-c - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-23-c08.12.312.2 Specific identification issuesThere are a number of more detailedissues relating to customer identificationwhich need to be addressed. Particularcomments are invited on the issuesmentioned in this section. Several of theseare currently under consideration by theFATF as part of a general review of its fortyrecommendations, and the WorkingGroup recognizes the need to beconsistent with the FATF.2.2.1 Trust, nominee and fiduciaryaccounts or client accounts opened byprofessional intermediariesTrust, nominee and fiduciary accountscan be used to avoid customeridentification procedures. While it maybe legitimate under certain circumstancesto provide an extra layer of security toprotect the confidentiality of legitimateprivate quasi-banking customers, it isessential that the true relationship isunderstood. QBs should establish whetherthe customer is acting on behalf of anotherperson as trustee, nominee or professionalintermediary (e.g. a lawyer or anaccountant). If so, a necessary preconditionis receipt of satisfactory evidence of theidentity of any intermediaries and of thepersons upon whose behalf they areacting, as well as details of the nature ofthe trust or other arrangements in place.QBs may hold “pooled’ accounts (e.g.client accounts managed by law firms) oraccounts opened on behalf of pooledentities, such as mutual funds and moneymanagers. In such cases, QBs have todecide, given the circumstances, whetherthe customer is the intermediary, orwhether it would be more appropriate tolook through the intermediary to theultimate beneficial owners. In each case,the identity of the customer that is subjectto due diligence should be clearlyestablished. The beneficial owners shouldbe verified where possible. Where not,the QBs should perform due diligence onthe intermediary and establish to itscomplete satisfaction that the intermediaryhas a sound due diligence process for eachof its clients.Special care needs to be exercised ininitiating business transactions withcompanies that have nomineeshareholders or shares in bearer form.Satisfactory evidence of the identity ofbeneficial owners of all companies needsto be obtained.The above procedures may provedifficult for QBs in some countries tofollow. In the case of professionalintermediaries such as lawyers, theremight exist professional codes of conductpreventing the dissemination ofinformation concerning their clients. TheFATF is currently engaged in a review ofKYC procedures governing accountsopened by lawyers on behalf of clients.The Working Group has therefore nottaken a definitive position on this issue.2.2.2 Introduced businessThe performance of identificationprocedures can be time consuming andthere is a natural desire to limit anyinconvenience for new customers. Insome countries, it has therefore becomecustomary for QBs to rely on theprocedures undertaken by other QBs orintroducers when business is beingreferred. In doing so, QBs risk placingexcessive reliance on the due diligenceprocedures that they expect the introducersto have performed. Relying on duediligence conducted by an introducer,however reputable, does not in any wayremove the ultimate responsibility of therecipient QB to know its customers andtheir business. In particular, QBs should notrely on introducers that are subject to weakerstandards than those governing the QBs’ ownKYC procedures or that are unwilling to sharecopies of due diligence documentation.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-c - Page 3

APP. Q-23-c08.12.31The FATF is currently engaged in areview of the appropriateness of eligibleintroducers, i.e. whether they should beconfined to reputable QBs only or shouldextend to other regulated institutions,whether a QB should establish acontractual relationship with its introducersand whether it is appropriate to rely on athird party introducer at all. The WorkingGroup is still developing its thinking on thistopic.2.2.3 Reputational riskBusiness relationship with individualsholding important/prominent positions,public or private, and with persons orcompanies clearly related to them mayexpose a QB to significant reputational and/or legal risks.Accepting and managing funds fromsuch persons could put at risk the QB’s ownreputation and can undermine publicconfidence in the ethical standards of anentire financial centre, since such casesusually receive extensive media attentionand strong political reaction, even if theillegal origin of the assets is often difficultto prove. In addition, the QB may besubject to costly information requests andseizure orders from law enforcement orjudicial authorities (including internationalmutual assistance procedures in criminalmatters) and could be liable to actions fordamages by the state concerned or thevictims of a regime. Under certaincircumstances, the QB and/or its officersand employees themselves can be exposedto charges of money laundering, if theyknow or should have known that the fundsstemmed from corruption or other seriouscrimes.3. On-going monitoring of high riskaccountsOn-going monitoring of accounts andtransactions is an essential aspect ofeffective KYC procedures. QBs can onlyeffectively control and reduce their risk ifthey have an understanding of normal andreasonable account activity of theircustomers. Without such knowledge, theyare likely to fail in their duty to reportsuspicious transactions to the appropriateauthorities in cases where they arerequired to do so. The on-goingmonitoring process includes the following:QBs should develop “clear standardson what records must be kept oncustomer identification and individualtransactions and the retention period”. 1 Asthe starting point and natural follow-up ofthe identification process, QBs shouldobtain and keep up to date customeridentification papers and retain them forat least five years after an account isclosed. They should also retain allfinancial transaction records for at leastfive years after the transaction has takenplace.QBs should ensure that they haveadequate management informationsystems to provide managers andcompliance officers with timelyinformation needed to identify, analyseand effectively monitor higher risk customeraccounts. The types of reports that may beneeded include reports of missing accountopening documentation, transactions madethrough a customer account that are unusual,and aggregations of a customer’s totalrelationship with the QB.Senior management of a QB incharge of private quasi-banking businessshould know the personal circumstancesof the QB’s large/important customersand be alert to sources of third partyinformation. Every QB should draw itsown distinction between large/importantcustomers and others, and set thresholdindicators for them accordingly, takinginto account the country of origin andother risk factors. Significant transactions1Core Principles Methodology, Essential Criterion 2Q RegulationsAppendix Q-23-c - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-23-c08.12.31by high-risk customers should beapproved by a senior manager.QBs should have systems in place todetect unusual or suspicious patterns ofactivity. This can be done by establishinglimits for a particular class or category ofaccounts. Particular attention should bepaid to transactions that exceed theselimits. Certain types of transactions shouldalert QBs to the possibility that thecustomer is conducting undesirableactivities. They may include transactionsthat do not make economic or commercialsense, or that involve large amounts of cashdeposits that are not consistent with thenormal and expected transactions of thecustomer. Very high account turnover,inconsistent with the size of the balance,may indicate that funds are being “washed”through the account. A list of suspiciousactivities drawn up by supervisors can bevery helpful to QBs.QB should develop a clear policy andinternal guidelines, procedures andcontrols and remain especially vigilantregarding business relationships withindividuals holding important/prominentpositions, public or private, and high profileindividuals or with persons and companiesthat are clearly related to or associated withthem 1 .4. Risk ManagementEffective KYC procedures embraceroutines for proper management oversight,systems and controls, segregation of duties,training and other related policies. Theboard of directors of the QB should be fullycommitted to an effective KYC programmeby establishing appropriate procedures andensuring their effectiveness. QBs shouldappoint a senior officer with explicitresponsibility for ensuring that the QB’spolicies and procedures are, at a minimum,in accordance with local supervisorypractice. QBs should have clear writtenprocedures, communicated to allpersonnel, for staff to report suspicioustransactions to a specified senior manager.That manager must then assess whetherthe QB’s statutory obligations underrecognized suspicious activity reportingregimes require the transaction to bereported to the appropriate lawenforcement and supervisory authorities.All QBs must have an ongoingemployee-training programme so that QBstaff is adequately trained in KYCprocedures. The timing and content oftraining for various sectors of staff will needto be adapted by the QB for its own needs.Training requirements should have adifferent focus for new staff, front-line staff,compliance staff or staff dealing with newcustomers. New staff should be educatedin the importance of KYC policies and thebasic requirements at the QB. Front-linestaff members who deal directly with thepublic should be trained to verify thecustomer identity for new customers, toexercise due diligence in handlingaccounts of existing customers on anongoing basis and to detect patterns ofsuspicious activity. Regular refreshertraining should be provided to ensure thatstaff is reminded of their responsibilities andis kept informed of new developments. It iscrucial that all relevant staff fully understandthe need for and implement KYC policiesconsistently. A culture within QBs thatpromotes such understanding is the key tosuccessful implementation.1It is unrealistic to expect the QB to know or investigate every distant family, political or business connection of a foreigncustomer. The need to pursue suspicions will depend on the size of the assets or turnover, pattern of transactions,economic background, reputation of the country, plausibility of the customer’s explanations etc. It should however benoted that individuals holding important/prominent positions, public or private (or rather their family members andfriends) would not necessarily present themselves in that capacity, but rather as ordinary (albeit wealthy) businesspeople, masking the fact they owe their high position in a legitimate business corporation only to their privilegedrelation with the holder of the public office.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-c - Page 5

APP. Q-23-c08.12.31QBs’ internal audit and compliancefunctions have important responsibilities inevaluating and ensuring adherence to KYCpolicies and procedures. As a general rule,the compliance function provides anindependent evaluation of the QB’s ownpolicies and procedures, including legal andregulatory requirements. Its responsibilitiesshould include ongoing monitoring of staffperformance through sample testing ofcompliance and review of exception reportsto alert senior management or the Board ofDirectors if it believes management is failingto address KYC procedures in a responsiblemanner.Internal audit plays an important rolein independently evaluating the riskmanagement and controls, dischargingits responsibility to the Audit Committeeof the Board of Directors or a similaroversight body through periodicevaluations of the effectiveness ofcompliance with KYC policies andprocedures. Management should ensurethat audit functions are staffed adequatelywith individuals who are well-versed insuch policies and procedures. Inaddition, internal auditors should beproactive in following-up their findingsand criticisms.Q RegulationsAppendix Q-23-c - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-23-d08.12.31GENERAL IDENTIFICATION REQUIREMENTSThis annex presents a suggested list of identification requirements for personal customersand corporates. National supervisors are encouraged to provide guidance to assist QBs indesigning their own identification procedures.Personal customersFor personal customers, QBs need to obtain the following information:Name and/or names used,permanent residential address,date and place of birth,name of employer or nature of self-employment/business,specimen signature, andsource of funds.Additional information would relate to nationality or country of origin, public or highprofile position, etc. QBs should verify the information against original documents of identityissued by an official authority (examples including identity cards and passports). Suchdocuments should be those that are most difficult to obtain illicitly. In countries where newcustomers do not possess the prime identity documents, e.g., identity cards, passports ordriving licenses, some flexibility may be required. However, particular care should betaken in accepting documents that are easily forged or which can be easily obtained infalse identities. Where there is face to face contact, the appearance should be verifiedagainst an official document bearing a photograph. Any subsequent changes to the aboveinformation should also be recorded and verified.Corporate and other business customersFor corporate and other business customers, QBs should obtain evidence of their legalstatus, such as an incorporation document, partnership agreement, association documentsor a business licence. For large corporate accounts, a financial statement of the business ora description of the customer’s principal line of business should also be obtained. In addition,if significant changes to the company structure or ownership occur subsequently, furtherchecks should be made. In all cases, QBs need to verify that the corporation or businessentity exists and engages in its stated business. The original documents or certified copiesof certificates should be produced for verification.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-d - Page 1

APP. Q-23-e08.12.31GENERAL GUIDE TO ACCOUNT OPENING AND CUSTOMER IDENTIFICATION1. The Basel Committee on BankingSupervision in its paper on Customer DueDiligence for Banks published in October2001 referred to the intention of theWorking Group on Cross-border Banking 1to develop guidance on customeridentification. Customer identification is anessential element of an effective customerdue diligence programme which banksneed to put in place to guard againstreputational, operational, legal andconcentration risks. It is also necessary inorder to comply with anti-moneylaundering legal requirements and aprerequisite for the identification of bankaccounts related to terrorism.2. What follows is account openingand customer identification guidelines anda general guide to good practice based onthe principles of the Basel Committee’sCustomer due diligence for banks paper.This document, which has been developedby the Working Group on Cross-borderBanking, does not cover every eventuality,but instead focuses on some of themechanisms that banks can use indeveloping an effective customeridentification programme.3. These guidelines represent a startingpoint for supervisors and banks in the areaof customer identification. This documentdoes not address the other elements of theCustomer Due Diligence for banks paper,such as the ongoing monitoring ofaccounts. However, these elements shouldbe considered in the development ofeffective customer due diligence, antimoneylaundering and combating thefinancing of terrorism procedures.4. These guidelines may be adaptedfor use by national supervisors who areseeking to develop or enhance customeridentification programmes. However,supervisors should recognize that anycustomer identification programme shouldreflect the different types of customers(individual vs. institution) and the differentlevels of risk resulting from a customer’srelationship with a bank. Higher risktransactions and relationships, such asthose with politically exposed persons ororganizations, will clearly require greaterscrutiny than lower risk transactions andaccounts.5. Guidelines and best practicescreated by national supervisors should alsoreflect the various types of transactions thatare most prevalent in the national bankingsystem. For example, non-face-to-faceopening of accounts may be moreprevalent in one country than another. Forthis reason the customer identificationprocedures may differ between countries.6. Some identification documents aremore vulnerable to fraud than others. Forthose that are most susceptible to fraud, orwhere there is uncertainty concerning thevalidity of the document(s) presented, thebank should verify the informationprovided by the customer throughadditional inquiries or other sources ofinformation.7. Customer identification documentsshould be retained for at least five yearsafter an account is closed. All financialtransaction records should be retained forat least five years after the transaction hastaken place.1The Working Group on Cross-border Banking is a joint group consisting of members of the Basel Committee and of theOffshore Group of Banking Supervisors.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-e - Page 1

APP. Q-23-e08.12.318. These guidelines are divided intotwo sections covering different aspects ofcustomer identification. Section Adescribes what types of information shouldbe collected and verified for naturalpersons seeking to open accounts orperform transactions. Section B describeswhat types of information should becollected and verified for institutions andis in two parts, the first relating to corporatevehicles and the second to other types ofinstitutions.9. All the terms used in theseguidelines have the same meaning as inthe Customer due diligence for banks paper.A. Natural Persons10. For natural persons the followinginformation should be obtained, whereapplicable:• legal name and any other namesused (such as maiden name);• correct permanent address (the fulladdress should be obtained; a Post Officebox number is not sufficient);• telephone number, fax number,and e-mail address;• date and place of birth;• nationality;• occupation, public position heldand/or name of employer;• an official person identificationnumber or other unique identifiercontained in an unexpired officialdocument (e.g. passport, identification card,residence permit, social security records,driving license) that bears a photograph ofthe customer;• type of account and nature of thebanking relationship;• signature.11. The bank should verify thisinformation by at least one of the followingmethods:• confirming the date of birth from anofficial document (e.g. birth certificate,passport, identity card,social security records);• confirming the permanent address(e.g. utility bill, tax assessment, bankstatement, a letter from a public authority);• contacting the customer bytelephone, by letter or by e-mail to confirmthe information supplied after an accounthas been opened (e.g. a disconnectedphone, returned mail, or incorrect e-mailaddress should warrant further investigation);• confirming the validity of theofficial documentation provided throughcertification by an authorized person (e.g.embassy official, notary public).12. The examples quoted above arenot the only possibilities. In particularjurisdictions there may be other documentsof an equivalent nature which may beproduced as satisfactory evidence ofcustomer’s identity.13. FIs should apply equally effectivecustomer identification procedures for nonface-to-facecustomers as for thoseavailable for interview.14. From the information provided inparagraph 10, FIs should be able to makean initial assessment of a customer’s riskprofile. Particular attention needs to befocused on those customers identifiedthereby as having a higher risk profile andadditional inquiries made or informationobtained in respect of those customers toinclude the following:• evidence of an individual’spermanent address sought through a creditreference agency search, or throughindependent verification by home visits;• personal reference (i.e., by anexisting customer of the same institution);• prior bank reference and contactwith the bank regarding the customer;• source of wealth;• verification of employment, publicposition held (where appropriate).15. For one-off or occasionaltransactions where the amount of thetransaction or series of linked transactionsdoes not exceed an established minimumQ RegulationsAppendix Q-23-e - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-23-e08.12.31monetary value, it might be sufficient torequire and record only name and address.16. It is important that the customeracceptance policy is not so restrictive thatit results in a denial of access by thegeneral public to banking services,especially for people who are financiallyor socially disadvantaged.B. Institutions17. The underlying principles ofcustomer identification for natural personshave equal application to customeridentification for all institutions. Where inthe following the identification andverification of natural persons is involved,the foregoing guidance in respect of suchpersons should have equal application.18. The term institution includes anyentity that is not a natural person. Inconsidering the customer identificationguidance for the different types ofinstitutions, particular attention should begiven to the different levels of riskinvolved.I. Corporate Entities19. For corporate entities (i.e.corporations and partnerships), thefollowing information should be obtained:• name of institution;• principal place of institution’sbusiness operations;• mailing address of institution;• contact telephone and fax numbers;• some form of official identificationnumber, if available (e.g. tax identificationnumber);• the original or certified copy of theCertificate of Incorporation andMemorandum and Articles of Association;• the resolution of the Board ofDirectors to open an account andidentification of those who have authorityto operate the account;• nature and purpose of business andits legitimacy.20. The bank should verify thisinformation by at least one of the followingmethods:• for established corporate entities –reviewing a copy of the latest report andaccounts (audited, if available);• conducting an inquiry by a businessinformation service, or an undertaking froma reputable and known firm of lawyers oraccountants confirming the documentssubmitted;• undertaking a company searchand/or other commercial enquiries to seethat the institution has not been, or is notin the process of being, dissolved, struckoff, wound up or terminated;• utilising an independentinformation verification process, such asby accessing public and private databases;• obtaining prior bank references;• visiting the corporate entity, wherepractical;• contacting the corporate entity bytelephone, mail or e-mail.21. The bank should also takereasonable steps to verify the identity andreputation of any agent that opens anaccount on behalf of a corporate customer,if that agent is not an officer of the corporatecustomer.Corporations/Partnerships22. For corporations/partnerships, theprincipal guidance is to look behind theinstitution to identify those who havecontrol over the business and thecompany’s/partnership’s assets, includingthose who have ultimate control. Forcorporations, particular attention should bepaid to shareholders, signatories, or otherswho inject a significant proportion of thecapital or financial support or otherwiseexercise control. Where the owner isanother corporate entity or trust, theobjective is to undertake reasonablemeasures to look behind that company orentity and to verify the identity of theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-e - Page 3

APP. Q-23-e08.12.31principals. What constitutes control for thispurpose will depend on the nature of acompany, and may rest in those who aremandated to manage funds, accounts orinvestments without requiring furtherauthorization, and who would be in aposition to override internal proceduresand control mechanisms. For partnerships,each partner should be identified and it isalso important to identify immediate familymembers that have ownership control.23. Where a company is listed on arecognized stock exchange or is asubsidiary of such a company then thecompany itself may be considered to bethe principal to be identified. However,consideration should be given to whetherthere is effective control of a listedcompany by an individual, small groupof individuals or another corporate entityor trust. If this is the case then thosecontrollers should also be considered tobe principals and identified accordingly.II. Other Types of Institution24. For the account categories referredto paragraphs 26 to 34, the followinginformation should be obtained in additionto that required to verify the identity of theprincipals:• name of account;• mailing address;• contact telephone and faxnumbers;• some form of official identificationnumber, if available (e.g. tax identificationnumber);• description of the purpose/activitiesof the account holder (e.g. in a formalconstitution);• copy of documentation confirmingthe legal existence of the account holder(e.g. register of charities).25. The bank should verify thisinformation by at least one of the following:• obtaining an independentundertaking from a reputable and knownfirm of lawyers or accountants confirmingthe documents submitted;• obtaining prior bank references;• accessing public and privatedatabases or official sources.Retirement Benefit Programmes26. Where an occupational pensionprogramme, employee benefit trust orshare option plan is an applicant for anaccount the trustee and any other personwho has control over the relationship(e.g. administrator, programme manager,and account signatories) should beconsidered as principals and the bankshould take steps to verify their identities.Mutuals/Friendly Societies, Cooperativesand Provident Societies27. Where these entities are anapplicant for an account, the principals tobe identified should be considered to bethose persons exercising control orsignificant influence over the organization’sassets. This will often include boardmembers plus executives and accountsignatories.Charities, Clubs and Associations28. In the case of accounts to beopened for charities, clubs, and societies,the bank should take reasonable steps toidentify and verify at least two signatoriesalong with the institution itself. Theprincipals who should be identified shouldbe considered to be those personsexercising control or significant influenceover the organization’s assets. This will ofteninclude members of a governing body orcommittee, the President, any boardmembers, the treasurer, and all signatories.29. In all cases independent verificationshould be obtained that the personsinvolved are true representatives of theinstitution. Independent confirmationshould also be obtained of the purpose ofthe institution.Q RegulationsAppendix Q-23-e - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-23-e08.12.31Trusts and Foundations30. When opening an account for atrust, the bank should take reasonable stepsto verify the trustee(s), the settler(s) of thetrust (including any persons settling assets intothe trust) any protector(s), beneficiary(ies), andsignatories. Beneficiaries should be identifiedwhen they are defined. In the case of afoundation, steps should be taken to verifythe founder, the managers/directors andthe beneficiaries.Professional Intermediaries31. When a professional intermediaryopens a client account on behalf of a singleclient that client must be identified.Professional intermediaries will often open“pooled” accounts on behalf of a numberof entities. Where funds held by theintermediary are not co-mingled butwhere there are “sub-accounts” which canbe attributable to each beneficial owner,all beneficial owners of the account heldby the intermediary should be identified.Where the funds are co-mingled, the bankshould look through to the beneficialowners; however, there may becircumstances which should be set out insupervisory guidance where the bank maynot need to look beyond the intermediary(e.g. when the intermediary is subject tothe same due diligence standards inrespect of its client base as the bank).32. Where such circumstances applyand an account is opened for an open orclosed ended investment company, unittrust or limited partnership which is alsosubject to the same diligence standards inrespect of its client base as the bank, thefollowing should be considered asprincipals and the bank should take stepsto identify:• the fund itself;• its directors or any controllingboard where it is a company;• its trustee where it is a unit trust;• its managing (general) partnerwhere it is a limited partnership;• account signatories;• any other person who has controlover the relationship e.g. fundadministrator or manager.33. Where other investment vehiclesare involved, the same steps should betaken as in paragraph 32 where it isappropriate to do so. In addition all reasonablesteps should be taken to verify the identityof the beneficial owners of the funds andof those who have control of the funds.34. Intermediaries should be treated asindividual customers of the bank and thestanding of the intermediary should beseparately verified by obtaining theappropriate information drawn from theitemised lists included in paragraphs19-20 above.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-e - Page 5

APP. Q-23-f08.12.31Anti-Money Laundering Council Resolution No. 02Series of 2005Pursuant to Section 9-c of the Anti-Money Laundering Act, as amended,covered institutions (CIs) shall report to theAMLC all covered transactions andsuspicious transactions within five (5)working days from occurrence thereof,subject to the circumstances described inResolution No. 292 dated 24 October 2003which remains in full force and effect.WHEREFORE, the Council, resolves asit hereby resolved, to approve thefollowing policies and guidelines inreckoning CIs’ compliance with theprescribed reporting period:1. The following non-working daysare excluded from the counting of theprescribed reporting period:• weekend (Saturday and Sunday)• official regular national holiday• officially declared national holiday(special non-working day nationwide)• officially declared local holiday inthe locality where AMLC Secretariat Officeis located2. A “non-reporting day” may bedeclared by the AMLC Secretariat whenthe File Transfer and Reporting Facility(FTRF), used by the CIs in transmitting theirelectronic reports to AMLC, is unavailableto all CIs for at least five (5) consecutivehours during the day• AMLC-declared “non-reportingday” is excluded from the counting of theprescribed reporting period.• The Executive Director of theAMLC Secretariat (or the Officer-in-charge)is authorized to declare such day as a “nonreporting”day upon notification andjustification by the Deputy Director ofIMAS AMLC Secretariat.3. Local holidays, except for officiallydeclared local holidays in the locality wherethe AMLC Secretariat Office is located, aretreated as working days even for CIslocated in such locality declared as onholiday, and hence, included in thecounting of the prescribed reportingperiod. However, the CIs affected may filea deviation request with the AMLCSecretariat.• CI’s request for deviation shall besubject to approval of the ExecutiveDirector of the AMLC Secretariat (or theOfficer-in-charge) upon recommendationof the Deputy Director of IMAS AMLCSecretariat. It shall be the basis ofmanually recomputing whatever penaltiesthat would be automatically computed byTMAS.4. Officially-declared non-workingdays in localities or regions affected bynatural calamities such as flood, typhoon,earthquake, etc. may be excluded fromthe counting of the prescribed reportingperiod for CIs located in affected localitiesor regions subject to submission ofdeviation request by the CI.• CI’s request for deviation shall besubject to approval of the ExecutiveDirector of the AMLC Secretariat (or theOfficer-in-charge) upon recommendationof the Deputy Director of IMAS AMLCSecretariat. It shall be the basis of manuallyrecomputing whatever penalties thatwould be automatically computed byTMAS.WHEREFORE, the Council, resolvesas it hereby resolved, to consider andinclude the foregoing policies andguidelines in the ongoing developmentand implementation of AMLC’s TransactionMonitoring and Analysis System (TMAS)and specifically, for the computation of thepenalty for delayed reporting by the CIs.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-23-f - Page 1

APP. Q-2409.12.31ACTIVITIES WHICH MAY BE CONSIDERED UNSAFEAND UNSOUND PRACTICES(Appendix to Secs. 4149Q and 4408Q and Subsec. 4301Q.6)The following activities are consideredonly as guidelines and are not irrebutablypresumed to be unsafe or unsound.Conversely, not all practices which mightunder the circumstances be termed unsafeor unsound are mentioned here. TheMonetary Board may now and thenconsider other acts/omissions as unsafe orunsound practices.a. Operating with management whosepolicies and practices are detrimental to theQB/trust entity and jeopardize the safety ofits deposit substitutes/trust accounts.b. Operating with total adjustedcapital and reserves that are inadequate inrelation to the kind and quality of the assetsof the QB/trust entity.c. Operating in a way that produces adeficit in net operating income withoutadequate measures to ensure a surplus innet operating income in the future.d. Operating with a serious lack ofliquidity, especially in view of the asset anddeposit substitute/liability structure of theQB/trust entity.e. Engaging in speculative andhazardous investment policies.f. Paying excessive cash dividends inrelation to the capital position, earningscapacity and asset quality of the QB/trustentity.g. Excessive reliance on large, highcostor volatile borrowings to fundaggressive growth that may beunsustainable.For this purpose, a QB is consideredoffering high-cost borrowings if the effectiveinterest rate paid on said borrowings and/or non-cash incentives is fifty percent (50%)over the prevailing comparable marketmedian rate for similar QB categories,maturities and currency denomination.h. Excessive reliance on letters of crediteither issued by the QB/trust entity oraccepted as collateral to loans advanced.i. Excessive amounts of loanparticipations sold.j. Paying interest on participationswithout advising participating institutionthat the source of interest was not from theborrower.k. Selling participations withoutdisclosing to the purchasers of thoseparticipations material, non-publicinformation known to the QB/trust entity.l. Failure to limit, control anddocument contingent liabilities.m. Engaging in hazardous lending andlax collection policies and practices, asevidenced by any of the followingcircumstances:(1) An excessive volume of loanssubject to adverse classification;(2) An excessive volume of loanswithout adequate documentation, includecredit information;(3) Excessive net loan losses;(4) An excessive volume of loans inrelation to the total assets and depositsubstitutes/trust liabilities of the QB/trustentity;(5) An excessive volume of weak andself-serving loans to persons connected withthe QB/trust entity, especially if a significantportion of these loans are adverselyclassified;(6) Excessive concentrations of credit,especially if a substantial portion of thiscredit is adversely classified;(7) Indiscriminate participation in weakand undocumented loans originated byother institutions;(8) Failing to adopt written loanpolicies;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-24 - Page 1

APP. Q-2409.12.31(9) An excessive volume of past dueor NPLs;(10) Failure to diversify the loanportfolio/asset mix of the institution;(11) Failure to make provision for anadequate reserve for possible loan losses;(12) High incidence of spurious andfraudulent loans due to patently inadequaterisk management systems and proceduresresulting in significant impairment of capital;(13) QB’s niche mostly consists ofborrowers who have impaired or limitedcredit history, or majority of the loans areeither clean/unsecured or backed withminimum collateral values except thoseunderwritten using microfinance technologyconsistent with Sec. X361 and otheracceptable cash flow-based lending systems;and the QB does not have a robust riskmanagement system in place leaving the QBvulnerable to losses;(14) Loan rates are excessively higherthan market rates to compensate the addedor higher risks involved. Excessively higherrates are those characterized by effectiveinterest rates that are fifty percent (50%) overthe prevailing comparable market medianrate for similar loan types, maturities andcollaterals; and(15) Assignment of loans on withoutrecourse basis with real estate propertiesas payment, resulting in total investmentin real estate in excess of the prescribedceiling.n. Permitting officers to engage inlending practices beyond the scope of theirpositions.o. Operating the QB/trust entity withinadequate internal controls.p. Failure to keep accurate andupdated books and records.q. Operating the institution withexcessive volume of out-of-territory loans.r. Excessive volume of non-earningassets.s. Failure to heed warnings andadmonitions of the supervisory andregulatory authorities.t. Continued and flagrant violation ofany law, rule, regulation or written agreementbetween the institution and the BSP.u. Any other action likely to causeinsolvency or substantial dissipation ofassets or earnings of the institution or likelyto seriously weaken its condition orotherwise seriously prejudice the interestof its investors/clients.v. Non-observance of the principlesand the requirements for managing andmonitoring large exposures and credit riskconcentrations under Subsec. 4301Q.6aand b.w. Improper or non-documentation ofrepurchase agreements coveringgovernment securities and commercialpapers and other negotiable and nonnegotiablesecurities or instruments.(As amended by Circular No. 640 dated 16 January 2009)Q RegulationsAppendix Q-24 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31REVISED IMPLEMENTING RULES AND REGULATIONSR.A. NO. 9160, AS AMENDED BY R.A. NO. 9194[Appendix to Sec. 4801Q (2008 - 4691Q)]RULE 1TITLERule 1.a. Title. - These Rules shall beknown and cited as the “Revised Rules andRegulations Implementing R.A. No. 9160”,(the Anti-Money Laundering Act of 2001[AMLA]), as amended by R.A. No. 9194.Rule 1.b. Purpose. - These Rules arepromulgated to prescribe the proceduresand guidelines for the implementation ofthe AMLA, as amended by R.A. No. 9194.RULE 2DECLARATION OF POLICYRule 2. Declaration of Policy. - It is herebydeclared the policy of the State to protectthe integrity and confidentiality of bankaccounts and to ensure that the Philippinesshall not be used as a money-launderingsite for the proceeds of any unlawfulactivity. Consistent with its foreign policy,the Philippines shall extend cooperation intransnational investigations andprosecutions of persons involved in moneylaundering activities wherever committed.RULE 3DEFINITIONSRule 3. Definitions. – For purposes of thisAct, the following terms are hereby definedas follows:Rule 3.a. Covered Institution refers to:Rule 3.a.1. Banks, offshore bankingunits, quasi-banks, trust entities, non-stocksavings and loan associations, pawnshops,and all other institutions, including theirsubsidiaries and affiliates supervisedand/or regulated by the Bangko Sentral ngPilipinas (BSP).(a) A subsidiary means an entity morethan fifty percent (50%) of the outstandingvoting stock of which is owned by a bank,quasi-bank, trust entity or any otherinstitution supervised or regulated by theBSP.(b) An affiliate means an entity at leasttwenty percent (20%) but not exceeding fiftypercent (50%) of the voting stock of whichis owned by a bank, quasi-bank, trust entity,or any other institution supervised and/orregulated by the BSP.Rule 3.a.2. Insurance companies,insurance agents, insurance brokers,professional reinsurers, reinsurance brokers,holding companies, holding companysystems and all other persons and entitiessupervised and/or regulated by theInsurance Commission (IC).(a) An insurance company includesthose entities authorized to transactinsurance business in the Philippines,whether life or non-life and whetherdomestic, domestically incorporated orbranch of a foreign entity. A contract ofinsurance is an agreement whereby oneundertakes for a consideration to indemnifyanother against loss, damage or liabilityarising from an unknown or contingentevent. Transacting insurance businessincludes making or proposing to make, asinsurer, any insurance contract, or as surety,any contract of suretyship as a vocation andnot as merely incidental to any otherlegitimate business or activity of the surety,doing any kind of business specificallyrecognized as constituting the doing of aninsurance business within the meaning ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 1

APP. Q-2508.12.31Presidential Decree (P.D.) No. 612, asamended, including a reinsurancebusiness and doing or proposing to doany business in substance equivalent toany of the foregoing in a mannerdesigned to evade the provisions ofP.D. No. 612, as amended.(b) An insurance agent includes anyperson who solicits or obtains insuranceon behalf of any insurance company ortransmits for a person other than himselfan application for a policy or contract ofinsurance to or from such company oroffers or assumes to act in the negotiationof such insurance.(c) An insurance broker includes anyperson who acts or aids in any manner insoliciting, negotiating or procuring themaking of any insurance contract or inplacing risk or taking out insurance, onbehalf of an insured other than himself.(d) A professional reinsurer includesany person, partnership, association orcorporation that transacts solely andexclusively reinsurance business in thePhilippines, whether domestic,domestically incorporated or a branch ofa foreign entity. A contract of reinsuranceis one by which an insurer procures a thirdperson to insure him against loss orliability by reason of such originalinsurance.(e) A reinsurance broker includesany person who, not being a dulyauthorized agent, employee or officerof an insurer in which any reinsuranceis effected, acts or aids in any mannerin negotiating contracts of reinsuranceor placing risks of effecting reinsurance,for any insurance company authorizedto do business in the Philippines.(f) A holding company includes anyperson who directly or indirectly controlsany authorized insurer. A holdingcompany system includes a holdingcompany together with its controlledinsurers and controlled persons.Rule 3.a.3. (i) Securities dealers,brokers, salesmen, associated persons ofbrokers or dealers, investment houses,investment agents and consultants,trading advisors, and other entitiesmanaging securities or rendering similarservices, (ii) mutual funds or open-endinvestment companies, close-endinvestment companies, common trustfunds, pre-need companies or issuers andother similar entities; (iii) foreign exchangecorporations, money changers, moneypayment, remittance, and transfercompanies and other similar entities, and(iv) other entities administering orotherwise dealing in currency,commodities or financial derivatives basedthereon, valuable objects, cash substitutesand other similar monetary instruments orproperty supervised and/or regulated bythe Securities and Exchange Commission(SEC).(a) A securities broker includes aperson engaged in the business of buyingand selling securities for the account ofothers.(b) A securities dealer includes anyperson who buys and sells securities forhis/her account in the ordinary course ofbusiness.(c) A securities salesman includes anatural person, employed as such or as anagent, by a dealer, issuer or broker to buyand sell securities.(d) An associated person of a brokeror dealer includes an employee thereofwho directly exercises control orsupervisory authority, but does not includea salesman, or an agent or a person whosefunctions are solely clerical or ministerial.(e) An investment house includes anenterprise which engages or purports toengage, whether regularly or on anisolated basis, in the underwriting ofsecurities of another person or enterprise,including securities of the Governmentand its instrumentalities.Q RegulationsAppendix Q-25 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31(f) A mutual fund or an open-endinvestment company includes aninvestment company which is offering forsale or has outstanding, any redeemablesecurity of which it is the issuer.(g) A closed-end investment companyincludes an investment company other thanopen-end investment company.(h) A common trust fund includes afund maintained by an entity authorizedto perform trust functions under a writtenand formally established plan, exclusivelyfor the collective investment andreinvestment of certain money representingparticipation in the plan received by it in itscapacity as trustee, for the purpose ofadministration, holding or management ofsuch funds and/or properties for the use,benefit or advantage of the trustor or ofothers known as beneficiaries.(i) A pre-need company or issuerincludes any corporation supervised and/or regulated by the SEC and is authorizedor licensed to sell or offer for sale pre-needplans. Pre-need plans are contracts whichprovide for the performance of futureservice(s) or payment of future monetaryconsideration at the time of actual need,payable either in cash or installment by theplanholder at prices stated in the contract withor without interest or insurance coverage andincludes life, pension, education, internmentand other plans, which the Commission may,from time to time, approve.(j) A foreign exchange corporationincludes any enterprise which engages orpurports to engage, whether regularly or onan isolated basis, in the sale and purchaseof foreign currency notes and such otherforeign-currency denominated non-bankdeposit transactions as may be authorizedunder its articles of incorporation.(k) Investment Advisor/Agent/Consultant shall refer to any person:(1) who for an advisory fee is engagedin the business of advising others, eitherdirectly or through circulars, reports,publications or writings, as to the value ofany security and as to the advisability oftrading in any security; or(2) who for compensation and as partof a regular business, issues orpromulgates, analyzes reports concerningthe capital market, except:(a) any bank or trust company;(b) any journalist, reporter, columnist,editor, lawyer, accountant, teacher;(c) the publisher of any bonafidenewspaper, news, business or financialpublication of general and regularcirculation, including their employees;(d) any contract market;(e) such other person not within theintent of this definition, provided that thefurnishing of such service by the foregoingpersons is solely incidental to the conductof their business or profession.(3) any person who undertakes themanagement of portfolio securities ofinvestment companies, including thearrangement of purchases, sales orexchanges of securities.(l) A moneychanger includes anyperson in the business of buying or sellingforeign currency notes.(m) A money payment, remittanceand transfer company includes any personoffering to pay, remit or transfer ortransmit money on behalf of any personto another person.(n) “Customer” refers to any personor entity that keeps an account, orotherwise transacts business, with acovered institution and any person orentity on whose behalf an account ismaintained or a transaction is conducted,as well as the beneficiary of saidtransactions. A customer also includes thebeneficiary of a trust, an investment fund,a pension fund or a company or personwhose assets are managed by an assetmanager, or a grantor of a trust. It includesany insurance policy holder, whetheractual or prospective.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 3

APP. Q-2508.12.31(o) “Property” includes any thing oritem of value, real or personal, tangible orintangible, or any interest therein or anybenefit, privilege, claim or right withrespect thereto.Rule 3.b. Covered transaction is atransaction in cash or other equivalentmonetary instrument involving a totalamount in excess of PhP500,000.00 withinone (1) banking day.Rule 3.b.1. Suspicious transactions aretransactions, regardless of amount, whereany of the following circumstances exists:(1) There is no underlying legal or tradeobligation, purpose or economicjustification;(2) The client is not properly identified;(3) The amount involved is notcommensurate with the business orfinancial capacity of the client;(4) Taking into account all knowncircumstances, it may be perceived that theclient’s transaction is structured in order toavoid being the subject of reportingrequirements under the act;(5) Any circumstance relating to thetransaction which is observed to deviatefrom the profile of the client and/or theclient’s past transactions with the coveredinstitution;(6) The transaction is in any way relatedto an unlawful activity or any moneylaundering activity or offense under this actthat is about to be, is being or has beencommitted; or(7) Any transaction that is similar,analogous or identical to any of theforegoing.Rule 3.c. Monetary instrument refers to:(1) Coins or currency of legal tender ofthe Philippines, or of any other country;(2) Drafts, checks and notes;(3) Securities or negotiable instruments,bonds, commercial papers, depositcertificates, trust certificates, custodialreceipts or deposit substitute instruments,trading orders, transaction tickets andconfirmations of sale or investments andmoney market instruments;(4) Contracts or policies of insurance,life or non-life, and contracts of suretyship;and(5) Other similar instruments wheretitle thereto passes to another byendorsement, assignment or delivery.Rule 3.d. Offender refers to any personwho commits a money launderingoffense.Rule 3.e. Person refers to any natural orjuridical person.Rule 3.f. Proceeds refers to an amountderived or realized from an unlawfulactivity. It includes:(1) All material results, profits, effectsand any amount realized from anyunlawful activity;(2) All monetary, financial oreconomic means, devices, documents,papers or things used in or having anyrelation to any unlawful activity; and(3) All moneys, expenditures,payments, disbursements, costs, outlays,charges, accounts, refunds and othersimilar items for the financing, operations,and maintenance of any unlawful activity.Rule 3.g. Supervising authority refers tothe BSP, the SEC and the IC. Where theBSP, SEC or IC supervision applies onlyto the registration of the coveredinstitution, the BSP, the SEC or the IC,within the limits of the AMLA, shall havethe authority to require and ask assistancefrom the government agency havingregulatory power and/or licensing authorityover said covered institution for theimplementation and enforcement of theAMLA and these Rules.Q RegulationsAppendix Q-25 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31Rule 3.h. Transaction refers to any actestablishing any right or obligation orgiving rise to any contractual or legalrelationship between the parties thereto.It also includes any movement of funds byany means with a covered institution.Rule 3.i. Unlawful activity refers to any actor omission or series or combination thereofinvolving or having relation, to thefollowing:(A) Kidnapping for ransom under Article267 of Act No. 3815, otherwise known asthe Revised Penal Code, as amended;(1) Kidnapping for ransom(B) Sections 4, 5, 6, 8, 9, 10, 12, 13,14, 15 and 16 of R.A. No. 9165, otherwiseknown as the Comprehensive DangerousDrugs Act of 2002;(2) Importation of prohibited drugs;(3) Sale of prohibited drugs;(4) Administration of prohibited drugs;(5) Delivery of prohibited drugs(6) Distribution of prohibited drugs(7) Transportation of prohibited drugs(8) Maintenance of a Den, Dive orResort for prohibited users(9) Manufacture of prohibited drugs(10)Possession of prohibited drugs(11)Use of prohibited drugs(12)Cultivation of plants which aresources of prohibited drugs(13)Culture of plants which are sourcesof prohibited drugs(C) Section 3 paragraphs b, c, e, g, hand i of R.A. No. 3019, as amended,otherwise known as the Anti-Graft andCorrupt Practices Act;(14)Directly or indirectly requesting orreceiving any gift, present, share,percentage or benefit for himself or for anyother person in connection with anycontract or transaction between theGovernment and any party, wherein thepublic officer in his official capacity has tointervene under the law;(15) Directly or indirectly requestingor receiving any gift, present or otherpecuniary or material benefit, for himselfor for another, from any person for whomthe public officer, in any manner orcapacity, has secured or obtained, or willsecure or obtain, any government permitor license, in consideration for the helpgiven or to be given, without prejudice toSection 13 of R.A. No. 3019;(16) Causing any undue injury to anyparty, including the government, or givingany private party any unwarranted benefits,advantage or preference in the dischargeof his official, administrative or judicialfunctions through manifest partiality,evident bad faith or gross inexcusablenegligence;(17) Entering, on behalf of thegovernment, into any contract ortransaction manifestly and grosslydisadvantageous to the same, whether ornot the public officer profited or will profitthereby;(18) Directly or indirectly havingfinancial or pecuniary interest in anybusiness contract or transaction inconnection with which he intervenes ortakes part in his official capacity, or inwhich he is prohibited by the Constitutionor by any law from having any interest;(19) Directly or indirectly becominginterested, for personal gain, or havingmaterial interest in any transaction or actrequiring the approval of a board, panel orgroup of which he is a member, and whichexercise of discretion in such approval,even if he votes against the same or hedoes not participate in the action of theboard, committee, panel or group.(D) Plunder under R.A. No. 7080, asamended;(20) Plunder through misappropriation,conversion, misuse or malversation ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 5

APP. Q-2508.12.31public funds or raids upon the publictreasury;(21) Plunder by receiving, directly orindirectly, any commission, gift, share,percentage, kickbacks or any other formof pecuniary benefit from any person and/or entity in connection with anygovernment contract or project or byreason of the office or position of the publicofficer concerned;(22) Plunder by the illegal or fraudulentconveyance or disposition of assetsbelonging to the National Government orany of its subdivisions, agencies,instrumentalities or government-owned orcontrolled corporations or their subsidiaries;(23) Plunder by obtaining, receiving oraccepting, directly or indirectly, any sharesof stock, equity or any other form of interestor participation including the promise offuture employment in any businessenterprise or undertaking;(24) Plunder by establishing agricultural,industrial or commercial monopolies or othercombinations and/or implementation ofdecrees and orders intended to benefitparticular persons or special interests;(25) Plunder by taking undueadvantage of official position, authority,relationship, connection or influence tounjustly enrich himself or themselves at theexpense and to the damage and prejudiceof the Filipino people and the republic ofthe Philippines.(E) Robbery and extortion underArticles 294, 295, 296, 299, 300, 301 and302 of the Revised Penal Code, asamended;(26) Robbery with violence orintimidation of persons;(27) Robbery with physical injuries,committed in an uninhabited place and bya band, or with use of firearms on a street,road or alley;(28) Robbery in an uninhabited house orpublic building or edifice devoted to worship.(F) Jueteng and Masiao punished asillegal gambling under P.D. No. 1602;(29) Jueteng;(30) Masiao.(G) Piracy on the high seas under theRevised Penal Code, as amended andP.D. No. 532;(31) Piracy on the high seas;(32) Piracy in inland Philippine waters;(33) Aiding and abetting pirates andbrigands.(H) Qualified theft under Article 310of the Revised Penal Code, as amended;(34) Qualified theft.(I) Swindling under Article 315 of theRevised Penal Code, as amended;(35) Estafa with unfaithfulness or abuseof confidence by altering the substance,quality or quantity of anything of valuewhich the offender shall deliver by virtueof an obligation to do so, even though suchobligation be based on an immoral or illegalconsideration;(36) Estafa with unfaithfulness or abuseof confidence by misappropriating orconverting, to the prejudice of another,money, goods or any other personalproperty received by the offender in trustor on commission, or for administration, orunder any other obligation involving theduty to make delivery or to return the same,even though such obligation be totally orpartially guaranteed by a bond; or bydenying having received such money,goods, or other property;(37) Estafa with unfaithfulness or abuseof confidence by taking undue advantageof the signature of the offended party inblank, and by writing any document abovesuch signature in blank, to the prejudice ofthe offended party or any third person;(38) Estafa by using a fictitious name,or falsely pretending to possess power,influence, qualifications, property, credit,Q RegulationsAppendix Q-25 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31agency, business or imaginarytransactions, or by means of other similardeceits;(39) Estafa by altering the quality,fineness or weight of anything pertainingto his art or business;(40) Estafa by pretending to havebribed any government employee;(41) Estafa by postdating a check, orissuing a check in payment of anobligation when the offender has no fundsin the bank, or his funds deposited thereinwere not sufficient to cover the amountof the check;(42) Estafa by inducing another, bymeans of deceit, to sign any document;(43) Estafa by resorting to somefraudulent practice to ensure success in agambling game;(44) Estafa by removing, concealingor destroying, in whole or in part, anycourt record, office files, document or anyother papers.(J) Smuggling under R.A. Nos. 455and 1937;(45) Fraudulent importation of anyvehicle;(46) Fraudulent exportation of anyvehicle;(47) Assisting in any fraudulentimportation;(48) Assisting in any fraudulentexportation;(49) Receiving smuggled article afterfraudulent importation;(50) Concealing smuggled articleafter fraudulent importation;(51) Buying smuggled article afterfraudulent importation;(52) Selling smuggled article afterfraudulent importation;(53) Transportation of smuggledarticle after fraudulent importation;(54) Fraudulent practices againstcustoms revenue.(K) Violations under R.A. No. 8792,otherwise known as the ElectronicCommerce Act of 2000;K.1. Hacking or cracking, which refersto:(55) unauthorized access into orinterference in a computer system/server orinformation and communication system; or(56) any access in order to corrupt, alter,steal, or destroy using a computer or othersimilar information and communicationdevices, without the knowledge and consentof the owner of the computer or informationand communications system, including(57) the introduction of computerviruses and the like, resulting in thecorruption, destruction, alteration, theft orloss of electronic data messages orelectronic document;K.2. Piracy, which refers to:(58) the unauthorized copying,reproduction,(59) the unauthorized dissemination,distribution,(60) the unauthorized importation,(61) the unauthorized use, removal,alteration, substitution, modification,(62) the unauthorized storage,uploading, downloading, communication,making available to the public, or(63) the unauthorized broadcasting, ofprotected material, electronic signature orcopyrighted works including legallyprotected sound recordings or phonogramsor information material on protected works,through the use of telecommunicationnetworks, such as, but not limited to, theinternet, in a manner that infringesintellectual property rights;K.3. Violations of the Consumer Act orR.A. No. 7394 and other relevant orpertinent laws through transactions coveredby or using electronic data messages orelectronic documents:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 7

APP. Q-2508.12.31(64) Sale of any consumer product thatis not in conformity with standards underthe Consumer Act;(65) Sale of any product that has beenbanned by a rule under the Consumer Act;(66) Sale of any adulterated ormislabeled product using electronicdocuments;(67) Adulteration or misbranding ofany consumer product;(68) Forging, counterfeiting orsimulating any mark, stamp, tag, label orother identification device;(69) Revealing trade secrets;(70) Alteration or removal of thelabeling of any drug or device held for sale;(71) Sale of any drug or device notregistered in accordance with the provisionsof the E-Commerce Act;(72) Sale of any drug or device by anyperson not licensed in accordance with theprovisions of the E-Commerce Act;(73) Sale of any drug or device beyondits expiration date;(74) Introduction into commerce of anymislabeled or banned hazardous substance;(75) Alteration or removal of thelabeling of a hazardous substance;(76) Deceptive sales acts and practices;(77) Unfair or unconscionable sales actsand practices;(78) Fraudulent practices relative toweights and measures;(79) False representations inadvertisements as the existence of awarranty or guarantee;(80) Violation of price tag requirements;(81) Mislabeling consumer products;(82) False, deceptive or misleadingadvertisements;(83) Violation of required disclosureson consumer loans;(84) Other violations of the provisionsof the E-Commerce Act;(L) Hijacking and other violationsunder R.A. No. 6235; destructive arsonand murder, as defined under the RevisedPenal Code, as amended, including thoseperpetrated by terrorists against noncombatantpersons and similar targets;(85) Hijacking;(86) Destructive arson;(87) Murder;(88) Hijacking, destructive arson ormurder perpetrated by terrorists againstnon-combatant persons and similar targets;(M) Fraudulent practices and otherviolations under R.A. No. 8799, otherwiseknown as the Securities Regulation Codeof 2000;(89) Sale, offer or distribution ofsecurities within the Philippines without aregistration statement duly filed with andapproved by the SEC;(90) Sale or offer to the public of anypre-need plan not in accordance with therules and regulations which the SEC shallprescribe;(91) Violation of reportorialrequirements imposed upon issuers ofsecurities;(92) Manipulation of security prices bycreating a false or misleading appearanceof active trading in any listed securitytraded in an Exchange or any other tradingmarket;(93) Manipulation of security prices byeffecting, alone or with others, a series oftransactions in securities that raises theirprices to induce the purchase of a security,whether of the same or different class, ofthe same issuer or of a controlling,controlled or commonly controlledcompany by others;(94) Manipulation of security prices byeffecting, alone or with others, a series oftransactions in securities that depressestheir price to induce the sale of a security,whether of the same or different class, ofthe same issuer or of a controlling,controlled or commonly controlledcompany by others;Q RegulationsAppendix Q-25 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31(95) Manipulation of security pricesby effecting, alone or with others, a seriesof transactions in securities that createsactive trading to induce such a purchaseor sale though manipulative devices suchas marking the close, painting the tape,squeezing the float, hype and dump, boilerroom operations and such other similardevices;(96) Manipulation of security pricesby circulating or disseminating informationthat the price of any security listed in anExchange will or is likely to rise or fallbecause of manipulative market operationsof any one or more persons conducted forthe purpose of raising or depressing the priceof the security for the purpose of inducingthe purchase or sale of such security;(97) Manipulation of security pricesby making false or misleading statementswith respect to any material fact, whichhe knew or had reasonable ground tobelieve was so false and misleading, forthe purpose of inducing the purchase orsale of any security listed or traded in anExchange;(98) Manipulation of security pricesby effecting, alone or with others, anyseries of transactions for the purchase and/or sale of any security traded in anExchange for the purpose of pegging,fixing or stabilizing the price of suchsecurity, unless otherwise allowed by theSecurities Regulation Code or by the rulesof the SEC;(99) Sale or purchase of any securityusing any manipulative deceptive deviceor contrivance;(100) Execution of short sales or stoplossorder in connection with the purchaseor sale of any security not in accordancewith such rules and regulations as the SECmay prescribe as necessary andappropriate in the public interest or theprotection of the investors;(101) Employment of any device,scheme or artifice to defraud inconnection with the purchase and sale ofany securities;(102) Obtaining money or property inconnection with the purchase and sale ofany security by means of any untruestatement of a material fact or any omissionto state a material fact necessary in orderto make the statements made, in the lightof the circumstances under which theywere made, not misleading;(103) Engaging in any act, transaction,practice or course of action in the sale andpurchase of any security which operatesor would operate as a fraud or deceit uponany person;(104) Insider trading;(105) Engaging in the business of buyingand selling securities in the Philippines as abroker or dealer, or acting as a salesman, oran associated person of any broker or dealerwithout any registration from theCommission;(106) Employment by a broker ordealer of any salesman or associatedperson or by an issuer of any salesman,not registered with the SEC;(107) Effecting any transaction in anysecurity, or reporting such transaction, inan Exchange or using the facility of anExchange which is not registered with theSEC;(108) Making use of the facility of aclearing agency which is not registeredwith the SEC;(109) Violations of marginrequirements;(110) Violations on the restrictions onborrowings by members, brokers anddealers;(111) Aiding and Abetting in anyviolations of the Securities RegulationCode;(112) Hindering, obstructing ordelaying the filing of any documentrequired under the Securities RegulationCode or the rules and regulations of theSEC;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 9

APP. Q-2508.12.31(113) Violations of any of the provisionsof the implementing rules and regulationsof the SEC;(114) Any other violations of any of theprovisions of the Securities Regulation Code.(N) Felonies or offenses of a similarnature to the afore-mentioned unlawfulactivities that are punishable under thepenal laws of other countries.In determining whether or not a felonyor offense punishable under the penal lawsof other countries, is “of a similar nature”,as to constitute the same as an unlawfulactivity under the AMLA, the nomenclatureof said felony or offense need not beidentical to any of the predicate crimeslisted under Rule 3.i.RULE 4MONEY LAUNDERING OFFENSERule 4.1. Money Laundering Offense. -Money laundering is a crime whereby theproceeds of an unlawful activity as hereindefined are transacted, thereby makingthem appear to have originated fromlegitimate sources. It is committed by thefollowing:(a) Any person knowing that anymonetary instrument or propertyrepresents, involves, or relates to, theproceeds of any unlawful activity, transactsor attempts to transact said monetaryinstrument or property.(b) Any person knowing that anymonetary instrument or property involvesthe proceeds of any unlawful activity,performs or fails to perform any act as aresult of which he facilitates the offense ofmoney laundering referred to in paragraph(a) above.(c) Any person knowing that anymonetary instrument or property is requiredunder this Act to be disclosed and filed withthe Anti-Money Laundering Council(AMLC), fails to do so.RULE 5JURISDICTION OF MONEYLAUNDERING CASES AND MONEYLAUNDERING INVESTIGATIONPROCEDURESRule 5.1. Jurisdiction of MoneyLaundering Cases. - The Regional TrialCourts shall have the jurisdiction to try allcases on money laundering. Thosecommitted by public officers and privatepersons who are in conspiracy with suchpublic officers shall be under thejurisdiction of the Sandiganbayan.Rule 5.2. Investigation of MoneyLaundering Offenses. - The AMLC shallinvestigate:(a) Suspicious transactions;(b) Covered transactions deemed suspiciousafter an investigation conductedby the AMLC;(c) Money laundering activities; and(d) Other violations of this act.Rule 5.3. Attempts at Transactions. -Section 4 (a) and (b) of the AMLA providesthat any person who attempts to transact anymonetary instrument or propertyrepresenting, involving or relating to theproceeds of any unlawful activity shall beprosecuted for a money laundering offense.Accordingly, the reports required under Rule9.3 (a) and (b) of these Rules shall includethose pertaining to any attempt by anyperson to transact any monetary instrumentor property representing, involving orrelating to the proceeds of any unlawfulactivity.RULE 6PROSECUTION OF MONEYLAUNDERINGRule 6.1. Prosecution of Money Laundering(a) Any person may be charged withand convicted of both the offense of moneyQ RegulationsAppendix Q-25 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31laundering and the unlawful activity asdefined under Rule 3 (i) of the AMLA.(b) Any proceeding relating to theunlawful activity shall be given precedenceover the prosecution of any offense orviolation under the AMLA without prejudiceto the application Ex-Parte by the AMLCto the Court of Appeals for a Freeze Orderwith respect to the monetary instrumentor property involved therein and resort to otherremedies provided under the AMLA, the rulesof court and other pertinent laws and rules.Rule 6.2. When the AMLC finds, afterinvestigation, that there is probable causeto charge any person with a moneylaundering offense under Section 4 of theAMLA, it shall cause a complaint to befiled, pursuant to Section 7 (4) of the AMLA,before the Department of Justice or theOmbudsman, which shall then conductthe preliminary investigation of the case.Rule 6.3. After due notice and hearing inthe preliminary investigation proceedingsbefore the Department of Justice, or theOmbudsman, as the case may be, and thelatter should find probable cause of amoney laundering offense, it shall file thenecessary information before the RegionalTrial Courts or the Sandiganbayan.Rule 6.4. Trial for the money launderingoffense shall proceed in accordance withthe Code of Criminal Procedure or theRules of Procedure of the Sandiganbayan,as the case may be.Rule 6.5. Knowledge of the offender thatany monetary instrument or propertyrepresents, involves, or relates to theproceeds of an unlawful activity or that anymonetary instrument or property is requiredunder the AMLA to be disclosed and filedwith the AMLC, may be established by directevidence or inferred from the attendantcircumstances.Rule 6.6. All the elements of every moneylaundering offense under Section 4 of theAMLA must be proved by evidencebeyond reasonable doubt, including theelement of knowledge that the monetaryinstrument or property represents, involvesor relates to the proceeds of any unlawfulactivity.Rule 6.7. No element of the unlawfulactivity, however, including the identity ofthe perpetrators and the details of the actualcommission of the unlawful activity needbe established by proof beyond reasonabledoubt. The elements of the offense ofmoney laundering are separate and distinctfrom the elements of the felony or offenseconstituting the unlawful activity.RULE 7CREATION OF ANTI-MONEYLAUNDERING COUNCIL (AMLC)Rule 7.1.a. Composition. - The Anti-MoneyLaundering Council is hereby created andshall be composed of the Governor of theBSP as Chairman, the Commissioner of theInsurance Commission and the Chairmanof the SEC as members.Rule 7.1.b. Unanimous Decision. - TheAMLC shall act unanimously in dischargingits functions as defined in the AMLA andin these Rules. However, in the case ofthe incapacity, absence or disability of anymember to discharge his functions, theofficer duly designated or authorized todischarge the functions of the Governor ofthe BSP, the Chairman of the SEC or theInsurance Commissioner, as the case maybe, shall act in his stead in the AMLC.Rule 7.2. Functions. - The functions of theAMLC are defined hereunder:(1) to require and receive covered orsuspicious transaction reports from coveredinstitutions;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 11

APP. Q-2508.12.31(2) to issue orders addressed to theappropriate Supervising Authority or thecovered institution to determine the trueidentity of the owner of any monetaryinstrument or property subject of a coveredor suspicious transaction report, or requestfor assistance from a foreign State, orbelieved by the Council, on the basis ofsubstantial evidence, to be, in whole or inpart, wherever located, representing,involving, or related to, directly orindirectly, in any manner or by any means,the proceeds of an unlawful activity;(3) to institute civil forfeitureproceedings and all other remedialproceedings through the Office of theSolicitor General;(4) to cause the filing of complaintswith the Department of Justice or theOmbudsman for the prosecution ofmoney laundering offenses;(5) to investigate suspicioustransactions and covered transactionsdeemed suspicious after an investigationby the AMLC, money laundering activitiesand other violations of this Act;(6) to apply before the Court ofAppeals, Ex-Parte, for the freezing of anymonetary instrument or property allegedto be proceeds of any unlawful activity asdefined under Section 3(i) hereof;(7) to implement such measures asmay be inherent, necessary, implied,incidental and justified under the AMLAto counteract money laundering. Subjectto such limitations as provided for by law,the AMLC is authorized under Rule 7 (7)of the AMLA to establish an informationsharing system that will enable the AMLCto store, track and analyze moneylaundering transactions for the resoluteprevention, detection and investigation ofmoney laundering offenses. For thispurpose, the AMLC shall install acomputerized system that will be used inthe creation and maintenance of aninformation database;(8) to receive and take action inrespect of any request from foreign statesfor assistance in their own anti-moneylaundering operations as provided in theAMLA. The AMLC is authorized underSections 7 (8) and 13 (b) and (d) of the AMLAto receive and take action in respect of anyrequest of foreign states for assistance in theirown anti-money laundering operations, inrespect of conventions, resolutions and otherdirectives of the United Nations (UN), theUN Security Council, and other internationalorganizations of which the Philippines is amember. However, the AMLC may refuseto comply with any such request, convention,resolution or directive where the actionsought therein contravenes theprovisions of the Constitution, or theexecution thereof is likely to prejudicethe national interest of the Philippines.(9) to develop educational programson the pernicious effects of moneylaundering, the methods and techniquesused in money laundering, the viablemeans of preventing money launderingand the effective ways of prosecuting andpunishing offenders.(10) to enlist the assistance of any branch,department, bureau, office, agency orinstrumentality of the government, includinggovernment-owned and -controlledcorporations, in undertaking any and all antimoneylaundering operations, which mayinclude the use of its personnel, facilities andresources for the more resolute prevention,detection and investigation of moneylaundering offenses and prosecution ofoffenders. The AMLC may require theintelligence units of the Armed Forces of thePhilippines, the Philippine National Police,the Department of Finance, the Departmentof Justice, as well as their attached agencies,and other domestic or transnationalgovernmental or non-governmentalorganizations or groups to divulge to theAMLC all information that may, in any way,facilitate the resolute prevention,Q RegulationsAppendix Q-25 - Page 12Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31investigation and prosecution of moneylaundering offenses and other violations ofthe AMLA.(11) To impose administrativesanctions for the violation of laws, rules,regulations and orders and resolutionsissued pursuant thereto.Rule 7.3. Meetings. - The AMLC shallmeet every first Monday of the month, oras often as may be necessary at the call ofthe Chairman.RULE 8CREATION OF A SECRETARIATRule 8.1. The Executive Director. - TheSecretariat shall be headed by anExecutive Director who shall be appointedby the AMLC for a term of five (5) years.He must be a member of the Philippine Bar,at least thirty-five (35) years of age, must haveserved at least five (5) years either at the BSP,the SEC or the IC and of good moralcharacter, unquestionable integrity andknown probity. He shall be considered aregular employee of the BSP with the rankof Assistant Governor, and shall be entitledto such benefits and subject to such rules andregulations, as well as prohibitions, as areapplicable to officers of similar rank.Rule 8.2. Composition. - In organizing theSecretariat, the AMLC may choose fromthose who have served, continuously orcumulatively, for at least five (5) years inthe BSP, the SEC or the IC. All membersof the Secretariat shall be consideredregular employees of the BSP and shallbe entitled to such benefits and subject tosuch rules and regulations as are applicableto BSP employees of similar rank.Rule 8.3. Detail and Secondment. - TheAMLC is authorized under Section 7 (10)of the AMLA to enlist the assistance of theBSP, the SEC or the IC, or any other branch,department, bureau, office, agency orinstrumentality of the government, includinggovernment-owned and controlledcorporations, in undertaking any and all antimoneylaundering operations. This includesthe use of any member of their personnelwho may be detailed or seconded to theAMLC, subject to existing laws and CivilService Rules and Regulations. Detailedpersonnel shall continue to receive theirsalaries, benefits and emoluments from theirrespective mother units. Seconded personnelshall receive, in lieu of their respectivecompensation packages from their respectivemother units, the salaries, emoluments andall other benefits to which their AMLCSecretariat positions are entitled to.Rule 8.4. Confidentiality Provisions. - Themembers of the AMLC, the ExecutiveDirector, and all the members of theSecretariat, whether permanent, on detailor on secondment, shall not reveal, in anymanner, any information known to themby reason of their office. This prohibitionshall apply even after their separationfrom the AMLA. In case of violation of thisprovision, the person shall be punishedin accordance with the pertinentprovisions of the Central Bank Act.RULE 9PREVENTION OF MONEYLAUNDERING; CUSTOMERIDENTIFICATION REQUIREMENTSAND RECORD KEEPINGRule 9.1. Customer IdentificationRequirementsRule 9.1.a. Customer Identification. -Covered institutions shall establish andrecord the true identity of its clients basedon official documents. They shallmaintain a system of verifying the trueidentity of their clients and, in case ofcorporate clients, require a system ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 13

APP. Q-2508.12.31verifying their legal existence andorganizational structure, as well as theauthority and identification of all personspurporting to act on their behalf. Coveredinstitutions shall establish appropriate systemsand methods based on internationallycompliant standards and adequate internalcontrols for verifying and recording the trueand full identity of their customers.Rule 9.1.b. Trustee, Nominee and AgentAccounts. - When dealing with customerswho are acting as trustee, nominee, agentor in any capacity for and on behalf ofanother, covered institutions shall verifyand record the true and full identity of theperson(s) on whose behalf a transactionis being conducted. Covered institutionsshall also establish and record the true andfull identity of such trustees, nominees,agents and other persons and the nature oftheir capacity and duties. In case a coveredinstitution has doubts as to whether suchpersons are being used as dummies incircumvention of existing laws, it shallimmediately make the necessary inquiriesto verify the status of the business relationshipbetween the parties.Rule 9.1.c. Minimum Information/Documents Required for IndividualCustomers. - Covered institutions shallrequire customers to produce originaldocuments of identity issued by an officialauthority, bearing a photograph of thecustomer. Examples of such documents areidentity cards and passports. The followingminimum information/documents shall beobtained from individual customers:(1) Name;(2) Present address;(3) Permanent address;(4) Date and place of birth;(5) Nationality;(6) Nature of work and name ofemployer or nature of self-employment/business;(7) Contact numbers;(8) Tax identification number, SocialSecurity System number or GovernmentService and Insurance System number;(9) Specimen signature;(10) Source of fund(s); and(11) Names of beneficiaries in case ofinsurance contracts and wheneverapplicable.Rule 9.1.d. Minimum Information/Documents Required for Corporate andJuridical Entities. - Before establishingbusiness relationships, coveredinstitutions shall endeavor to ensure thatthe customer is a corporate or juridicalentity which has not been or is not inthe process of being, dissolved, woundup or voided, or that its business oroperations has not been or is not in theprocess of being, closed, shut down,phased out, or terminated. Dealingswith shell companies and corporations,being legal entities which have nobusiness substance in their own right butthrough which financial transactionsmay be conducted, should beundertaken with extreme caution. Thefollowing minimum information/documents shall be obtained fromcustomers that are corporate or juridicalentities, including shell companies andcorporations:(1) Articles of Incorporation/Partnership;(2) By-laws;(3) Official address or principalbusiness address;(4) List of directors/partners;(5) List of principal stockholdersowning at least two percent (2%) of thecapital stock;(6) Contact numbers;(7) Beneficial owners, if any; and(8) Verification of the authority andidentification of the person purporting toact on behalf of the client.Q RegulationsAppendix Q-25 - Page 14Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31Rule 9.1.e. Prohibition Against CertainAccounts. Covered institutions shallmaintain accounts only in the true and fullname of the account owner or holder. Theprovisions of existing laws to the contrarynotwithstanding, anonymous accounts,accounts under fictitious names, and allother similar accounts shall be absolutelyprohibited.Rule 9.1.f. Prohibition Against Openingof Accounts Without Face-to-faceContact. - No new accounts shall beopened and created without face-to-facecontact and full compliance with therequirements under Rule 9.1.c of these Rules.Rule 9.1.g. Numbered Accounts. - Pesoand foreign currency non-checkingnumbered accounts shall be allowed:Provided, That the true identity of thecustomers of all peso and foreign currencynon-checking numbered accounts aresatisfactorily established based on officialand other reliable documents and records,and that the information and documentsrequired under the provisions of theseRules are obtained and recorded by thecovered institution. No peso and foreigncurrency non-checking accounts shall beallowed without the establishment of suchidentity and in the manner herein provided.The BSP may conduct annual testing for thepurpose of determining the existence andtrue identity of the owners of such accounts.The SEC and the IC may conduct similartesting more often than once a year andcovering such other related purposes as maybe allowed under their respective charters.Rule 9.2. Record Keeping RequirementsRule 9.2.a. Record Keeping: Kinds ofRecords and Period for Retention. – Allrecords of all transactions of coveredinstitutions shall be maintained and safelystored for five (5) years from the dates oftransactions. Said records and files shallcontain the full and true identity of theowners or holders of the accounts involvedin the covered transactions and all othercustomer identification documents.Covered institutions shall undertake thenecessary adequate security measures toensure the confidentiality of such file.Covered institutions shall prepare andmaintain documentation, in accordance withthe aforementioned client identificationrequirements, on their customer accounts,relationships and transactions such that anyaccount, relationship or transaction can beso reconstructed as to enable the AMLC,and/or the courts to establish an audit trailfor money laundering.Rule 9.2.b. Existing and New Accountsand New Transactions. - All records ofexisting and new accounts and of newtransactions shall be maintained and safelystored for five (5) years from 17 October2001 or from the dates of the accounts ortransactions, whichever is later.Rule 9.2.c. Closed Accounts. - With respectto closed accounts, the records on customeridentification, account files and businesscorrespondence shall be preserved andsafely stored for at least five (5) years fromthe dates when they were closed.Rule 9.2.d. Retention of Records in Casea Money Laundering Case has been Filedin Court. – If a money laundering casebased on any record kept by the coveredinstitution concerned has been filed incourt, said file must be retained beyond theperiod stipulated in the three (3) immediatelypreceding sub-Rules, as the case may be,until it is confirmed that the case has beenfinally resolved or terminated by the court.Rule 9.2.e. Form of Records. – Recordsshall be retained as originals in such formsas are admissible in court pursuant toManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 15

APP. Q-2508.12.31existing laws and the applicable rulespromulgated by the Supreme Court.Rule 9.3. Reporting of CoveredTransactions. -Rule 9.3.a. Period of Reporting CoveredTransactions and SuspiciousTransactions.- Covered institutions shall report to theAMLC all covered transactions andsuspicious transactions within five (5)working days from occurrence thereof,unless the supervising authority concernedprescribes a longer period not exceedingten (10) working days.Should a transaction be determined tobe both a covered and a suspicioustransaction, the covered institution shallreport the same as a suspicioustransaction.The reporting of covered transactionsby covered institutions shall be deferredfor a period of sixty (60) days after theeffectivity of R.A. No. 9194, or as may bedetermined by the AMLC, in order toallow the covered institutions to configuretheir respective computer systems;provided that, all covered transactionsduring said deferment period shall besubmitted thereafter.Rule 9.3.b. Covered and SuspiciousTransaction Report Forms. - The CoveredTransaction Report (CTR) and the SuspiciousTransaction Report (STR) shall be in theforms prescribed by the AMLC.Rule 9.3.b.1. Covered institutions shalluse the existing forms for CoveredTransaction Reports and SuspiciousTransaction Reports, until such time as theAMLC has issued new sets of forms.Rule 9.3.b.2. Covered TransactionReports and Suspicious TransactionReports shall be submitted in a securedmanner to the AMLC in electronic form,either via diskettes, leased lines, orthrough internet facilities, with thecorresponding hard copy for suspicioustransactions. The final flow andprocedures for such reporting shall bemapped out in the manual ofoperations to be issued by the AMLC.Rule 9.3.c. Exemption from BankSecrecy Laws. – When reportingcovered or suspicious transactions to theAMLC, covered institutions and theirofficers and employees, shall not bedeemed to have violated R.A. No. 1405,as amended, R.A. No. 6426, asamended, R.A. No. 8791 and othersimilar laws, but are prohibited fromcommunicating, directly or indirectly, inany manner or by any means, to anyperson the fact that a covered orsuspicious transaction report was made,the contents thereof, or any otherinformation in relation thereto. In caseof violation thereof, the concernedofficer and employee of the coveredinstitution, shall be criminally liable.Rule 9.3.d. Confidentiality Provisions. –When reporting covered transactions orsuspicious transactions to the AMLC,covered institutions and their officers,employees, representatives, agents,advisors, consultants or associates areprohibited from communicating, directlyor indirectly, in any manner or by anymeans, to any person, entity, or themedia, the fact that a covered transactionreport was made, the contents thereof,or any other information in relationthereto. Neither may such reporting bepublished or aired in any manner or formby the mass media, electronic mail, orother similar devices. In case of violationhereof, the concerned officer, employee,representative, agent, advisor, consultantor associate of the covered institution,or media shall be held criminally liable.Q RegulationsAppendix Q-25 - Page 16Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31Rule 9.3.e. Safe Harbor Provisions. – Noadministrative, criminal or civil proceedings,shall lie against any person for having madea covered transaction report or a suspicioustransaction report in the regular performanceof his duties and in good faith, whether ornot such reporting results in any criminalprosecution under this Act or any otherPhilippine law.RULE 10APPLICATION FOR FREEZE ORDERSRule 10.1. When the AMLC May Applyfor the Freezing of Any MonetaryInstrument or Property. -(a) After an investigation conducted bythe AMLC and upon determination thatprobable cause exists that a monetaryinstrument or property is in any way relatedto any unlawful activity as defined underSection 3 (i), the AMLC may file an Ex-Parteapplication before the Court of Appeals forthe issuance of a freeze order on anymonetary instrument or property subjectthereof prior to the institution or in the courseof, the criminal proceedings involving theunlawful activity to which said monetaryinstrument or property is any way related.(b) Considering the intricate anddiverse web of related and interlockingaccounts pertaining to the monetaryinstrument(s) or property(ies) that anyperson may create in the different coveredinstitutions, their branches and/or otherunits, the AMLC may apply to the Court ofAppeals for the freezing, not only of themonetary instruments or properties in thenames of the reported owner(s)/holder(s),and monetary instruments or propertiesnamed in the application of the AMLC butalso all other related web of accountspertaining to other monetary instrumentsand properties, the funds and sources ofwhich originated from or are related to themonetary instrument(s) or property(ies)subject of the freeze order(s).(c) The freeze order shall be effective fortwenty (20) days unless extended by theCourt of Appeals upon application by theAMLC.Rule 10.2. Definition of Probable Cause.- Probable cause includes such facts andcircumstances which would lead areasonably discreet, prudent or cautiousman to believe that an unlawful activityand/or a money laundering offense is aboutto be, is being or has been committed andthat the account or any monetary instrumentor property subject thereof sought to befrozen is in any way related to said unlawfulactivity and/or money laundering offense.Rule 10.3. Duty of Covered InstitutionUpon Receipt Thereof. –Rule 10.3.a. Upon receipt of the notice ofthe freeze order, the covered institutionconcerned shall immediately freeze themonetary instrument or property and relatedweb of accounts subject thereof.Rule 10.3.b. The covered institution shalllikewise immediately furnish a copy of thenotice of the freeze order upon the owneror holder of the monetary instrument orproperty or related web of accounts subjectthereof.Rule 10.3.c. Within twenty-four (24) hoursfrom receipt of the freeze order, the coveredinstitution concerned shall submit to theCourt of Appeals and the AMLC, by personaldelivery, a detailed written return on thefreeze order, specifying all the pertinent andrelevant information which shall include thefollowing:1. The account number(s);2. The name(s) of the account owner(s)or holder(s);3. The amount of the monetaryinstrument, property or related web ofaccounts as of the time they were frozen;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 17

APP. Q-2508.12.314. All relevant information as to thenature of the monetary instrument orproperty;5. Any information on the related webof accounts pertaining to the monetaryinstrument or property subject of the freezeorder; and6. The time when the freeze thereontook effect.Rule 10.4. Definition of Related Web ofAccounts. -Related Web of Accounts pertaining tothe money instrument or property subject ofthe freeze order is defined as those accounts,the funds and sources of which originatedfrom and/or are materially linked to themonetary instrument(s) or property(ies)subject of the freeze order(s).Upon receipt of the freeze order issuedby the court of appeals and uponverification by the covered institution thatthe related web of accounts originated fromand/or are materially linked to themonetary instrument or property subjectof the freeze order, the covered institutionshall freeze these related web of accountswherever these funds may be found.The return of the covered institution asrequired under rule 10.3.c shall include thefact of such freezing and an explanation asto the grounds for the identification of therelated web of accounts.Rule 10.5. Extension of the Freeze Order.- Before the twenty (20) day period of thefreeze order issued by the court of appealsexpires, the AMLC may apply in the samecourt for an extension of said period. Uponthe timely filing of such application andpending the decision of the Court ofAppeals to extend the period, said periodshall be deemed suspended and the freezeorder shall remain effective.However, the covered institution shallnot lift the effects of the freeze order withoutsecuring official confirmation from the AMLC.Rule 10.6. Prohibition Against Issuanceof Freeze Orders Against Candidates foran Electoral Office During ElectionPeriod. - No assets shall be frozen to theprejudice of a candidate for an electoraloffice during an election period.RULE 11AUTHORITY TO INQUIRE INTOBANK DEPOSITSRule 11.1. Authority to Inquire into BankDeposits with Court Order. -Notwithstanding the provisions ofR.A. No. 1405, as amended; R.A. No. 6426,as amended; R.A. No. 8791, and other laws,the AMLC may inquire into or examine anyparticular deposit or investment with anybanking institution or non-bank financialinstitution and their subsidiaries and affiliatesupon order of any competent court in casesof violation of this Act, when it has beenestablished that there is probable cause thatthe deposits or investments involved arerelated to an unlawful activity as defined inSection 3 (i) hereof or a money launderingoffense under Section 4 hereof; except incases as provided under Rule 11.2.Rule 11.2. Authority to Inquire into BankDeposits Without Court Order. - TheAMLC may inquire into or examine depositand investments with any banking institutionor non-bank financial institution and theirsubsidiaries and affiliates without a CourtOrder where any of the following unlawfulactivities are involved:(a) Kidnapping for ransom under Article267 of Act No. 3815, otherwise known asthe Revised Penal Code, as amended;(b) Sections 4,5,6, 8, 9, 10. 12, 13, 14,15 and 16 of R.A. No. 9165, otherwiseknown as the Comprehensive DangerousDrugs Act of 2002;(c) Hijacking and other violations underR.A. No. 6235; destructive arson andmurder, as defined under the RevisedQ RegulationsAppendix Q-25 - Page 18Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31Penal Code, as amended, including thoseperpetrated by terrorists against noncombatantpersons and similar targets.Rule 11.2.a. Procedure For ExaminationWithout A Court Order. - Where any ofthe unlawful activities enumerated underthe immediately preceding Rule 11.2 areinvolved, and there is probable cause thatthe deposits or investments with anybanking or non-banking financialinstitution and their subsidiaries andaffiliates are in anyway related to theseunlawful activities the AMLC shall issue aresolution authorizing the inquiry into orexamination of any deposit or investmentwith such banking or non-banking financialinstitution and their subsidiaries andaffiliates concerned.Rule 11.2.b. Duty of the bankinginstitution or non- banking institutionupon receipt of the AMLC Resolution. -The banking institution or the non-bankingfinancial institution and their subsidiariesand affiliates shall, immediately upon receiptof the AMLC Resolution, allow the AMLCand/or its authorized representative(s) fullaccess to all records pertaining to the depositor investment account.Rule 11.3. - BSP Authority to Examinedeposits and investments; AdditionalException to the Bank Secrecy Act. - Toensure compliance with this act, the BSPmay inquire into or examine any particulardeposit or investment with any bankinginstitution or non-bank financial institutionand their subsidiaries and affiliates whenthe examination is made in the course of aperiodic or special examination, inaccordance with the rules of examinationof the BSP.Rule 11.3.a. BSP Rules of Examination. -The BSP shall promulgate its rules ofexamination for ensuring compliance bybanks and non-bank financial institutionsand their subsidiaries and affiliates with theAMLA and these rules.Any findings of the BSP which mayconstitute a violation of any provision ofthis act shall be transmitted to the AMLCfor appropriate action.RULE 12FORFEITURE PROVISIONSRule 12.1. Authority to Institute CivilForfeiture Proceedings. – The AMLC isauthorized under Section 7 (3) of the AMLAto institute civil forfeiture proceedings andall other remedial proceedings through theOffice of the Solicitor General.Rule 12.2. When Civil Forfeiture May beApplied. – When there is a SuspiciousTransaction Report or a CoveredTransaction Report deemed suspicious afterinvestigation by the AMLC, and the courthas, in a petition filed for the purpose,ordered the seizure of any monetaryinstrument or property, in whole or in part,directly or indirectly, related to said report,the Revised Rules of Court on civil forfeitureshall apply.Rule 12.3. Claim on Forfeited Assets. -Where the court has issued an order offorfeiture of the monetary instrument orproperty in a criminal prosecution for anymoney laundering offense under Section 4of the AMLA, the offender or any otherperson claiming an interest therein mayapply, by verified petition, for a declarationthat the same legitimately belongs to him,and for segregation or exclusion of themonetary instrument or propertycorresponding thereto. The verified petitionshall be filed with the court which renderedthe judgment of conviction and order offorfeiture within fifteen (15) days from thedate of the order of forfeiture, in default ofwhich the said order shall become final andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 19

APP. Q-2508.12.31executory. This provision shall apply inboth civil and criminal forfeiture.Rule 12.4. Payment in Lieu of Forfeiture.- Where the court has issued an order offorfeiture of the monetary instrument orproperty subject of a money launderingoffense under Section 4 of the AMLA, andsaid order cannot be enforced because anyparticular monetary instrument or propertycannot, with due diligence, be located, orit has been substantially altered, destroyed,diminished in value or otherwise renderedworthless by any act or omission, directlyor indirectly, attributable to the offender,or it has been concealed, removed,converted or otherwise transferred toprevent the same from being found or toavoid forfeiture thereof, or it is locatedoutside the Philippines or has been placedor brought outside the jurisdiction of thecourt, or it has been commingled with othermonetary instruments or property belongingto either the offender himself or a thirdperson or entity, thereby rendering the samedifficult to identify or be segregated forpurposes of forfeiture, the court may, insteadof enforcing the order of forfeiture of themonetary instrument or property or partthereof or interest therein, accordingly orderthe convicted offender to pay an amountequal to the value of said monetaryinstrument or property. This provision shallapply in both civil and criminal forfeiture.RULE 13MUTUAL ASSISTANCE AMONGSTATESRule 13.1. Request for Assistance from aForeign State. - Where a foreign state makesa request for assistance in the investigationor prosecution of a money launderingoffense, the AMLC may execute therequest or refuse to execute the same andinform the foreign state of any valid reasonfor not executing the request or fordelaying the execution thereof. Theprinciples of mutuality and reciprocityshall, for this purpose, be at all timesrecognized.Rule 13.2. Powers of the AMLC to Act ona Request for Assistance from a ForeignState. - The AMLC may execute a requestfor assistance from a foreign state by:(1) tracking down, freezing, restraining andseizing assets alleged to be proceeds ofany unlawful activity under the procedureslaid down in the AMLA and in these Rules;(2) giving information needed by theforeign state within the procedures laiddown in the AMLA and in these Rules; and(3) applying for an order of forfeiture of anymonetary instrument or property in thecourt: Provided, That the court shall notissue such an order unless the applicationis accompanied by an authenticated copyof the order of a court in the requesting stateordering the forfeiture of said monetaryinstrument or property of a person who hasbeen convicted of a money launderingoffense in the requesting state, and acertification or an affidavit of a competentofficer of the requesting state stating thatthe conviction and the order of forfeitureare final and that no further appeal lies inrespect of either.Rule 13.3. Obtaining Assistance fromForeign States. - The AMLC may make arequest to any foreign state for assistancein (1) tracking down, freezing, restrainingand seizing assets alleged to be proceedsof any unlawful activity; (2) obtaininginformation that it needs relating to anycovered transaction, money launderingoffense or any other matter directly orindirectly related thereto; (3) to the extentallowed by the law of the foreign state,applying with the proper court therein foran order to enter any premises belongingto or in the possession or control of, any orall of the persons named in said request,Q RegulationsAppendix Q-25 - Page 20Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31and/or search any or all such personsnamed therein and/or remove anydocument, material or object named in saidrequest: Provided, That the documentsaccompanying the request in support of theapplication have been duly authenticatedin accordance with the applicable law orregulation of the foreign state; and (4)applying for an order of forfeiture of anymonetary instrument or property in theproper court in the foreign state: Provided,That the request is accompanied by anauthenticated copy of the order of theRegional Trial Court ordering the forfeitureof said monetary instrument or propertyof a convicted offender and an affidavit ofthe clerk of court stating that the convictionand the order of forfeiture are final and thatno further appeal lies in respect of either.Rule 13.4. Limitations on Requests forMutual Assistance. - The AMLC may refuseto comply with any request for assistancewhere the action sought by the requestcontravenes any provision of the Constitutionor the execution of a request is likely toprejudice the national interest of thePhilippines, unless there is a treaty betweenthe Philippines and the requesting staterelating to the provision of assistance inrelation to money laundering offenses.Rule 13.5. Requirements for Requests forMutual Assistance from Foreign States. -A request for mutual assistance from aforeign state must (1) confirm that aninvestigation or prosecution is beingconducted in respect of a moneylaunderer named therein or that he hasbeen convicted of any money launderingoffense; (2) state the grounds on whichany person is being investigated orprosecuted for money laundering or thedetails of his conviction; (3) givesufficient particulars as to the identity ofsaid person; (4) give particulars sufficientto identify any covered institutionbelieved to have any information,document, material or object which maybe of assistance to the investigation orprosecution; (5) ask from the coveredinstitution concerned any information,document, material or object which maybe of assistance to the investigation orprosecution; (6) specify the manner inwhich and to whom said information,document, material or object obtainedpursuant to said request, is to beproduced; (7) give all the particularsnecessary for the issuance by the court inthe requested state of the writs, orders orprocesses needed by the requesting state;and (8) contain such other information asmay assist in the execution of the request.Rule 13.6. Authentication of Documents- For purposes of Section 13 (f) of the AMLAand Section 7 of the AMLA, a document isauthenticated if the same is signed orcertified by a judge, magistrate or equivalentofficer in or of, the requesting state, andauthenticated by the oath or affirmation ofa witness or sealed with an official or publicseal of a minister, secretary of state, orofficer in or of, the government of therequesting state, or of the personadministering the government or adepartment of the requesting territory,protectorate or colony. The certificate ofauthentication may also be made by asecretary of the embassy or legation,consul general, consul, vice consul,consular agent or any officer in the foreignservice of the Philippines stationed in theforeign state in which the record is kept,and authenticated by the seal of his office.Rule 13.7. Suppletory Application of theRevised Rules of Court. –Rule 13.7.1. For attachment of Philippineproperties in the name of personsconvicted of any unlawful activity asdefined in Section 3 (i) of the AMLA,Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 21

APP. Q-2508.12.31execution and satisfaction of finaljudgments of forfeiture, application forexamination of witnesses, procuring searchwarrants, production of bank documentsand other materials and all other actionsnot specified in the AMLA and these Rules,and assistance for any of theaforementioned actions, which is subjectof a request by a foreign state, resort maybe had to the proceedings pertinent theretounder the Revised Rules of Court.Rule 13.7.2. Authority to Assist the UnitedNations and other InternationalOrganizations and Foreign States. – TheAMLC is authorized under Section 7 (8)and 13 (b) and (d) of the AMLA to receiveand take action in respect of any requestof foreign states for assistance in their ownanti-money laundering operations. It isalso authorized under Section 7 (7) of theAMLA to cooperate with the NationalGovernment and/or take appropriateaction in respect of conventions,resolutions and other directives of theUnited Nations (UN), the UN SecurityCouncil, and other internationalorganizations of which the Philippines isa member. However, the AMLC mayrefuse to comply with any such request,convention, resolution or directive wherethe action sought therein contravenes theprovision of the Constitution or theexecution thereof is likely to prejudice thenational interest of the Philippines.Rule 13.8. Extradition. – The Philippinesshall negotiate for the inclusion of moneylaundering offenses as defined underSection 4 of the AMLA among theextraditable offenses in all future treaties.With respect, however, to the state partiesthat are signatories to the United NationsConvention Against TransnationalOrganized Crime that was ratified by thePhilippine Senate on 22 October 2001,money laundering is deemed to beincluded as an extraditable offense in anyextradition treaty existing between saidstate parties, and the Philippines shallinclude money laundering as anextraditable offense in every extraditiontreaty that may be concluded betweenthe Philippines and any of said stateparties in the future.RULE 14PENAL PROVISIONSRule 14.1. Penalties for the Crime ofMoney Laundering.Rule 14.1.a. Penalties under Section 4 (a)of the AMLA. - The penalty of imprisonmentranging from seven (7) to fourteen (14) yearsand a fine of not less than Php3.0 Millionbut not more than twice the value of themonetary instrument or property involvedin the offense, shall be imposed upon aperson convicted under Section 4 (a) of theAMLA.Rule 14.1.b. Penalties under Section 4 (b)of the AMLA. - The penalty of imprisonmentfrom four (4) to seven (7) years and a fineof not less than Php1.5 Million but not morethan Php3.0 Million, shall be imposed upona person convicted under Section 4 (b) ofthe AMLA.Rule 14.1.c. Penalties under Section 4 (c)of the AMLA. - The penalty of imprisonmentfrom six (6) months to four (4) years or afine of not less than Php100,000.00 but notmore than Php500,000.00, or both, shallbe imposed on a person convicted underSection 4(c) of the AMLA.Rule 14.1.d. Administrative Sanctions. - (1)After due notice and hearing, the AMLC shall,at its discretion, impose fines upon anycovered institution, its officers and employees,or any person who violates any of theprovisions of R.A. No. 9160, as amended byQ RegulationsAppendix Q-25 - Page 22Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31R.A. No. 9194 and rules, regulations, ordersand resolutions issued pursuant thereto. Thefines shall be in amounts as may bedetermined by the council, taking intoconsideration all the attendant circumstances,such as the nature and gravity of the violationor irregularity, but in no case shall such finesbe less than Php100,000.00 but not to exceedPhp500,000.00. The imposition of theadministrative sanctions shall be withoutprejudice to the filing of criminal chargesagainst the persons responsible for theviolations.Rule 14.2. Penalties for Failure to KeepRecords - The penalty of imprisonmentfrom six (6) months to one (1) year or a fineof not less than Php100,000.00 but notmore than Php500,000.00, or both, shallbe imposed on a person convicted underSection 9 (b) of the AMLA.Rule 14.3. Penalties for MaliciousReporting. - Any person who, with malice,or in bad faith, reports or files a completelyunwarranted or false information relativeto money laundering transaction againstany person shall be subject to a penalty ofsix (6) months to four (4) yearsimprisonment and a fine of not less thanPhp100,000.00 but not more thanPhp500,000.00, at the discretion of thecourt: Provided, That the offender is notentitled to avail the benefits of the ProbationLaw.Rule 14.4. Where Offender is a JuridicalPerson. - If the offender is a corporation,association, partnership or any juridicalperson, the penalty shall be imposed uponthe responsible officers, as the case maybe, who participated in, or allowed by theirgross negligence the commission of thecrime. If the offender is a juridical person,the court may suspend or revoke its license.If the offender is an alien, he shall, in additionto the penalties herein prescribed, bedeported without further proceedings afterserving the penalties herein prescribed. If theoffender is a public official or employee, heshall, in addition to the penalties prescribedherein, suffer perpetual or temporaryabsolute disqualification from office, as thecase may be.Rule 14.5. Refusal by a Public Official orEmployee to Testify. - Any public officialor employee who is called upon to testifyand refuses to do the same or purposely failsto testify shall suffer the same penaltiesprescribed herein.Rule 14.6. Penalties for Breach ofConfidentiality. – The punishment ofimprisonment ranging from three (3) toeight (8) years and a fine of not less thanPhp500,000.00 but not more than Php1.0Million, shall be imposed on a personconvicted for a violation under Section 9(c).In case of a breach of confidentiality that ispublished or reported by media, theresponsible reporter, writer, president,publisher, manager and editor-in-chief shallbe liable under this act.RULE 15PROHIBITIONS AGAINST POLITICALHARASSMENTRule 15.1. Prohibition against PoliticalPersecution. - The AMLA and these Rulesshall not be used for political persecution orharassment or as an instrument to hampercompetition in trade and commerce. No casefor money laundering may be filed to theprejudice of a candidate for an electoral officeduring an election period.Rule 15.2. Provisional RemediesApplication; Exception. –Rule 15.2.a. - The AMLC may apply, inthe course of the criminal proceedings,for provisional remedies to prevent theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 23

APP. Q-2508.12.31monetary instrument or property subjectthereof from being removed, concealed,converted, commingled with other propertyor otherwise to prevent its being found ortaken by the applicant or otherwise placedor taken beyond the jurisdiction of the court.However, no assets shall be attached to theprejudice of a candidate for an electoral officeduring an election period.Rule 15.2.b. - Where there is conviction formoney laundering under Section 4 of theAMLA, the court shall issue a judgment offorfeiture in favor of the Government of thePhilippines with respect to the monetaryinstrument or property found to be proceedsof one or more unlawful activities.However, no assets shall be forfeited to theprejudice of a candidate for an electoraloffice during an election period.RULE 16RESTITUTIONRule 16. Restitution. - Restitution for anyaggrieved party shall be governed by theprovisions of the New Civil Code.RULE 17IMPLEMENTING RULES ANDREGULATIONS AND MONEYLAUNDERING PREVENTIONPROGRAMSRule 17.1. Implementing Rules andRegulations. –(a) Within thirty (30) days from theeffectivity of R.A. No. 9160, as amendedby R.A. No. 9194, the BSP, the InsuranceCommission and the Securities andExchange Commission shall promulgatethe Implementing Rules and Regulationsof the AMLA, which shall be submitted tothe Congressional Oversight Committeefor approval.(b) The Supervising Authorities, theBSP, the SEC and the IC shall, under theirown respective charters and regulatoryauthority, issue their Guidelines andCirculars on anti-money laundering toeffectively implement the provisions of R.A.No. 9160, as amended by R.A. No. 9194.Rule 17.2. Money Laundering PreventionPrograms. –Rule 17.2.a. Covered institutions shallformulate their respective moneylaundering prevention programs inaccordance with Section 9 and otherpertinent provisions of the AMLA and theseRules, including, but not limited to,information dissemination on moneylaundering activities and their prevention,detection and reporting, and the trainingof responsible officers and personnel ofcovered institutions, subject to suchguidelines as may be prescribed by theirrespective supervising authority. Everycovered institution shall submit its ownmoney laundering program to thesupervising authority concerned within thenon-extendible period that the supervisingauthority has imposed in the exercise ofits regulatory powers under its own charter.Rule 17.2.b. Every money launderingprogram shall establish detailed proceduresimplementing a comprehensive, institutionwide“know-your-client” policy, set-up aneffective dissemination of information onmoney laundering activities and theirprevention, detection and reporting, adoptinternal policies, procedures and controls,designate compliance officers atmanagement level, institute adequatescreening and recruitment procedures, andset-up an audit function to test the system.Rule 17.2.c. Covered institutions shall adopt,as part of their money laundering programs,a system of flagging and monitoringtransactions that qualify as suspicioustransactions, regardless of amount or coveredQ RegulationsAppendix Q-25 - Page 24Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2508.12.31transactions involving amounts below thethreshold to facilitate the process ofaggregating them for purposes of futurereporting of such transactions to the AMLCwhen their aggregated amounts breach thethreshold. All covered institutions, includingbanks insofar as non-deposit and nongovernmentbond investment transactionsare concerned, shall incorporate in theirmoney laundering programs the provisionsof these Rules and such other guidelines forreporting to the AMLC of all transactions thatengender the reasonable belief that a moneylaundering offense is about to be, is being,or has been committed.Rule 17.3. Training of Personnel. - Coveredinstitutions shall provide all their responsibleofficers and personnel with efficient andeffective training and continuing educationprograms to enable them to fully comply withall their obligations under the AMLA andthese Rules.Rule 17.4. Amendments. - These Rules orany portion thereof may be amended byunanimous vote of the members of theAMLC and submitted to the CongressionalOversight Committee as provided for underSection 19 of R.A. No. 9160, as amendedby R.A. No. 9194.RULE 18CONGRESSIONAL OVERSIGHTCOMMITTEERule 18.1. Composition of CongressionalOversight Committee. - There is herebycreated a Congressional Oversight Committeecomposed of seven (7) members from theSenate and seven (7) members from theHouse of Representatives. The membersfrom the Senate shall be appointed by theSenate President based on the proportionalrepresentation of the parties or coalitionstherein with at least two (2) Senatorsrepresenting the minority. The membersfrom the House of Representatives shall beappointed by the Speaker also based onproportional representation of the parties orcoalitions therein with at least two (2)members representing the minority.Rule 18.2. Powers of the CongressionalOversight Committee. - The OversightCommittee shall have the power topromulgate its own rules, to oversee theimplementation of this Act, and to reviewor revise the implementing rules issued bythe Anti-Money Laundering Council withinthirty (30) days from the promulgation ofthe said rules.RULE 19APPROPRIATIONS FOR ANDBUDGET OF THE AMLCRule 19.1. Budget. – The budget of 25Million Pesos appropriated by Congressunder the AMLA shall be used to defray theinitial operational expenses of the AMLC.Appropriations for succeeding years shallbe included in the General AppropriationsAct. The BSP shall advance the fundsnecessary to defray the capital outlay,maintenance and other operating expensesand personnel services of the AMLC subjectto reimbursement from the budget of theAMLC as appropriated under the AMLA andsubsequent appropriations.Rule 19.2. Costs and Expenses. - The budgetshall answer for indemnification for legal costsand expenses reasonably incurred for theservices of external counsel in connectionwith any civil, criminal or administrativeaction, suit or proceedings to which membersof the AMLC and the Executive Director andother members of the Secretariat may bemade a party by reason of the performanceof their functions or duties. The costs andexpenses incurred in defending theaforementioned action, suit or proceedingmay be paid by the AMLC in advance of theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-25 - Page 25

APP. Q-2508.12.31final disposition of such action, suit orproceeding upon receipt of an undertakingby or on behalf of the member to repay theamount advanced should it be ultimatelydetermined that said member is not entitledto such indemnification.RULE 20SEPARABILITY CLAUSERule 20. Separability Clause. – If anyprovision of these Rules or the applicationthereof to any person or circumstance isheld to be invalid, the other provisions ofthese Rules, and the application of suchprovision or Rule to other persons orcircumstances, shall not be affected thereby.RULE 21REPEALING CLAUSERule 21. Repealing Clause. – All laws,decrees, executive orders, rules andregulations or parts thereof, including therelevant provisions of R.A. No. 1405, asamended; R.A. No. 6426, as amended;R.A. No. 8791, as amended, and othersimilar laws, as are inconsistent with theAMLA, are hereby repealed, amended ormodified accordingly.RULE 22EFFECTIVITY OF THE RULESRule 22. Effectivity. – These Rules shalltake effect after its approval by theCongressional Oversight Committee andfifteen (15) days after its completepublication in the Official Gazette or in anewspaper of general circulation.RULE 23TRANSITORY PROVISIONSRule 23.1. - Transitory Provisions. - Existingfreeze orders issued by the AMLC shallremain in force for a period of thirty (30) daysafter effectivity of this act, unless extendedby the Court of Appeals.Rule 23.2. - Effect of R.A. No. 9194 on Casesfor Extension of Freeze Orders Resolvedby the Court of Appeals. - All existing freezeorders which the Court of Appeals hasextended shall remain effective, unlessotherwise dissolved by the same court.Q RegulationsAppendix Q-25 - Page 26Manual of Regulations for Non-Bank Financial Institutions

APP. Q-2608.12.31INVESTMENT HOUSES AND FINANCING COMPANIES (IH/FC)WITH QUASI-BANKING FUNCTIONS[Appendix to Subsec. 4601Q.2 (2008 - 4602Q.1)]REVERSE REPURCHASE AGREEMENTS WITH BSPPRO-FORMA ACCOUNTING ENTRIES1. To record the purchase by IH/FC from BSP of government securities under reverseREPO agreement.DR Trading Account Securities – Loans- Government Securities Purchased under Reverse RepurchaseAgreements with BSPCRDue from BSP (or any appropriate account)2. To record the subsequent sale by IH/FC of reverse REPO with BSP to clientsDR Cash (or any appropriate account)CRBills Payable – Others- Reverse Repurchase Agreements with BSP Sold to Clients3. To record payment of client’s claim on the IH/FCDR Bills Payable – Others- Reverse Repurchase Agreements with BSP Sold to ClientsDR Interest Expense on Borrowed Funds – Bills Payable – OthersCRCash (or any appropriate account)4. To record BSP’s payment of the reverse REPO agreementDR Due from BSP (or any appropriate account)CRCRTrading Account Securities – Loans- Government Securities Purchased under Reverse RepurchaseAgreements with BSPInterest Income – Trading Account Securities - LoansManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-26 - Page 1

APP. Q-2708.12.31DETAILS ON THE COMPUTATION OF QUARTERLY INTEREST PAYMENTSCREDITED TO THE DEMAND DEPOSIT ACCOUNTS OF QUASI-BANKS’ LEGALRESERVE DEPOSITS WITH THE BANGKO SENTRAL[Appendix to Subsec. 4254Q.3 (2008 - 4246Q.7)]The following are the pertinentinformation on the computation ofquarterly interest payments credited to theDDAs of QBs’ legal reserve deposits withBSP.1. BSP Circular No. 262, asamended, (for regular DDA) andMemorandum to All Banks and OtherFinancial Intermediaries PerformingTrust, Other Fiduciary Business andInvestment Management Activities (forCTF and TOFA), as amended, both dated18 October 2000 state that computationof quarterly interest payments due onQBs’ legal reserve deposits with the BSPis based on the lower of their outstandingdaily DDA balance and forty percent(40%) of the reserve requirement(excluding liquidity reserve). Interest rateis at four percent (4%) per annum andinterest base at 365 days.2. The daily DDA balance used in thecomputation of interest may be obtainedfrom the semi-monthly demand depositstatements of account balances that areavailable electronically to QBs throughEFTIS (for PhilPaSS participants) or monthlythrough the DDA statements sent by mail(for non-PhilPaSS participants).3. The data on reserve requirementsare based on the institutions’ ConsolidatedReport of Condition Required andAvailable Reserves against depositsubstitutes and special financing submittedto the SDC on a weekly basis. Unless SDCfurnishes an amended data, the QB’scomputation is used in determining theforty percent (40%) of the reserverequirement that shall be compared withthe outstanding daily balance, in arrivingat the amount of interest credit.4. The interest credit to each DDA issupported by a credit advice whichindicates the period covered by thepayment. For PhilPaSS participants, thecredit advices are released through theirauthorized QB representatives togetherwith the cancelled checks drawn against theinstitutions’ DDA with the BSP while fornon-PhilPaSS participants, the creditadvices are sent by mail together with theirDDA Statement of Accounts.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-27 - Page 1

APP. Q-2808.12.31TRANSFER/SALE OF NON-PERFORMING ASSETS TO ASPECIAL PURPOSE VEHICLE OR TO AN INDIVIDUAL[Appendix to Sec. 4394Q.10 (2008 - 4396Q)]The following procedures shall governthe transfer/sale of NPAs to a SPV or to anindividual that involves a single familyresidential unit, or transactions involvingdacion en pago by the borrower or thirdparty of a NPL, for the purpose of obtainingthe COE which is required to avail of theincentives provided under R.A. No. 9182,as amended by R.A. No. 9343.a. Prior to the filing of any applicationfor transfer/sale of NPAs, a QB shallcoordinate with the BSP through the SDCand the appropriate department of the SESto develop a reconciled and finalizedmaster list of its eligible NPAs.For this purpose, QBs were requestedto submit a complete inventory of theirNPAs in the format prescribed underCircular Letter dated 07 January 2003.Only NPAs included in the masterlist thatmeet the definition of NPA, NPL andROPA under R.A. No. 9182 may qualifyfor the COE. The QBs shall be provided acopy of their reconciled and finalizedmasterlist for their guidance.Only QBs which have not yetsubmitted their masterlist of NPAs andintend to avail of the incentives and feeprivileges of the SPV Act 2nd Phaseimplementation are allowed to submit acomplete inventory of their NPAs in theformat prescribed under Circular Letterdated 07 January 2003. QBs which havealready submitted to BSP a masterlist ofNPAs as of 30 June 2002 in the 1st Phaseimplementation of the SPV Act will not beallowed to submit a new/amendedmasterlist.b. An application for eligibility ofspecific NPAs shall be filed in writing (hardcopy) by the selling QB with the BSPthrough the appropriate department of theSES for each proposed transfer of asset/s.Although no specific form is prescribed, theapplicant shall describe in sufficient detailits proposed transaction, identifying itscounterparty/ies and disclosing the terms,conditions and all material commitmentsrelated to the transaction.c. For applications involving morethan ten (10) NPA accounts, the list of NPAsto be transferred/sold shall be submittedin soft copy (by electronic mail or diskette)in excel format using the prescribed datastructure/format for NPLs and ROPAs tothe appropriate department of the SES ofthe applicant QB at the followingaddresses:SEDI-SPV@bsp.gov.phSEDII-SPV@bsp.gov.phSEDIII-SPV@bsp.gov.phSEDIV-SPV@bsp.gov.phFor applications involving ten (10)NPA accounts or less, it is preferable thatthe list be submitted also in soft copy. Theapplicant may opt to submit the list in hardcopy, provided all the necessaryinformation shown in the prescribed datastructure that are relevant to each NPL orROPA to be transferred/sold will beindicated. The list to be submitted in hardcopy would be ideal for the sale/transferof NPAs that involve one (1) promissorynote and/or one (1) asset item peraccount.d. The application shall beaccompanied by a written certificationsigned by a senior officer with a rank of atleast senior vice president or equivalent,who is authorized by the board of directors,or by the country head, in the case offoreign banks, that:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-28 - Page 1

APP. Q-2808.12.31(1) the assets to be sold/transferredare NPAs as defined under the SPV Act of2002;(2) the proposed sale/transfer of saidNPAs is under a true sale;(3) the notification requirement to theborrowers has been complied with; and(4) the maximum ninety (90)-dayperiod for renegotiation and restructuringhas been complied with.Items (3) and (4) above shall not applyif the NPL has become a ROPA after30 June 2002.e. In the case of dacion en pago bythe borrower or a third party to a QB, theapplication for COE on the NPL beingsettled shall be accompanied by a Deedof Dacion executed by the borrower, thethird party, the registered owner of theproperty and the QB.f. The appropriate department of theSES may conduct an on-site review of theNPLs and ROPAs proposed to betransferred/sold. After the on-site review,the application for transfer/sale shall besubmitted to the Deputy Governor, SESfor approval and for the issuance of thecorresponding COE.g. Upon the issuance of the SPVApplication Number by the BSP, a QBshall be charged a processing fee, asfollows:(1) 1/100 of one percent (1%) of thebook value of NPAs transferred or the transferprice, whichever is higher, but not belowP25,000 if the transfer is made to an SPV;(2) 1/100 of 1% of the book value ofthe NPL but not below P5,000 in case of adacion en pago arrangement by anindividual or corporate borrower;(3) P5,000 if the transfer involves asingle family residential unit to anindividual.h. An SPV that intends to transfer/sellto a third party an NPA that is covered bya COE previously issued by the BSP shallfile an application for such transfer/salewith the SEC which shall issue thecorresponding COE based on the data baseof COEs maintained at the BSP.An individual who intends to transfer/sell an NPA that involves a single familyresidential unit he had acquired that iscovered by a COE shall file an applicationfor the another COE with the BSP throughthe QB from which the NPA was acquired.The individual shall indicate in hisapplication the previous COE issued forthe NPA he had acquired and the name,address and TIN of the transferee/buyer ofthe NPA. A processing fee of P5,000 shallbe collected by BSP upon issuance of theSPV Application Number by the BSP.(As amended by M-2006-001 dated 11 May 2006)Q RegulationsAppendix Q-28 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-28-a08.12.31ACCOUNTING GUIDELINES ON THE SALE OF NON-PERFORMING ASSETSTO SPECIAL PURPOSE VEHICLES AND TO QUALIFIED INDIVIDUALSFOR HOUSING UNDER “THE SPECIAL PURPOSE VEHICLEACT OF 2002”[Appendix to Sec. 4394Q.10 (2008 - 4396Q)]General PrinciplesThese guidelines set out alternativeregulatory accounting treatment of the saleof NPAs by banks and other FIs under BSPsupervision to SPVs and to qualifiedindividuals for housing underR.A. No. 9182, otherwise known as “TheSpecial Purpose Vehicle Act of 2002”.The guidelines recognize that banks/FIs may need temporary regulatoryrelief, in addition to tax relief under theSPV Law, particularly in the timing ofrecognition of losses, so that they maybe encouraged to maximize the sale oftheir NPAs even at substantial discounts:Provided, however, That in the interestof upholding full transparency andsustaining market discipline, banks/FIsthat avail of such regulatory relief shallfully disclose its impact in all relevantfinancial reports.The guidelines cover the followingareas:(1) Derecognition of NPAs sold/transferred to an SPV and initial recognitionof financial instruments issued by the SPVto the selling bank/FI as partial or fullsettlement of the NPAs sold/transferred tothe SPV;(2) Subsequent measurement of thecarrying amount of financial instrumentsissued by the SPV to the selling bank/FI;(3) Capital adequacy ratio (CAR)calculation; and(4) Disclosure requirement on theselling bank/FI.The sale/transfer of NPAs to SPVreferred to in these guidelines shall be inthe nature of a “true sale” pursuant toSection 13 of the SPV Law and itsImplementing Rules and Regulations.I. Derecognition of NPAs Sold and InitialRecognition of Financial InstrumentsReceivedA bank/FI should derecognize an NPAin accordance with the provisions ofPAS 39 (for financial assets such as loansand securities) and PAS 16 and 40 (for nonfinancialassets such as land, building andequipment).A sale of NPA qualifying as a true salepursuant to Section 13 of the SPV Lawand its Implementing Rules andRegulations but not qualifying forderecognition under PASs 39, 16 and 40may nonetheless, be derecognized.Provided: That the bank/FI shall disclosesuch fact, in addition to all otherdisclosures provided in this Appendix.On derecognition, any excess of thecarrying amount of the NPA (i.e., net ofspecific allowance for probable losses afterbooking the BSP recommended valuationreserve) over the proceeds received in theform of cash and/or financial instrumentsissued by the SPV represents an actual lossthat should be charged to current period’soperations.However, a bank/FI may use anyexisting specific allowance for probablelosses on NPA sold:(1) to cover any unbooked (specific/general) allowance for probable losses; and(2) to apply the excess, if any, asadditional (specific/general) allowance forprobable losses, on remaining assets, inwhich case the carrying amount of the NPAManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-28-a - Page 1

APP. Q-28-a08.12.31(which is compared with the proceedsreceived for purposes of determining theactual loss) shall be the gross amount of theNPA: Provided, That the use of such existingspecific allowance for probable losses on theNPA sold as provisions against remainingassets shall be properly disclosed.The loss may, moreover, be bookedunder “Deferred Charges” account whichshould be written down over the next ten(10) years based on the followingschedule:End of Period CumulativeFrom Date of Write-down ofTransaction Deferred ChargesYear 1 5%Year 2 10%Year 3 15%Year 4 25%Year 5 35%Year 6 45%Year 7 55%Year 8 70%Year 9 85%Year 10 100%Provided, That the staggered bookingof actual loss on sale/transfer of the NPAshall be properly disclosed.In case the face amounts of thefinancial instruments exceed the excess ofthe carrying amount of the NPA over thecash proceeds, the same shall be adjustedby setting up specific allowance forprobable losses so that no gain shall berecognized from the transaction.The carrying amount of the NPA shallbe initially assumed to be the NPA’s fairvalue. The excess of the carrying amountof the NPA over the cash proceeds or theface amounts of the financial instruments,whichever is lower, shall then be the initialcost of financial instruments received.Banks/FIs shall book such financialinstruments under the general ledgeraccount “Unquoted Debt SecuritiesClassified as Loans” for debt instrumentsor “Investments in Non-Marketable EquitySecurities” for equity instruments.Consolidation of SPV with Bank/FI. Evenif the sale of NPAs to SPVs qualifies forderecognition, a bank/FI shall consolidatethe SPV in the audited consolidatedfinancial statements when the relationshipbetween the bank/FI and the SPV indicatesthat the SPV is controlled by the bank/FI inaccordance with the provisions of SIC(Standing Interpretations Committee) -12Consolidation - Special Purpose Entities.II. Subsequent Measurement of FinancialInstruments Received(a) A bank/FI should assess at end of eachfiscal year or more frequently whether thereis any objective evidence or indication basedon analysis of expected net cash inflows thatthe carrying amount of financial instrumentsissued by an SPV may be impaired. Afinancial instrument is impaired if its carryingamount (i.e., net of specific allowance forprobable loss) is greater than its estimatedrecoverable amount. The estimatedrecoverable amount is determined based onthe net present value of expected future cashflows discounted at the current market rateof interest for a similar financial instrument.In applying discounted cash flowanalysis, a bank/FI should use the discountrate(s) equal to the prevailing rate of returnfor financial instruments having substantiallythe same terms and characteristics, includingthe creditworthiness of the issuer.(b) Alternatively, the estimatedrecoverable amount of the financialinstruments may be determined based onan updated estimate of residual NPV of theissuing SPV.Q RegulationsAppendix Q-28-a - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-28-a08.12.31The estimated recoverable amount ofthe financial instrument shall be the presentvalue of the excess of expected cash inflows(e.g., proceeds from the sale of collateralsand/or ROPAs, which in no case shallexceed the contract price of the NPAs sold/transferred, interest on the reinvestment ofproceeds) over expected cash outflows (e.g.,direct costs to sell, administrative expenses,principal and interest payments on seniorobligations, interest payments on thefinancial instruments).The fair market value of the collateraland/or ROPAs should under this methodbe considered only under the followingconditions:(1) The appraisal was performed by anindependent appraiser acceptable to theBSP; and(2) The valuation of the independentappraiser is based on current marketvaluation of similar assets in the samelocality as underlying collateral rather thanother valuation methods such asreplacement cost, etc.The assumptions regarding the timingof sale, the direct cost to sell, administrativeexpenses, reinvestments rate and currentmarket rate should be disclosed in sufficientdetail in the audited financial statements.The applicable discount rate should bebased on the implied stripped yield of theTreasury note or bond for the tenor plusan appropriate risk premium.(c) In case of impairment, thecarrying amount of the financialinstrument should be reduced to itsestimated recoverable amount, throughthe use of specific allowance for probablelosses account that should be charged tocurrent period’s operations. However, atthe end of the fiscal year the sale/transferof NPA occurred, such setting up ofspecific allowance for probable lossesaccount may be booked on a staggeredbasis over the next ten (10) years basedon the following schedule:End of PeriodFrom Date ofTransactionCumulative Bookingof Allowance forProbable LossesYear 1 5%Year 2 10%Year 3 15%Year 4 25%Year 5 35%Year 6 45%Year 7 55%Year 8 70%Year 9 85%Year 10 100%Provided, That the staggered bookingof impairment, if any, upon remeasurementof financial instruments at end of the fiscalyear the sale/transfer of the NPA occurredshall be properly disclosed.After initially recognizing animpairment loss, the bank/FI should reviewthe financial instruments for futureimpairment in subsequent financialreporting date.If in a subsequent period, the estimatedrecoverable amount of the financialinstrument decreases, the bank/FI shouldimmediately book additional allowance forprobable losses corresponding to thedecrease. However, a bank/FI may staggerthe booking of such additional allowancefor probable losses in such a way that itcatches up and keeps pace with theoriginal deferral schedule (e.g., if theimpairment occurred in Year 8, a bank/FIshould immediately book 70 percent (70%)at end of Year 8, and thereafter, additional15 percent (15%) each at end of Year 9and Year 10, respectively): Provided, Thatthe staggered booking of impairment, ifany, upon remeasurement of financialinstruments shall be properly disclosed.If in a subsequent period, theestimated recoverable amount of thefinancial instrument increases exceedingits carrying amount, and the increase canManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-28-a - Page 3

APP. Q-28-a08.12.31be objectively related to an eventoccurring after the write-down, the writedownof the financial instruments shouldbe reversed by adjusting the specificallowance for probable losses account. Thereversal should not result in a carryingamount of the financial instrument thatexceeds what the cost would have beenhad the impairment not been recognizedat the date the write-down of the financialinstrument is reversed. The amount of thereversal should be included in the profitfor the period.Illustrative accounting entries forderecognition of NPAs, initial recognitionof financial instruments issued by the SPV,and subsequent measurement of thecarrying amount of the financial instrumentare in Annex Q-28-a-1.III. CAR CalculationBanks/FIs may, for purposes ofcalculating CAR, likewise stagger over aperiod of seven (7) years the recognitionof:(1) actual loss on sale/transfer of NPAs; and(2)impairment, if any, uponremeasurement of financial instruments, inaccordance with the following schedule:End of Period CumulativeFrom Date of Recognition ofTransaction Losses/ImpairmentYear 1 5%Year 2 10%Year 3 15%Year 4 25%Year 5 35%Year 6 45%Year 7 55%Year 8 70%Year 9 85%Year 10 100%Provided, That no cash dividend oncommon stock and/or preferred stock shallbe declared by the bank/FI while thestaggered recognition of actual loss on sale/transfer of NPA and/or impairment, if any,on the remeasurement of financialinstruments at end of the first fiscal yearfollowing the sale/transfer of NPA exist.The financial instruments received bythe selling bank/FI shall be risk weightedin accordance with Sec. 4115Q.A bank/FI may declare cash dividendon common and/or preferred stocknotwithstanding deferred recognition of lossduly authorized by the BSP.IV. DisclosureBanks/FIs should disclose as”Additional Information” in periodic reportssubmitted to the BSP, as well as inpublished reports and audited financialstatements and all relevant financial reportsthe specific allowance for probable losseson NPAs sold used as provisions againstremaining assets, the staggered recognitionof actual loss on sale/transfer of NPAs” and/or impairment, if any, on theremeasurement of financial instruments.In addition, banks/FIs which receivefinancial instruments issued by the SPVs aspartial or full settlement of the NPAstransferred to the SPVs should disclose inthe AFS the method used and the significantassumptions applied in estimating therecoverable amount of the financialinstruments, including the timing of thesale, the direct cost to sell, administrativeexpenses, reinvestment rate, currentmarket rate, etc. (The pro-forma disclosurerequirements on the staggered recognitionof actual loss on sale/transfer of NPAs and/or impairment, if any, on theremeasurement of financial instruments areshown in Annex Q-28-a-2.)Q RegulationsAppendix Q-28-a - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-28-a08.12.31Annex Q-28-a-1ILLUSTRATIVE ACCOUNTING ENTRIES TO RECORD SALE OF NPAs TO SPVUNDER THE SPV LAW OF 2002 UNDER DEFERRED RECOGNITIONOF LOSS/IMPAIRMENT OF FINANCIAL INSTRUMENTSMode of Payment(Cash, Financial Instruments)Cash Only(30, 0)FinancialInstrumentsOnly(0, 120)Part Cash, PartFinancialInstruments 1(30,100)Part Cash, PartFinancialInstruments 2(30, 90)Part Cash, PartFinancialInstruments(30, 70)Assumptions:Loans/ROPAs, grossAllowance for probablelossesLoans/ROPAs, netCash payment receivedFinancial instrumentsreceivedUnbooked valuationreserves on remainingassets12020100300151202010001201512020100301001512020100309015120201003070151Face amounts of financial instruments exceed the excess of the gross amount of the NPAs over the cashproceeds.2Face amounts of financial instruments do not exceed the excess of the gross amount of the NPAs over the cashproceeds.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-28-a - Page 5

APP. Q-28-a08.12.311Accounting EntriesAllowance for Probable Losses – NPAssold Allowance For Probable Losses -Remaining Assets(For unbooked provisions)(As additional provisions)Cash Only20(30, 0)155FinancialInstrumentsOnly(0, 120)20Part Cash,PartFinancialInstruments 1(30, 100)Part Cash,PartFinancialInstruments 2(30, 90)Part Cash,PartFinancialInstruments(30, 70)Debit Credit Debit CreditDebitCredit Debit Credit Debit Credit155201552015520155To record the reclassification of existingspecific allowance for credit losses onNPAs sold as provisions againstremaining assets.2CashUnquoted Debt Securities Classified asLoans/INMESDeferred ChargesLoans/ROPAsAllowance for Credit Losses -Unquoted Debt SecuritiesClassified as Loans/INMES300901200012001200301000120103090012003070201200To record the sale of NPAs, receipt ofcash and/or financial instruments, anddeferred recognition of loss, if any.3Amortization – Deferred ChargesDeferred Chargesxxxxxx000000xxxxxxTo record annual write down ofdeferred charges based on schedule ofstaggered booking of losses.4Provision for Credit Losses –Unquoted Debt Securitues Classifiedas Loans/INMESAllowance for Credit Losses –Unquoted Debt SecuritiesClassified as Loans/INMES00xxxxxxxxxxxxxxxxxxxxxTo record annual build up of allowancefor credit losses on financial instrumentsbased on schedule of staggered bookingof allowance for credit losses.1Face amounts of financial instruments exceed the excess of the gross amount of the NPAs over the cashproceeds.2Face amounts of financial instruments do not exceed the excess of the gross amount of the NPAs over thecash proceeds.Q RegulationsAppendix Q-28-a - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-28-a08.12.31Annex Q-28-a-2PRO-FORMA DISCLOSURE REQUIREMENTA. Statement of ConditionParticularsAmountQualified for Not Qualified forderecognition derecognition TotalUnder UnderPFRS/PAS PFRS/PASAdditional Information:NPAs sold, grossAllowance for credit losses (specific) onNPAs soldAllowance for credit losses (specific) onNPAs sold applied to:Unbooked allowance for creditlosses:SpecificGeneralAdditional allowance for credit lossesSpecificGeneralCash receivedFinancial instruments received, grossLess: Allowance for credit losses (specific)Carrying amount of financial instrumentsreceivedLess: Unbooked allowance for creditlosses (specific)Adj. carrying amount of financialinstruments receivedDeferred charges, grossLess: Deferred charges written downCarrying amount of deferred chargesxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-28-a - Page 7

APP. Q-28-a08.12.31B. Statement of Income and ExpensesParticularsAmountQualified for Not Qualifiedderecognition for derecognition TotalUnder UnderPFRS/PAS PFRS/PASAdditional Information:Net income/(loss) after income tax(with regulatory relief)Less: Deferred charges not yet writtendownUnbooked allowance for creditlosses (specific) on financialinstruments receivedTotal deductionless: Deferred tax liability, ifapplicableNet deductionsxxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxxxx xxx xxxNet income/(loss) after income tax(without regulatory relief)Q RegulationsAppendix Q-28-a - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-28b08.12.31SIGNIFICANT TIMELINES RELATIVE TO THE IMPLEMENTATION OFR.A. NO. 9182, ALSO KNOWN AS THE “SPECIAL PURPOSE VEHICLE ACT”,AS AMENDED BY R.A. NO. 9343[Appendix to Sec. 4394Q.10 (2008 - 4396Q]A. Filing of Applications with the SEC forEstablishing an SPVUnder Section 6 of R.A. No. 9182,as amended by R.A. No. 9343,applications for the establishment andregistration of an SPV shall be filed withthe SEC within eighteen (18) months fromthe effectivity of the amendatory Act (i.e.,up to 14 November 2007).B. Sale/Transfer of NPAs Entitled to TaxExemptions and Fee PrivilegesThe following transactions enumeratedas Items “1” to “6” of Section 15 of the IRRof the SPV Law are entitled to the taxexemptions and fee privileges under thesame Section only if such transactions occurwithin two (2) years from the effectivity ofthe amendatory Act or from 14 May 2006to 14 May 2008: 11. The transfer of the NPL by the FIto an SPV;2. The transfer of the ROPA by the FIto an SPV;3. The dation in payment (dacion enpago) of the NPL by the borrower to the FI;4. The dation in payment (dacion enpago) of the NPL by a third party, on behalfof the borrower, to the Fl;5. The transfer of the NPL (secured bya real estate mortgage on a residential unit)by the FI to an individual; and6. The transfer of the ROPA (single familyresidential unit) by the FI to an individual.For purposes of determining whether atransaction occurred within the two (2)-yearperiod or from 14 May 2006 to 14 May 2008,relevant documents to support the application(e.g., Asset Sale and Purchase Agreement,Deed of Assignment, Deed of Dation, etc.)should be notarized within the said two (2)-year period.(M-2007 -013 dated 11 May 2007 as amended by M-2008-014dated 17 March 2008)1The Monetary Board authorized the SES to accept applications for Certificate of Eligibility (COE) until 13 June 2008, orup to 30 days after the 14 May 2008 deadline.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-28b - Page 1

APP. Q-2908.12.31GUIDELINES AND MINIMUM DOCUMENTARY REQUIREMENTS FORFOREIGN EXCHANGE FORWARD AND SWAP TRANSACTIONS[Appendix to Subsecs. 4625Q.3 - 4625Q.4 and 4625Q.6 (2008 - 4603Q.16 - 4603Q.18)]The following is a list of minimumdocumentary requirements for FX forwardand swap transactions. Unless otherwiseindicated, original documents 1 shall bepresented on or before deal date to QBs.A. FORWARD SALE OF FX TO COVEROBLIGATIONS – DELIVERABLE ANDNON-DELIVERABLE1. FORWARD SALE OF FX – TRADE1.1 Trade transactions1.1.1 Under LCa. Copy of LC opened; andb. Accepted draft, or commercialinvoice/Bill of Lading1.1.2 Under DA/OA arrangementsa. Certification of reporting QB onthe details of DA/OA under Schedule 10(Import Letters of Credits Opened andDA/OA Import Availments andExtensions) of FX Form 1 (ConsolidatedReport on Foreign Exchange Assets andLiabilities); andb. Copy of commercial invoice;In addition to the aboverequirements, the QB shall require thecustomer to submit a Letter ofUndertaking that:(i.) Before or at maturity date of theforward contract, it (the importer) shallcomply with the documentationrequirements on sale of FX for tradetransactions under existing regulations;and(ii.) No double hedging has beenobtained by the customer for the coveredtransactions.1.1.3 Direct RemittanceOriginal shipping documentsindicated in Item "II.a" of Circular Letterdated 24 January 2002.2. NON-TRADE TRANSACTIONSOnly non-trade transactions withspecific due dates shall be eligible forforward contracts, and shall be subject tothe same documentation requirementsunder Circular No. 388 dated 26 May 2003with the following additional guidelines forforeign currency loans and investments.2.1 Foreign Currency Loans owed tonon-residents or AABs2.1.1 Deliverable ForwardsThe maturing portion of the outstandingeligible obligation, i.e., those that areregistered with the BSP registration letter,may be covered by a deliverable forwardsubject to the documentary requirementsunder Circular No. 388. A copy of thecreditor’s billing statement may besubmitted only on or before the maturitydate of the contract.2.1.2 NDFsThe outstanding eligible obligation,i.e., those that are registered with the BSP,including interests and fees thereon asindicated in the BSP registration letter maybe covered by a NDF, subject to thedocumentary requirements under CircularNo. 388, except for the creditor’s billingstatement which need not be submitted.The amount of the forward contractshall not exceed the outstanding amountof the underlying obligation during theterm of the contract.2.2 Inward Foreign InvestmentsThe unremitted amount of sales/maturity proceeds due for repatriation tonon-resident investors pertaining to BSP- registered investments in the followinginstruments issued by a Philippineresident:a. shares of stock listed in the PSE;b. GS;1If copy is indicated, it shall mean photocopy, electronic copy or facsimile of original.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-29 - Page 1

APP. Q-2908.12.31c. money market instruments; andd. peso time deposits with a minimumtenor of ninety (90) days may be coveredby FX forward contracts subject to thepresentation of the original BSRD on orbefore deal date. However, for Item"2.2.a" above, original BSRD or BSRDLetter-Advice, together with the broker’ssales invoice, shall be presented on orbefore maturity date of the FX forwardcontract, which date coincides with thesettlement date of the PSE transaction.Sales proceeds of BSP-registeredinvestments in shares of stock that are notlisted in the PSE may be covered by adeliverable FX forward contract only ifdetermined to be outstanding as of the dealdate for the contract and payable on aspecific future date as may be indicated inthe Contract To Sell/Deed of AbsoluteSale and subject to the samedocumentary requirements underCircular No. 388.B. FORWARD SALE OF FX TO COVEREXPOSURES– DELIVERABLE ANDNON-DELIVERABLE1. TRADE (DELIVERABLE AND NON-DELIVERABLE)1.1 Under LCa. Copy of LC opened; andb. Proforma Invoice, or SalesContract/Purchase Order1.2 Under DA/OA, Documents AgainstPayment (DP) or Direct Remittance (DR)Any of the following where deliveryor shipment shall be made not later thanone (1) year from deal date:a. Sales Contractb. Confirmed Purchase Orderc. Accepted Proforma Invoiced. Shipment/Import Advice of theSupplierIn addition to the above requirements,the QB shall require the customer to submita Letter of Undertaking that:(i) At maturity of the forward contract,it shall comply with the documentationrequirements on the sale of FX for tradetransactions under Circular-Letter dated24 January 2002, as amended; and(ii) No double hedging has beenobtained by the customer for the coveredtransactions.2. NON-TRADE (NON-DELIVERABLE)The outstanding balance of BSPregisteredforeign investments withoutspecific repatriation date, appearing in thecovering BSRD may only be covered byan NDF contract, based on its market/book value on deal date, subject to priorBSP approval and if already with BSRDpresentation of the covering BSRD andthe proof that the investment still exists(e.g., stock certificate, or broker’s buyinvoice, or confirmation of sale, orcertificate of investment in moneymarket instruments, or certificate ofpeso time deposits). Hedging forpermanently assigned capital ofPhilippine branches of foreign banks/firms is not allowed.C. FORWARD PURCHASE OF FXSuch FX forward contracts shall besubject to the QB’s “Know YourCustomer” policy and existing regulationson anti-money laudering. In addition,counterparties must be limited to thosethat are manifestly eligible to engage inFX forwards as part of the normal courseof their operations and which satisfy theQB’s suitability and eligibility rules forsuch transactions.D. FX SWAP TRANSACTIONS1. FX SALE (first leg)/FORWARD FXPURCHASE (second leg)The same minimum documentaryrequirements for sale of FX under BSPQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-29 - Page 2

APP. Q-2908.12.31Circular No. 388 for non-trade transactions,and Circular-Letter dated 24 January 2002,as amended, for trade transactions, shallbe presented on or before deal date.2. FX PURCHASE (first leg)/FORWARDFX SALE (second leg)The first leg of the swap will be subjectto the QB’s “Know Your Customer” policyand existing regulations on anti-moneylaundering. The second leg of the swaptransaction will be subject to the swapcontract between the counterparties.Swap contracts of this type intended tofund peso loans to be extended by nonresidentsin favor of residents shall requireprior BSP approval.(As amended by Circular No. 591 dated 15 October 2007)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-29 - Page 3

APP. Q-3009.12.31GUIDELINES TO GOVERN THE SELECTION, APPOINTMENT, REPORTINGREQUIREMENTS AND DELISTING OF EXTERNAL AUDITORS AND/ORAUDITING FIRM OF COVERED ENTITIES[Appendix to Sec. 4189Q (2008 - 4180Q) and 4162Q (2008 - 4190Q)]Pursuant to Section 58 of the RepublicAct No. 8791, otherwise known as "TheGeneral Banking Law of 2000", and theexisting provisions of the executedMemorandum of Agreement (hereinafterreferred to as the MOA) dated 12 August2009, binding the Bangko Sentral ngPilipinas (BSP), Securities and ExchangeCommission (SEC), Professional RegulationCommission (IC) - Board of Accountancy(BOA) and the Insurance Commission (IC)for a simplified and synchronizedaccreditation requirements for externalauditor and/or auditing firm, the MonetaryBoard, in its Resolution No. 950 dated02 July 2009, approved the followingrevised rules and regulations that shallgovern the selection and delisting by the BSPof covered institution which under speciallaws are subject to BSP supervision.A. STATEMENT OF POLICYIt is the policy of the BSP to ensureeffective audit and supervision of banks,QBs, trust entities and/or NSSLAs includingtheir subsidiaries and affiliates engaged inallied activities and other FIs which underspecial laws are subject to BSP supervision,and to ensure reliance by BSP and the publicon the opinion of external auditors andauditing firms by prescribing the rules andregulations that shall govern the selection,appointment, reporting requirements anddelisting for external auditors and auditingfirms of said institutions, subject to thebinding provisions and implementingregulations of the aforesaid MOA.B. COVERED ENTITIESThe proposed amendment shall applyto the following supervised institution, ascategorized below, and their externalauditors:1. Category Aa. UBs/KBs;b. Foreign banks and branches orsubsidiaries of foreign banks, regardless ofunimpaired capital; andc. Banks, trust department of qualifiedbanks and other trust entities with additionalderivatives authority, pursuant to Sec. X611regardless of classification, category andcapital position.2. Category Ba. TBs;b. QBs;c. Trust department of qualified banksand other trust entities;d. National Coop Banks; ande. NBFIs with quasi-banking functions.3. Category Ca. RBs;b. NSSLAs;c. Local Coop Banks; andd. Pawnshops.The above categories include theirsubsidiaries and affiliates engaged in alliedactivities and other FIs which are subject toBSP risk-based and consolidated supervision:Provided, That an external auditor who hasbeen selected by the BSP to audit entitiesunder Category B and C and if selected bythe BSP to audit covered entities underCategory B is automatically qualified to auditentities under Category C.C. DEFINITION OF TERMSThe following terms shall be defined asfollows:1. Audit – an examination of thefinancial statements of any issuer by anexternal auditor in compliance with the rulesManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-30 - Page 1

APP. Q-3009.12.31of the BSP or the SEC in accordance withthen applicable generally accepted auditingand accounting principles and standards, forthe purpose of expressing an opinion onsuch statements.2. Non-audit services – anyprofessional services provided to thecovered institution by an external auditor,other than those provided to a coveredinstitution in connection with an audit or areview of the financial statements of saidcovered institution.3. Professional Standards - includes:(a) accounting principles that are(1) established by the standard setting body;and (2) relevant to audit reports for particularissuers, or dealt with in the quality controlsystem of a particular registered publicaccounting firm; and (b) auditing standards,standards for attestation engagements,quality control policies and procedures,ethical and competency standards, andindependence standards that the BSP or SECdetermines (1) relate to the preparation orissuance of audit reports for issuers; and(2) are established or adopted by the BSP orpromulgated as SEC rules.4. Fraud – an intentional act by one (1)or more individuals among management,employees, or third parties that results in amisrepresentation of financial statements,which will reduce the consolidated totalassets of the company by five percent (5%).It may involve:a. Manipulation, falsification oralteration of records or documents;b. Misappropriation of assets;c. Suppression or omission of theeffects of transactions from records ordocuments;d. Recording of transactions withoutsubstance;e. Intentional misapplication ofaccounting policies; orf. Omission of material information.5. Error - an intentional mistake infinancial statements, which will reduce theconsolidated total assets of the company byfive percent (5%). It may involve:a. Mathematical or clerical mistakesin the underlying records and accountingdata;b. Oversight or misinterpretation offacts; orc. Unintentional misapplication ofaccounting policies.6. Gross negligence - wanton orreckless disregard of the duty of due care incomplying with generally accepted auditingstandards.7. Material fact/information - any fact/information that could result in a change inthe market price or value of any of theissuer’s securities, or would potentially affectthe investment decision of an investor.8. Subsidiary - a corporation or firmmore than fifty percent (50%) of theoutstanding voting stock of which is directlyor indirectly owned, controlled or held withpower to vote by a bank, QB, trust entity orNSSLA.9. Affiliate - a corporation, not morethan fifty percent (50%) but not less thanten percent (10%) of the outstanding votingstock of which is directly or indirectlyowned, controlled or held with power to voteby a bank, QB, trust entity or NSSLA and ajuridical person that is under common controlwith the bank, QB, trust entity or NSSLA.10. Control - exists when the parentowns directly or indirectly more than onehalf of the voting power of an enterpriseunless, in exceptional circumstance, it canbe clearly demonstrated that such ownershipdoes not constitute control.Control may also exist even whenownership is one half or less of the votingpower of an enterprise when there is:a. Power over more than one half ofthe voting rights by virtue of an agreementwith other stockholders;b. Power to govern the financial andoperating policies of the enterprise under astatute or an agreement;Q RegulationsAppendix Q-30 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3009.12.31c. Power to appoint or remove themajority of the members of the board ofdirectors or equivalent governing body; ord. Power to cast the majority votes atmeetings of the board of directors orequivalent governing body.11. External auditor - means a singlepractitioner or a signing partner in anauditing firm.12. Auditing firm – includes aproprietorship, partnership limited liabilitycompany, limited liability partnership,corporation (if any), or other legal entity,including any associated person of any ofthese entities, that is engaged in the practiceof public accounting or preparing or issuingaudit reports.13. Associate – any director, officer,manager or any person occupying a similarstatus or performing similar functions in theaudit firm including employees performingsupervisory role in the auditing process.14. Partner - all partners including thosenot performing audit engagements.15. Lead partner – also referred to asengagement partner/partner-in-charge/managing partner who is responsible forsigning the audit report on the consolidatedfinancial statements of the audit client, andwhere relevant, the individual audit reportof any entity whose financial statementsform part of the consolidated financialstatements.16. Concurring partner - the partnerwho is responsible for reviewing the auditreport.17. Auditor-in-charge – refers to theteam leader of the audit engagement.D. GENERAL CONSIDERATION ANDLIMITATIONS OF THE SELECTIONPROCEDURES1. Subject to mutual recognitionprovision of the MOA and as implementedin this regulation, only external auditors andauditing firms included in the list of BSPselected external auditors and auditing firmsshall be engaged by all the coveredinstitutions detailed in Item "B". The externalauditor and/or auditing firm to be hired shallalso be in-charge of the audit of the entity’ssubsidiaries and affiliates engaged in alliedactivities: Provided, That the external auditorand/or auditing firm shall be changed or thelead and concurring partner shall be rotatedevery five (5) years or earlier: Providedfurther, That the rotation of the lead andconcurring partner shall have an interval ofat least two (2) years.2. Category A covered entities whichhave engaged their respective externalauditors and/or auditing firm for aconsecutive period of five (5) years or moreas of 18 September 2009 shall have a one(1)-year period from said date within whichto either change their external auditorsand/or auditing firm or to rotate the leadand/or concurring partner.3. The selection of the external auditorsand/or auditing firm does not exonerate thecovered institution or said auditors fromtheir responsibilities. Financial statementsfiled with the BSP are still primarily theresponsibility of the management of thereporting institution and accordingly, thefairness of the representations madetherein is an implicit and integral part ofthe institution’s responsibility. Theindependent certified public accountant’sresponsibility for the financial statementsrequired to be filed with the BSP isconfined to the expression of his opinion,or lack thereof, on such statements whichhe has audited/examined.4. The BSP shall not be liable for anydamage or loss that may arise from itsselection of the external auditors and/orauditing firm to be engaged by banks forregular audit or non-audit services.5. Pursuant to paragraph (5) of theMOA, SEC, BSP and IC shall mutuallyrecognize the accreditation granted by anyof them for external auditors and firms ofGroup C or D companies under SEC,Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-30 - Page 3

APP. Q-3009.12.31Category B and C under BSP, and insurancebrokers under IC. Once accredited/selectedby any one (1) of them, the above-mentionedspecial requirements shall no longer beprescribed by the other regulators.For corporations which are required tosubmit financial statements to differentregulators and are not covered by the mutualrecognition policy of this MOA, thefollowing guidance shall be observed:a. The external auditors of UBs whichare listed in the Exchange, should beselected/accredited by both the BSP andSEC, respectively; andb. For insurance companies and banksthat are not listed in the Exchange, theirexternal auditors must each be selected/accredited by BSP or IC, respectively. Forpurposes of submission to the SEC, thefinancial statements shall be at least auditedby an external auditor registered/accreditedwith BOA.This mutual recognition policy shallhowever be subject to the BSP restrictionthat for banks and its subsidiary and affiliatebank, QBs, trust entities, NSSLAs, theirsubsidiaries and affiliates engaged in alliedactivities and other FIs which under speciallaws are subject to BSP consolidatedsupervision, the individual and consolidatedfinancial statements thereof shall be auditedby only one (1) external auditor/auditingfirm.6. The selection of external auditorsand/or auditing firm shall be valid for aperiod of three (3) years. The SES shall makean annual assessment of the performanceof external auditors and/or auditing firm andwill recommend deletion from the list evenprior to the three (3)-year renewal period, ifbased on assessment, the external auditors’report did not comply with BSPrequirements.E. QUALIFICATION REQUIREMENTThe following qualification requirementsare required to be met by the individualexternal auditor and the auditing firm at thetime of application and on continuing basis,subject to BSP’s provisions on the delistingand suspension of accreditation:1. Individual external auditora. General requirements(1) The individual applicant must beprimarily accredited by the BOA. Theindividual external auditor or partnerin-charge of the auditing firm must have atleast five (5) years of audit experience.(2) Auditor’s independence.In addition to the basic screeningprocedures of BOA on evaluating auditor’sindependence, the following are requiredfor BSP purposes to be submitted in the formof notarized certification that:(a) No external auditor may be engagedby any of the covered institutions under Item"B" hereof if he or any member of hisimmediate family had or has committed toacquire any direct or indirect financialinterest in the concerned covered institution,or if his independence is consideredimpaired under the circumstances specifiedin the Code of Professional Ethics for CPAs.In case of a partnership, this limitation shallapply to the partners, associates and theauditor-in-charge of the engagement andmembers of their immediate family;(b) The external auditor does not have/shall not have outstanding loans or anycredit accommodations or arranged for theextension of credit or to renew an extensionof credit (except credit card obligationswhich are normally available to other creditcard holders and fully secured auto loansand housing loans which are not past due)with the covered institutions under Item "B"at the time of signing the engagement andduring the engagement. In the case ofpartnership, this prohibition shall apply tothe partners and the auditor-in-charge of theengagement; and(c) It shall be unlawful for an externalauditor to provide any audit service to acovered institution if the coveredQ RegulationsAppendix Q-30 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3009.12.31institution’s CEO, CFO, Chief AccountingOfficer (CAO), or comptroller was previouslyemployed by the external auditor andparticipated in any capacity in the audit of thecovered institution during the one-yearpreceding the date of the initiation of the audit;(3) Individual applications as externalauditor of entities under Category A abovemust have established adequate qualityassurance procedures, such consultationpolicies and stringent quality control, toensure full compliance with the accountingand regulatory requirements.b. Specific requirements(1) At the time of application,regardless of the covered institution, theexternal auditor shall have at least five (5)years experience in external audits;(2) The audit experience above refersto experience required as an associate,partner, lead partner, concurring partner orauditor-in-charge; and(3) At the time of application, theapplicant must have the following trackrecord:(a) For Category A, he/she must haveat least five (5) corporate clients with totalassets of at least P50.0 million each.(b) For Category B, he/she must havehad at least three (3) corporate clients withtotal assets of at least P25.0 million each.(c) For Category C, he/she must havehad at least three (3) corporate clients withtotal assets of at least P5.0 million each;2. Auditing firmsa. The auditing firm must be primarilyaccredited by the BOA and the name of thefirm’s applicant partner’s should appear inthe attachment to the certificate ofaccreditation issued by BOA. Additionalpartners of the firm shall be furnished byBOA to the concerned regulatory agencies(e.g. BSP, SEC and IC) as addendum to thefirm’s accreditation by BOA.b. Applicant firms to act as the externalauditor of entities under Category A in Item"B" must have established adequate qualityassurance procedures, such consultationpolicies and stringent quality control, toensure full compliance with the accountingand regulatory requirements.c. At the time of application, theapplicant firm must have at least one (1)signing practitioner or partner who is alreadyselected/accredited, or who is alreadyqualified and is applying for selection byBSP.d. A registered accounting/auditingfirm may engage in any non-auditing servicefor an audit client only if such service isapproved in advance by the client’s auditcommittee. Exemptions from the prohibitionsmay be granted by the Monetary Board on acase-by-case basis to the extent that suchexemption is necessary or appropriate in thepublic interest. Such exemptions are subjectto review by the BSP.e. At the time of application, theapplicant firm must have the following trackrecord:(1) For Category A, the applicant firmmust have had at least twenty (20) corporateclients with total assets of at least P50.0million each;(2) For Category B, the applicant firmmust have had at least five (5) corporateclients with total assets of at least P20.0million each;(3) For Category C, the applicant firmmust have had at least five (5) corporateclients with total assets of at least P5.0million each.F. APPLICATION FOR AND/ORRENEWAL OF THE SELECTION OFINDIVIDUAL EXTERNAL AUDITOR1. The initial application for BSPselection shall be signed by the externalauditor and shall be submitted to theappropriate department of the SES togetherwith the following documents/information:a. Copy of effective and valid BOACertificate of Accreditation with the attachedlist of qualified partner/s of the firm;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-30 - Page 5

APP. Q-3009.12.31b. A notarized undertaking of theexternal auditor that he is in compliancewith the qualification requirements underItem "E" and that the external auditor shallkeep an audit or review working papers forat least seven (7) years in sufficient detail tosupport the conclusion in the audit reportand making them available to the BSP’sauthorized representative/s when requiredto do so;c. Copy of Audit Work Program whichshall include assessment of the auditedinstitution’s compliance with BSP rules andregulations, such as, but not limited to thefollowing:(1) capital adequacy ratio, as currentlyprescribed by the BSP;(2) AMLA framework;(3) risk management system,particularly liquidity and market risks; and(4) loans and other risk assets reviewand classification, as currently prescribedby the BSP rules and regulations.d. If the applicant will have clientsfalling under Category A, copy of the QualityAssurance Manual which, aside from thebasic elements as required under the BOAbasic quality assurance policies andprocedures, specialized quality assuranceprocedures should be provided consistingof, among other, review asset quality,adequacy of risk-based capital, riskmanagement systems and corporategovernance framework of the coveredentities.e. Copy of the latest AFS of theapplicant’s two (2) largest clients in termsof total assets.2. Subject to BSP’s provision on earlydeletion from the list of selected externalauditor, the selection may be renewedwithin two (2) months before the expirationof the three (3)-year effectivity of theselection upon submission of the writtenapplication for renewal to the appropriatedepartment of the SES together with thefollowing documents/information:(a) copy of updated BOA Certificate ofAccreditation with the attached list ofqualified partner/s of the firm;(b) notarized certification of the externalauditor that he still possess all qualificationrequired under Item "F.1.b" of this Appendix;(c) list of corporate clients auditedduring the three (3)-year period of beingselected as external auditor by BSP. Suchlist shall likewise indicate the findings notedby the BSP and other regulatory agencieson said AFS including the action thereonby the external auditor; and(d) written proof that the auditor hasattended or participated in trainings for atleast thirty (30) hours in addition to theBOA’s prescribed training hours. Suchtraining shall be in subjects like internationalfinancial reporting standards, internationalstandards of auditing, corporategovernance, taxation, code of ethics,regulatory requirements of SEC, IC and BSPor other government agencies, and othertopics relevant to his practice, conductedby any professional organization orassociation duly recognized/accredited bythe BSP, SEC or by the BOA/PRC through aCPE Council which they may set up.The application for initial or renewalaccreditation of an external auditor shall beaccomplished by a fee of P2,000.00.G. APPLICATION FOR AND/ORRENEWAL OF THE SELECTION OFAUDITING FIRMS1. The initial application shall besigned by the managing partner of theauditing firm and shall be submitted tothe appropriate department of the SEStogether with the following documents/information:a. copy of effective and valid BOACertificate of Accreditation with attachmentlisting the names of qualified partners;b. notarized certification that the firmis in compliance with the generalqualification requirements under Item "E.2"Q RegulationsAppendix Q-30 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3009.12.31and that the firm shall keep an audit orreview working papers for at least seven(7) years insufficient detail to support theconclusions in the audit report and makingthem available to the BSP’s authorizedrepresentative/s when required to do so;c. copy of audit work program whichshall include assessment of the auditedinstitution’s compliance with BSP rules andregulations, such as, but not limited to thefollowing;(1) capital adequacy ratio, as currentlyprescribed by the BSP;(2) AMLA framework;(3) risk management system,particularly liquidity and market risks; and(4) loans and other risk assets reviewand classification, as currently prescribedby the BSP rules and regulations.d. If the applicant firm will haveclients falling under Category A, copyQuality Assurance Manual where, asidefrom the basic elements as required underthe BOA basic quality assurance policiesand procedures, specialized qualityassurance procedures should be providedrelative to, among others review assetquality, adequacy of risk-based capital, riskmanagement systems and corporategovernance framework of covered entities;e. Copy of the latest AFS of theapplicant’s two (2) largest clients in termsof total assets; andf. Copy of firm’s AFS for theimmediately preceding two (2) years.2. Subject to BSP’s provision on earlydeletion from the list of selected auditingfirm, the selection may be renewed withintwo (2) months before the expiration of thethree (3)-year effectivity of the selection uponsubmission of the written application forrenewal to the appropriate department ofthe SES together with the followingdocuments/information:a. a copy of updated BOA Certificateof Registration with the attached list ofqualified partner/s of the firm;b. amendments on Quality AssuranceManual, inclusive of written explanation onsuch revision, if any; andc. notarized certification that the firmis in compliance with the generalqualification requirements under Item"G.1.b" hereof;The application for initial or renewalaccreditation of an auditing firm shall beaccompanied by a fee of P5,000.00.H. REPORTORIAL REQUIREMENTS1. To enable the BSP to take timely andappropriate remedial action, the externalauditor and/or auditing firm must report tothe BSP within thirty (30) calendar days afterdiscovery, the following cases:a. Any material finding involving fraudor dishonesty (including cases that wereresolved during the period of audit);b. Any potential losses the aggregate ofwhich amounts to at least one percent (1%)of the capital;c. Any finding to the effect that theconsolidated assets of the company, on agoing concern basis, are no longeradequate to cover the total claims ofcreditors; andd. Material internal control weaknesseswhich may lead to financial reportingproblems.2. The external auditor/auditing firmshall report directly to the BSP within fifteen(15) calendar days from the occurrence ofthe following:a. Termination or resignation asexternal auditor and stating the reasontherefor;b. Discovery of a material breach oflaws or BSP rules and regulations such as,but not limited to:(1) CAR; and(2) Loans and other risk assets reviewand classification.c. Findings on matters of corporategovernance that may require urgent actionby the BSP.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-30 - Page 7

APP. Q-3009.12.313. In case there are no matters to report(e.g. fraud, dishonesty, breach of laws, etc.)the external auditor/auditing firm shallsubmit directly to BSP within fifteen (15)calendar days after the closing of the auditengagement a notarized certification thatthere is none to report.The management of the coveredinstitutions, including its subsidiaries andaffiliates, shall be informed of the adversefindings and the report of the externalauditor/auditing firm to the BSP shall includepertinent explanation and/or correctiveaction.The management of the coveredinstitutions, including its subsidiaries andaffiliates, shall be given the opportunity tobe present in the discussions between theBSP and the external auditor/auditing firmregarding the audit findings, except incircumstances where the external auditorbelieves that the entity’s management isinvolved in fraudulent conduct.It is, however, understood that theaccountability of an external auditor/auditing firm is based on matters within thenormal coverage of an audit conducted inaccordance with generally accepted auditingstandards and identified non-audit services.I. DELISTING AND SUSPENSION OFSELECTED EXTERNAL AUDITOR/AUDITING FIRM1. An external auditor’s duly selectedpursuant to this regulation shall besuspended or delisted, in a mannerprovided under this regulation, under anyof the following grounds:a. Failure to submit the report underItem "H" of this Appendix or the requiredreports under Subsec. X190.1;b. Continuous conduct of audit despiteloss of independence as provided under Item"E.1" or contrary to the requirements underthe Code of Professional Ethics;c. Any willful misrepresentation in thefollowing information/documents;(1) application and renewal foraccreditation;(2) report required under Item "H"; and(3) Notarized certification of theexternal auditor and/or auditing firm.d. The BOA found that, after duenotice and hearing, the external auditorcommitted an act discreditable to theprofession as specified in the Code ofProfessional Ethics for CPAs. In this case,the BOA shall inform the BSP of the resultsthereof;e. Declaration of conviction by acompetent court of a crime involving moralturpitude, fraud (as defined in the RevisedPenal Code), or declaration of liability forviolation of the banking laws, rules andregulation, the Corporation Code of thePhilippines, the Securities Regulation Code(SRC); and the rules and regulations ofconcerned regulatory authorities;f. Refusal for no valid reason, uponlawful order of the BSP, to submit therequested documents in connection with anongoing investigation. The external auditorshould however been made aware of suchinvestigation;g. Gross negligence in the conduct ofaudits which would result, among others,in non-compliance with generally acceptedauditing standards in the Philippines orissuance of an unqualified opinion whichis not supported with full compliance by theauditee with generally accepted accountingprinciples in the Philippines (GAAP). Suchnegligence shall be determined by the BSPafter proper investigation during which theexternal auditor shall be given due noticeand hearing;h. Conduct of any of the non-auditservices enumerated under Item "E.1" forhis statutory audit clients, if he has notundertaken the safeguards to reduce thethreat to his independence; andi. Failure to comply with thePhilippine Auditing Standards andPhilippine Auditing Practice Statements.Q RegulationsAppendix Q-30 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3009.12.312. An auditing firms; accreditationshall be suspended or delisted, after duenotice and hearing, for the followinggrounds:a. Failure to submit the report underItem "H" or the required reports under Sec.X190.1.b. Continuous conduct of auditdespite loss of independence of the firm asprovided under this regulation and underthe Code of Professional Ethics;c. Any willful misrepresentation in thefollowing information/ documents;(1) Application and renewal foraccreditation;(2) Report required under Item "H";and(3) Notarized certification of themanaging partner of the firm.d. Dissolution of the auditing firm/partnership, as evidenced by an Affidavitof Dissolution submitted to the BOA, orupon findings by the BSP that the firm/partnership is dissolved. The accreditationof such firm/partnership shall however bereinstated by the BSP upon showing thatthe said dissolution was solely for thepurpose of admitting new partner/s havecomplied with the requirements of thisregulation and thereafter shall bereorganized and re-registered;e. There is a showing that theaccreditation of the following number orpercentage of external auditors, whicheveris lesser, have been suspended or delistedfor whatever reason, by the BSP:(1) at least ten (10) signing partners andcurrently employed selected/accreditedexternal auditors, taken together; or(2) such number of external auditorsconstituting fifty percent (50%) or more ofthe total number of the firm’s signingpartners and currently selected/accreditedauditors, taken together.f. The firm or any one (1) of its auditorshas been involved in a major accounting/auditing scam or scandal. The suspensionor delisting of the said firm shall depend onthe gravity of the offense or the impact ofsaid scam or scandal on the investing publicor the securities market, as may bedetermined by the BSP;g. The firm has failed reasonably tosupervise an associated person andemployed auditor, relating to the following:(1) auditing or quality control standards,or otherwise, with a view to preventingviolations of this regulations;(2) provisions under SRC relating topreparation and issuance of audit reportsand the obligations and liabilities ofaccountants with respect thereto;(3) the rules of the BSP under thisAppendix; or(4) professional standards.h. Refusal for no valid reason, uponorder of the BSP, to submit requesteddocuments in connection with an ongoinginvestigation. The firm should however bemade aware of such investigation.3. Pursuant to paragraph 8 of theaforesaid MOA, the SEC, BSP and IC shallinform BOA of any violation by anaccredited/selected external auditor whichmay affect his/her accreditation status as apublic practitioner. The imposition ofsanction by BOA on an erring practitionershall be without prejudice to the appropriatepenalty that the SEC, IC or BSP may assessor impose on such external auditor pursuantto their respective rules and regulations. Incase of revocation of accreditation of a publicpractitioner by BOA, the accreditation bySEC, BSP and IC shall likewise beautomatically revoked/derecognized.The SEC, BSP and IC shall inform eachother of any violation committed by anexternal auditor who is accredited/selectedby any one (1) or all of them. Each agencyshall undertake to respond on any referralor endorsement by another agency withinten (10) working days from receipt thereof.4. Procedure and Effects of Delisting/Suspension.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-30 - Page 9

APP. Q-3009.12.31a. An external auditor/auditing firmshall only be delisted upon prior notice tohim/it and after giving him/it the opportunityto be heard and defend himself/itself bypresenting witnesses/ evidence in his favor.Delisted external auditor and/or auditingfirm may re-apply for BSP selection after theperiod prescribed by the Monetary Board.b. BSP shall keep a record of itsproceeding/investigation. Said proceedings/investigation shall not be public, unlessotherwise ordered by the Monetary Boardfor good cause shown, with the consent ofthe parties to such proceedings.c. A determination of the MonetaryBoard to impose a suspension or delistingunder this section shall be supported by aclear statement setting forth the following:(1) Each act or practice in which theselected/accredited external auditor orauditing firm, or associated entry, ifapplicable, has engaged or omitted toengage, or that forms a basis for all or partof such suspension/delisting;(2) The specific provision/s of thisregulation, the related SEC rules orprofessional standards which the MonetaryBoard determined as has been violated; and(3) The imposed suspension ordelisting, including a justification for eithersanction and the period and otherrequirements specially required withinwhich the delisted auditing firm or externalauditor may apply for re-accreditation.d. The suspension/delisting, includingthe sanctions/penalties provided in Sec.X189 shall only apply to:(1) Intentional or knowing conduct,including reckless conduct, that results inviolation or applicable statutory, regulatoryor professional standards; or(2) Repeated instances of negligentconduct, each resulting in a violation of theapplicable statutory, regulatory orprofessional standards.e. No associate person or employedauditor of a selected/accredited auditingfirm shall be deemed to have failedreasonably to supervise any other personfor purpose of Item "I.2.g" above, if:(1) There have been established in andfor that firm procedures, and a system forapplying such procedures, that comply withapplicable rules of BSP and that wouldreasonably be expected to prevent anddetect any such violation by such associatedperson; and(2) Such person or auditor hasreasonably discharged the duties andobligations incumbent upon that person byreason of such procedures and system, andhad no reasonable cause to believe that suchprocedures and system were not beingcomplied with.f. The BSP shall discipline anyselected external auditor that is suspendedor delisted from being associated with anyselected auditing firm, or for any selectedauditing firm that knew, or in the exerciseor reasonable care should have known,of the suspension or delisting of anyselected external auditor, to permit suchassociation, without the consent of theMonetary Board.g. The BSP shall discipline any coveredinstitution that knew or in the exercise ofreasonable care should have known, of thesuspension or delisting of its external auditoror auditing firm, without the consent of theMonetary Board.h. The BSP shall establish forappropriate cases an expedited procedurefor consideration and determination of thequestion of the duration of stay of any suchdisciplinary action pending review of anydisciplinary action of the BSP under thisSection.J. SPECIFIC REVIEWWhen warranted by supervisoryconcern, the Monetary Board may, at theexpense of the covered institution requirethe external auditor and/or auditing firm toundertake a specific review of a particularQ RegulationsAppendix Q-30 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3009.12.31aspect of the operations of these institutions.The report shall be submitted to the BSPand the audited institution simultaneously,within thirty (30) calendar days after theconclusion of said review.K. AUDIT BY THE BOARD OFDIRECTORSPursuant to Section 58 of RA. No. 8791,otherwise known as “The General BankingLaw of 2000” the Monetary Board may alsodirect the board of directors of a coveredinstitution or the individual membersthereof, to conduct, either personally or bya committee created by the board, an annualbalance sheet audit of the coveredinstitution to review the internal audit andthe internal control system of theconcerned entity and to submit a reportof such audit to the Monetary Boardwithin thirty (30) calendar days after theconclusion thereof.L. AUDIT ENGAGEMENTCovered institutions shall submit theaudit engagement contract between them,their subsidiaries and affiliates and theexternal auditor/auditing firm to theappropriate department of the SES withinfifteen (15) calendar days from signingthereof. Said contract shall include thefollowing provisions:1. That the covered institution shall beresponsible for keeping the auditor fullyinformed of existing and subsequent changesto prudential regulatory and statutoryrequirements of the BSP and that bothparties shall comply with said requirements;2. That disclosure of information by theexternal auditor/auditing firm to the BSP asrequired under Items “H” and “J” hereof, shallbe allowed; and3. That both parties shall comply withall the requirements under this Appendix.(As amended by Circular No. 660 dated 25 August 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-30 - Page 11

APP. Q-3108.12.31QUALIFICATION REQUIREMENTS FOR A BANK/NON-BANK FINANCIALINSTITUTION APPLYING FOR ACCREDITATION TO ACT AS TRUSTEE ON ANYMORTGAGE OR BOND ISSUED BY ANY MUNICIPALITY, GOVERNMENT-OWNED OR CONTROLLED CORPORATION, OR ANY BODY POLITIC(Appendix to Subsec. 4409Q.16)A bank/NBFI applying for accreditationto act as trustee on any mortgage or bondissued by any municipality, governmentownedor controlled corporation, or anybody politic must comply with thefollowing requirements:a. It must be a bank or NBFI underBSP supervision;b. It must have a license to engage intrust and other fiduciary business;c. It must have complied with theminimum capital accounts required underexisting regulations, as follows:UBs and KBs The amount required underexisting regulations or suchamount as may be requiredby the Monetary Board inthe futureBranches ofForeign BanksThrift BanksThe amount required underexisting regulationsP650 million or such amountsas may be required by theMonetary Board in the futureNBFIs Adjusted capital of at leastP300.0 million or suchamounts as may be requiredby the Monetary Board in thefuture.d. Its risk-based capital adequacy ratiois not lower than twelve percent (12%) atthe time of filing the application;e. The articles of incorporation orgoverning charter of the institution shallinclude among its powers or purposes,acting as trustee or administering any trustor holding property in trust or on depositfor the use, or in behalf of others;f. The by-laws of the institution shallinclude among others, provisions on thefollowing:(1) The organization plan or structureof the department, office or unit which shallconduct the trust and other fiduciarybusiness of the institution;(2) The creation of a trust committee,the appointment of a trust officer andsubordinate officers of the trust department;and(3) A clear definition of the duties andresponsibilities as well as the line and stafffunctional relationships of the various units,officers and staff within the organization.g. The bank’s operation during thepreceding calendar year and for the periodimmediately preceding the date ofapplication has been profitable;h. It has not incurred net weeklyreserve deficiencies during the eight (8)weeks period immediately preceding thedate of application;i. It has generally complied withbanking laws, rules and regulations, ordersor instructions of the Monetary Board and/or BSP Management in the last twopreceding examinations prior to the dateof application, particularly on the following:(1) election of at least two (2)independent directors;(2) attendance by every member of theboard of directors in a special seminar forboard of directors conducted or accreditedby the BSP;(3) the ceilings on creditaccommodations to DOSRI;(4) liquidity floor requirements forgovernment deposits;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-31 - Page 1

APP. Q-3108.12.31(5) single borrower’s loan limit; and(6) investment in bank premises andother fixed assets.j. It maintains adequate provisionsfor probable losses commensurate to thequality of its assets portfolio but not lowerthan the required valuation reserves asdetermined by the BSP;k. It does not have float itemsoutstanding for more than sixty (60)calendar days in the “Due From/To HeadOffice/Branches/Other Offices” accountsand the “Due from Bangko Sentral”account exceeding one percent (1%) of thetotal resources as of date of application;l. It has established a risk managementsystem appropriate to its operationscharacterized by clear delineation ofresponsibility for risk management,adequate risk measurement systems,appropriately structured risk limits,effective internal controls and complete,timely and efficient risk reporting system;m. It has a CAMELS Composite Ratingof at least "3" in the last regularexamination with management rating ofnot lower than "3"; andn. It is a member of the PDIC in goodstanding (for banks only).Compliance with the foregoing as wellas with other requirements under existingregulations shall be maintained up to thetime the trust license is granted. A bankthat fails in this respect shall be requiredto show compliance for another test periodof the same duration.Q RegulationsAppendix Q-31 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3209.12.31RULES AND REGULATIONS ON COMMON TRUST FUNDS 1(Appendix to Sec. 4410Q)1. The administration of CTFs shall besubject to the provisions of Subsecs.4409Q.1 up to 4409Q.6 and to thefollowing regulations.As an alternative compliance with therequired prior authority and disclosureunder Subsecs. 4409Q.2 and 4409Q.3, alist which shall be updated quarterly ofprospective and/or outstanding investmentoutlets may be made available by the trusteefor the review of all CTF clients. (Sec.4410Q)2. Establishment of CTFs. Any trustcompany or investment house authorizedto engage in trust business may establish,administer and maintain one (1) or moreCTFs. (Subsec. 4410Q.1)3. Minimum documentary requirementsfor CTFs. In addition to the trust agreementor indenture required under Subsec.4409Q.1, each CTF shall be established,administered and maintained in accordancewith a written declaration of trust referredto as the plan, which shall be approved bythe board of directors of the trustee and acopy submitted to the appropriatedepartment of the SES within thirty (30)business days prior to its implementation.The plan shall make provisions on thefollowing matters:a. Title of the plan;b. Manner in which the plan is to beoperated;c. Investment powers of the trusteewith respect to the plan, including thecharacter and kind of investments which maybe purchased;d. Allocation, apportionment anddistribution dates of income, profit andlosses;e. Terms and conditions governing theadmission or withdrawal as well asexpansion or contraction of participationsin the plan including the minimum initialplacement and account balance to bemaintained by the trustor;f. Auditing and settlement of accountsof the trustee with respect to the plan;g. Detailed information on the basis,frequency, and method of valuing andaccounting of CTF assets and eachparticipation in the fund;h. Basis upon which the plan may beterminated;i. Liability clause of the trustee;j. Schedule of fees and commissionswhich shall be uniformly applied to allparticipants in a fund and which shall notbe changed between valuation dates; andk. Such other matters as may benecessary or proper to define clearly therights of participants under the plan.The legal capacity of the institutionadministering a CTF shall be indicated inthe plan and other related agreements orcontracts as trustee of the fund and not inany other capacity such as fund manager,financial manager, or like terms.The provisions of the plan shall controlall participations in the fund and the rightsand benefits of all parties in interest.The plan may be amended by resolutionof the board of directors of the trustee:Provided, however, That participants in thefund shall be immediately notified of suchamendments and shall be allowed to1The rules and regulations on CTFs were previously under Sec. 4410Q and the subsections enclosed in parentheses.The UITFunds regulations which are now in said section/subsections took effect on 01 October 2004 (effectivity of Circular No. 447dated 03 September 2004).Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-32 - Page 1

APP. Q-3209.12.31withdraw their participations if they are notin conformity with the amendments made:Provided, further, That amendments to theplan shall be submitted to the appropriatedepartment of the SES within ten (10)business days from approval of theamendments by the board of directors.A copy of the plan shall be available atthe principal office of the trustee duringregular office hours for inspection by anyperson having an interest in a trust whosefunds are invested in the plan or by hisauthorized representative. Upon request, acopy of the plan shall be furnished suchperson. (Subsec. 4410Q.2)4. Management of CTFs. The trusteeshall have the exclusive management andcontrol of each CTF administered by it, andthe sole right at any time to sell, convert,reinvest, exchange, transfer or otherwisechange or dispose of the assets comprisingthe fund.The trustee shall designate clearly in itsrecords the trust accounts owningparticipation in the CTF and the extent ofthe interests of such account. The trusteeshall not negotiate nor assign the trustor’sbeneficial interest in the CTF without priorwritten consent of the trustor or beneficiary.No trust account holding a participation ina CTF shall have or be deemed to have anyownership or interest in any particular assetor investment in the CTF but shall have onlyits proportionate beneficial interest in thefund as a whole. (Subsec. 4410Q.3)5. Trustee as participant in CTFs. Atrustee administering a CTF shall not haveany interest in such fund other than in itscapacity as trustee of the CTF nor grant anyloan on the security of a participation in suchfund: Provided, however, That a trusteewhich administers funds representingemployee benefit plans under trust orinvestment management may invest fundsin the CTF: Provided, further, That in thecase of employee benefit plans under trustbelonging to employees of entities otherthan that of the trustee, the trustee mayinvest such funds in its own CTF only on atemporary basis in accordance with Subsec.4409Q.5. (Subsec. 4410Q.4)6. Exposure limit of CTF to a singleperson or entity. No investment for a CTFshall be made in stocks, bonds, bankdeposits or other obligations of any one (1)person, firm or corporation, if as a result ofsuch investment the total amount investedin stocks, bonds, bank deposits or otherobligations issued or guaranteed by suchperson, firm or corporation shall aggregateto an amount in excess of fifteen percent(15%) of the market value of the CTF:Provided, That this limitation shall not applyto investments in government securities orother evidences of indebtedness of theRepublic of the Philippines and of the BSP,and any other evidences of indebtedness orobligations the servicing and repayment ofwhich are fully guaranteed by the Republicof the Philippines. (Subsec. 4410Q.5)7. Operating and accountingmethodology. By its inherent nature, a CTFshall be operated and accounted for inaccordance with the following:a. The trustee shall have exclusivemanagement and control of each CTFadministered by it and the sole right at anytime to sell, convert, reinvest, exchange,transfer or otherwise change or dispose ofthe assets comprising the fund;b. The total assets and accountabilitiesof each fund shall be accounted for as asingle account referred to as pooled fundaccounting;c. Contributions to each fund byclients shall always be throughparticipations in the fund;d. All such participations shall bepooled and invested as one (1) account(referred to as collective investments); andQ RegulationsAppendix Q-32 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3209.12.31e. The interest of each participant shallbe determined by a formal method ofparticipation valuation established in thewritten plan of the CTF, and no participationshall be admitted to or withdrawn from thefund except on the basis of such valuation.(Subsec. 4410Q.6)8. Tax-exempt common trust fundsThe following shall be the features/requirements of CTFs which may qualify forexemption from the twenty percent (20%)final tax under Section 24(B)(1) of R.A. No.8424 (The Tax Reform Act of 1997):a. The tax exemption shall apply toCTFs established on or after January 3, 2000;b. The CTF indenture or plan as wellas evidences of participation shall clearlyindicate that the participants shall be limitedto individual trustors/investors who areFilipino citizens or resident aliens and thatparticipation is non-negotiable and nontransferable;c. The date of contributions to the CTFshall be clearly indicated in the evidence ofparticipation to serve as basis for the trustee-QB to determine the period of participationfor tax exemption purposes;d. The CTF indenture/plan as well asthe evidence of participation shall indicatethat pursuant to Section 24(B)(1) of R.A. No.8424, interest income of the CTF derivedfrom investments in interest-bearinginstruments (e.g., time deposits, governmentsecurities, loans and other debt instruments)which are otherwise subject to the twentypercent (20%) final tax, shall be exemptfrom said final tax provided participation inthe CTF is for a period of at least five (5)years. If participation is for a period less thanfive (5) years, interest income shall besubject to a final tax which shall be deductedand withheld based on the followingschedule:RateParticipation Period of TaxFour (4) years to less than five(5) years 5%Three (3) years to less than four(4) years 12%Less than three (3) years 20%Necessarily, the date of contributionshall be clearly indicated in the evidence ofparticipation which shall serve as basis fordetermining the participation period of eachparticipant; ande. Tax-exempt CTFs established underthis Subsection shall be subject to theprovisions of Subsecs. 4409Q.1(c),4409Q.2 up to 4409Q.7, and Items “2 to 7”of this Appendix.Regarding the required prior authorityand disclosure under Subsecs. 4409Q.2 and4409Q.3, a list of prospective and/oroutstanding investment outlets that is madeavailable by the trustee for the review of allCTF clients may serve as an alternativecompliance, which list shall be updatedquarterly. (Subsec. 4410Q.7)9. Custody of Securities. Investmentsin securities of all existing CTFs shall bedelivered to a BSP-accredited third partycustodian not later than 31 October 2004.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-32 - Page 3

APP. Q-3308.12.31CHECKLIST OF BSP REQUIREMENTS IN THE SUBMISSION OF FINANCIALAUDIT REPORT, ANNUAL AUDIT REPORT AND REPORTS REQUIRED UNDERAPPENDIX Q-30[Appendix to Secs. 4190Q (2008 - 4172Q), 4172S and 4172N]The external auditor (Included in the List of BSP Selected External Auditors) shall startthe audit not later than thirty (30) calendar days after the close of the calendar/fiscal yearadopted by the bank. AFS of banks/QBs with subsidiaries shall be presented side by side ona solo basis and on a consolidated basis (QBs and subsidiaries). The FAR shall be submittedby the bank/QB to the appropriate department of the SES not later than 120 calendar daysafter the close of the calendar year or fiscal year adopted by the bank/QB, together with thefollowing:Information/Data RequiredA. FAR1. Certification by the external auditor onthe following:a. The dates of commencement andtermination of audit.Deadline for submissionFor submission together with the FAR notlater than 120 calendar days after the closeof the calendar year or fiscal year adoptedby the bank.b. The date when the FAR and certificationunder oath stating that no materialweakness or breach in the internalcontrol and risk management systemswas noted in the course of the audit ofthe bank/QB were submitted to theboard of directors or country head, inthe case of foreign bank branches; andc. That the external auditor, partners,associates, auditor-in-charge of theengagement and the members of theirimmediate family do not have any director indirect financial interest with thebank/QB, its subsidiaries and affiliatesand that their independence is notconsidered impaired under thecircumstances specified in the Code ofProfessional Ethics for CPAs.2. Reconciliation statement for thedifferences in amounts between theaudited and the submitted BS and ISfor bank proper (regular and FCDU) andFor submission together with the FAR notlater than 120 calendar days after the closeof the calendar year or fiscal year adoptedby the bank.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-33 - Page 1

APP. Q-3308.12.31Information/Data RequiredDeadline for submissiontrust department, including copies ofadjusting entries on the reconcilingitems.Note: Please see pro-formacomparative analysis (Annex Q-33-a).3. LOC indicating the external auditor'sfindings and comments on the materialweakness noted in the internal controland risk management systems and otheraspects of operations.In case no material weakness is notedto warrant the issuance of an LOC, acertification under oath stating that nomaterial weakness or breach in theinternal control and risk managementsystems was noted in the course of theaudit of the bank shall be submitted bythe external auditor.Within thirty (30) calendar days aftersubmission of the FAR.For submission together with the FAR notlater than 120 calendar days after the closeof the calendar year or fiscal year adoptedby the bank.4. Copies of the board resolutions showingthe:a. Action taken on the FAR and, whereapplicable, on the certification underoath including the names of thedirectors, present and absent, amongother things; andb. Action taken on the findings andrecommendations in the LOC, and thenames of the directors present andabsent, among other things.Within thirty (30) banking days after thereceipt of the FAR and certification underoath by the board of directors.Within thirty (30) banking days after thereceipt of the LOC by the board of directors.5. In case of foreign banks with branchesin the Philippines, in lieu of the boardresolution:a. A report by the country head on theaction taken by management (headoffice, regional or country) on the FARand, where applicable, on theWithin thirty (30) banking days after thereceipt of the FAR and certification underoath by the country head.Q RegulationsAppendix Q-33 - Page 2Manual of Regulations for Non-Bank Financial Institutions

Information/Data Required Deadline for submissionapplicable, on certification under oathstating that no material weakness orbreach in the internal control and riskmanagement systems was noted in thecourse of the audit of the bank.APP. Q-3308.12.31b. A report by the country head on theaction taken by management (headoffice, regional or country) on the LOC.6. Certification of the external auditor on thedate when the LOC was submitted tothe board of directors or country head.7. All the required disclosures in the AFSprovided under Subsec. 4190Q.4Within thirty (30) banking days after thereceipt of the LOC by the country head.Within thirty (30) banking days after thereceipt of the LOC by the board of directorsor country head.For submission together with the FAR notlater than one hundred twenty calendardays after the close of the calendar year orfiscal year adopted by the bank.8. Reports required to be submitted by theexternal auditor under Appendix Q-30.a. To enable the BSP to take timely andappropriate remedial action, the externalauditor must report to the BSP, thefollowing cases:Within thirty (30) calendar days afterdiscovery.(1) Any material finding involving fraudor dishonesty (including cases that wereresolved during the period of audit); and(2) Any potential losses the aggregate ofwhich amounts to at least one percent(1%) of the capital.b. The external auditor shall report directlyto the BSP the following:Within fifteen (15) calendar days after theoccurrence/discovery.(1) Termination or resignation as externalauditor and starting the reason therefore;(2) Discovery of a material breach oflaws or BSP rules and regulations suchas, but not limited to:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-33 - Page 3

APP. Q-3308.12.31Information/Data Required Deadline for submission(a) CAR; and(b) Loans and other risk assets reviewand classification.(3) Findings on matters of corporategovernance that may require urgentaction by the BSP.c. In case there are no matters to report(e.g., fraud, dishonesty, breach of laws,etc.) a notarized certification that thereis none to report.Within fifteen (15) calendar days after theclosing of the audit engagement.B. AAR – For banks and other FIs underthe concurrent jurisdiction of the BSPand COA.1. Copy of the AAR accompanied by the:a. Certification by the institutionconcerned on the date of receipt of theAAR by the board of directors;Within thirty (30) banking days after receiptof the AAR by the board of directors.b. Reconciliation statement between theAFS in the AAR and the BS and IS ofbank proper (Regular and FCDU) andtrust department submitted to the BSP,including copies of adjusting entries onthe reconciling items; andc. Other information that may be requiredby the BSP.2. Copy of the board resolution showingthe action taken on the AAR, as well ason the comments and observations,including the names of the directorspresent and absent, among otherthings.Within thirty (30) banking days after receiptof the AAR by the board of directors.(As amended by Circular Nos. 554 dated 22 December 2006 and 540 dated 09 August 2006)Q RegulationsAppendix Q-33 - Page 4Manual of Regulations for Non-Bank Financial Institutions

Name of Financial InstitutionComparison of Submitted Consolidated Balance Sheet and Income Statementand Audited Financial Statements(Parent and Subsidiaries)As of (end of calendar or fiscal year)(In Thousand Pesos)APP. Q-3308.12.31Annex Q-33-aSubmitted Audited Variance/ Reasons forReport Report Discrepancy DiscrepancyCash and Other Cash ItemsDue from BSPDue from Other BanksFinancial Assets Held for Trading (HFT)Held-to-Maturity (HTM) Financial AssetsAvailable-for-Sale Financial AssetsLoans and Receivables, netInterbank Loans ReceivableEquity Investments in Subsidiaries, Associates& Joint VenturesBank Premises, Furniture, Fixtures and Equipment, netReal and Other Properties Acquired (ROPA), netOther AssetsDue from Head Office/Branches/Agencies AbroadTotal Assets===== ==== ===== ======Deposit LiabilitiesBills PayableBonds PayableUnsecured Subordinated Debt (UnSD)Redeemable Preferred SharesAccrued Interest, Taxes and Other ExpensesOther LiabilitiesDue to Head Office/Branches/Agencies AbroadTotal Liabilities===== ==== ===== ======Paid-in Capital StockAdditional Paid-In CapitalRetained EarningsAssigned CapitalTotal Capital===== ==== ===== ======Total Liabilities and Capital===== ==== ===== ======Total IncomeTotal ExpensesNet Income before Income Tax===== ==== ===== ======(As amended by Circular Nos. 554 dated 22 December 2006 and 540 dated 09 August 2006)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-33 - Page 5

APP. Q-3408.12.31QUARTERLY INVESTMENT DISCLOSURE STATEMENT(Appendix to Subsec. 4410Q.7)Name of Unit Investment Trust Fund:For the Quarter ended:Net Asset Value, end of quarter:Net Asset Value Per Unit (NAVPu):Short Description:(e.g., The Fund is a peso denominated fixed-income fund. The investment objective of theFund is to generate a steady stream of income by investing in a diversified portfolio ofhigh-grade marketable securities)Administrative Details:Trust Fee:Minimum Investment:Holding Period:Participation/Redemption Conditions:Special Reimbursable Expenses, if any:Outstanding Investments:The Fund has investments in the following:(may be in graph format showing weightings per investment type or class of security)Prospective Investments:The following names/securities are among the fund’s approved investment outlets wherethe Trustee intends to invest in depending on its availability or other market drivencircumstances:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-34 - Page 1

APP. Q-34a08.12.31Annex A(NAME OF TRUST ENTITY)-(TRUST BANKING GROUP/TRUST DEPARTMENT)Unit Investment Trust FundsRISK DISCLOSURE STATEMENTPrior to making an investment in any of the (Name of Trust Entity) Unit InvestmentTrust Funds (UITFs), (Name of Trust Entity) is hereby informing you of the nature of theUITFs and the risks involved in investing therein. As investments in UITFs carry differentdegrees of risk, it is necessary that before you participate/invest in these funds, you shouldhave: 1. Fully understood the nature of the investment in UITFs and the extent of yourexposure to risks; 2. Read this Risk disclosure Statement completely; and 3. Independentlydetermined that the investment in the UITFs is appropriate for you.There are risks involved in investing in the UITFs because the value of your investmentis based on the Net Asset Value per unit (NAVpu) of the Fund which uses a marked-tomarketvaluation and therefore may fluctuate daily. The NAVpu is computed by dividingthe Net Asset Value (NAV) of the Fund by the number of outstanding units. The NAV isderived from the summation of the market value of the underlying securities of the Fundplus accrued interest income less liabilities and qualified expenses.Investment in the UITF does not provide guaranteed returns even if invested ingovernment securities and high-grade prime investment outlets. Your principal andearnings from investment in the Fund can be lost in whole or in part when the NAVpu atthe time of redemption is lower than the NAVpu at the time of participation. Gainsfrom investment is realized when the NAVpu at the time of redemption is higher thanthe NAVpu at the time of participation.Your investment in any of the (Name of Trust Entity) UITFs exposes you to the varioustypes of risks enumerated and defined hereunder:Interest Rate Risk. This is the possibility for an investor to experience losses due tochanges in interest rates. The purchase and sale of a debt instrument may result in profit orloss because the value of a debt instrument changes inversely with prevailing interestrates.The UITF portfolio, being market-to-market, is affected by changes in interest ratesthereby affecting the value of fixed income investments such as bonds. Interest rate changesmay affect the prices of fixed income securities inversely, i.e., as interest rates rise, bondprices fall and when interest rates decline, bond prices rise. As the prices of bonds in aFund adjust to a rise in interest rates, the Fund’s unit price may decline.Market/Price Risk. This is the possibility for an investor to experience losses due tochanges in market prices of securities (e.g., bonds and equities). It is the exposure to theuncertain market value of a portfolio due to price fluctuations.It is the risk of the UITF to lose value due to a decline in securities prices, which maysometimes happen rapidly or unpredictably. The value of investments fluctuates over agiven time period because of general market conditions, economic changes or other eventsthat impact large portions of the market such as political events, natural calamities, etc. Asa result, the NAVpu may increase to make profit or decrease to incur loss.Liquidity Risk. This is the possibility for an investor to experience losses due to theinability to sell or convert assets into cash immediately or in instances where conversion toAppendix Q-34a - Page 1

APP. Q-34a08.12.31cash is possible but at a loss. These may be caused by different reasons such as trading insecurities with small or few outstanding issues, absence of buyers, limited buy/sell activityor underdeveloped capital market.Liquidity risk occurs when certain securities in the UITF portfolio may be difficult orimpossible to sell at a particular time which may prevent the redemption of investment inUITF until its assets can be converted to cash. Even government securities which are themost liquid of fixed income securities may be subjected to liquidity risk particularly if asizeable volume is involved.Credit Risk/Default Risk. This is the possibility for an investor to experience lossesdue to a borrower’s failure to pay principal and/or interest in a timely manner on instrumentssuch as bonds, loans, or other forms of security which the borrower issued. This inability ofthe borrower to make good on its financial obligations may have resulted from adversechanges in its financial condition thus, lowering credit quality of the security, andconsequently lowering the price (market/price risk) which contributes to the difficulty inselling such security. It also includes risk on a counterparty (a party the UITF Managertrades with) defaulting on a contract to deliver its obligation either in cash or securities.This is the risk of losing value in the UITF portfolio in the event the borrower defaultson his obligation or in the case of a counterparty, when it fails to deliver on the agreedtrade. This decline in the value of the UITF happens because the default/failure wouldmake the price of the security go down and may make the security difficult to sell. As thesehappen, the UITFs NAVpu will be affected by a decline in value.Reinvestment Risks. This is the risk associated with the possibility of having lowerreturns or earnings when maturing funds or the interest earnings of funds are reinvested.Investors in the UITF who redeem and realize their gains run the risk of reinvestingtheir funds in an alternative investment outlet with lower yields. Similarly, the UITFmanager is faced with the risk of not being able to find good or better alternative investmentoutlets as some of the securities in the fund matures.In case of a foreign-currency denominated UITF or a peso denominated UITF allowedto invest in securities denominated in currencies other than its base currency, the UITF isalso exposed to the following risks:Foreign Exchange Risk. This is the possibility for an investor to experience losses due tofluctuations in foreign exchange rates. The exchange rates depend upon a variety of globaland local factors, e.g., interest rates, economic performance, and political developments.It is the risk of the UITF to currency fluctuations when the value of investments insecurities denominated in currencies other than the base currency of the UITF depreciates.Conversely, it is the risk of the UITF to lose value when the base currency of the UITFappreciates. The NAVpu of a peso-denominated UITF invested in foreign currencydenominatedsecurities may decrease to incur loss when the peso appreciates.Country Risk. This is the possibility for an investor to experience losses arising frominvestments in securities issued by/in foreign countries due to the political, economic andsocial structures of such countries. There are risks in foreign investments due to the possibleinternal and external conflicts, currency devaluations, foreign ownership limitations andtax increases of the foreign country involved which are difficult to predict but must betaken into account in making such investments.Likewise, brokerage commissions and other fees may be higher in foreign securities.Government supervision and regulation of foreign stock exchanges, currency markets,trading systems and brokers may be less than those in the Philippines. The procedures andrules governing foreign transactions and custody of securities may also involve delays inpayment, delivery or recovery of investments.Appendix Q-34a - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-34a08.12.31Other Risks. Your participation in the UITFs may be further exposed to the risk of anyactual or potential conflicts of interest in the handling of in-house or related party transactionsby (Name of Trust Entity). These transactions may include own-bank deposits; purchase ofown-institution or affiliate obligations (stock, mortgages); purchase of assets from or salesto own institution, directors, officers, subsidiaries, affiliates or other related interests/parties;or purchases or sales between fiduciary/managed accounts.I/we have completely read and fully understood this risk disclosure statement and thesame was clearly explained to me/us by a (Name of Trust Entity) UIT marketing personnelbefore I/we affixed my/our signature/s herein. I/we hereby voluntarily and willingly agreeto comply with any and all laws, regulations, the plan rules, terms and conditions governingmy/our investment in the (Name of Trust Entity) UITFs.Signature over Printed NameDateI acknowledge that I have (1) advised the client to read this Risk Disclosure Statement, (2)encouraged the client to ask questions on matters contained in this Risk Disclosure Statement,and (3) fully explained the same to the client.Signature over Printed Name/Position of UIT Marketing PersonnelDate(Circular No. 593 dated 08 January 2008)Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-34a - Page 3

APP. Q-3508.12.31BANGKO SENTRAL RULES OF PROCEDURE ON ADMINISTRATIVE CASESINVOLVING DIRECTORS AND OFFICERS OF QUASI-BANKS AND TRUST ENTITIES(Appendix to Sec. 4150Q)RULE I – GENERAL PROVISIONSSection 1. Title. – These Rules shall beknown as the BSP Rules of Procedure onAdministrative Cases Involving Directorsand Officers of Quasi-Banks and TrustEntities.Sec. 2. Applicability. – These Rulesshall apply to administrative cases filed withor referred to the Office of SpecialInvestigation (OSI), BSP, involving directorsand officers of quasi-banks and trust entitiespursuant to Section 37 of R.A. No. 7653(The New Central Bank Act) and Sections16 and 66 of R.A. No. 8791 (The GeneralBanking Law of 2000).The disqualification of directors andofficers under Section 16 of R.A. No. 8791shall continue to be covered by existing BSPrules and regulations.Sec. 3. Nature of Proceedings. – Theproceedings under these Rules shall besummary in nature and shall be conductedwithout necessarily adhering to thetechnical rules of procedure and evidenceapplicable to judicial trials. Proceedingsunder these Rules shall be confidential andshall not be subject to disclosure to thirdparties, except as may be provided underexisting laws.RULE II – COMPLAINTSec. 1. Complaint. - The complaint shallbe in writing and subscribed and sworn toby the complainant. However, in casesinitiated by the appropriate department ofthe BSP, the complaint need not be underoath. No anonymous complaint shall beentertained.Sec. 2. Where to file. – The complaintshall be filed with or referred to the OSI.Sec. 3. Contents of the Complaint - Thecomplaint shall contain the ultimate factsof the case and shall include:a. full name and address of thecomplainant;b. full name and address of the personcomplained of;c. specification of the charges;d. statement of the material facts;e. statement as to whether or not asimilar complaint has been filed with theBSP or any other public office.The complaint shall include copies ofdocuments and affidavits of witnesses, ifany, in support of the complaint.RULE III – DETERMINATION OF PRIMAFACIE CASE AND PROSECUTION OFTHE CASESec. 1. Action on Complaint.- Upondetermination that the complaint is sufficientin form and substance, the OSI shall furnishthe respondent with a copy thereof andrequire respondent to file within ten (10)days from receipt thereof, a sworn answer,together with copies of documents andaffidavits of witnesses, if any, copy furnishedthe complainant.Failure of the respondent to file ananswer within the prescribed period shallbe considered a waiver and the case shallbe deemed submitted for resolution.Sec. 2. Preliminary Investigation. –Upon receipt of the sworn answer of therespondent, the OSI shall determinewhether there is a prima facie case againstthe respondent. If a prima facie isManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-35 - Page 1

APP. Q-3508.12.31established during the preliminaryinvestigation, the OSI shall file the formalcharge with the Supervised BanksComplaints Evaluation Group (SBCEG),BSP. However, in the absence of a primafacie case, the OSI shall dismiss thecomplaint without prejudice or takeappropriate action as may be warranted.Sec. 3. Formal Charge. – The formalcharge shall contain the name of therespondent, a brief statement of material orrelevant facts, the specific charge, and thepertinent provisions of banking laws, rulesor regulations violated.Sec. 4. Prosecution. – The OSI shallprosecute the case. The complainant maybe assisted or represented by counsel, whomay be deputized for such purpose, underthe direction and control of the OSI.RULE IV – PROCEEDING BEFORE THEHEARING PANEL OR HEARINGOFFICERSec. 1. Filing of the Formal Charge.-The OSI shall file the formal charge beforethe SBCEG. It shall also furnish the SBCEGwith supporting documents relevant to theformal charge.Sec. 2. Hearing Officer andComposition of the Hearing Panel. – Thecase shall be heard either by a HearingOfficer or a Hearing Panel, which shall becomposed of a Chairman and two (2)members, all of whom shall be designatedby the SBCEG. The SBCEG shall determinewhether the case shall be heard either by aHearing Panel or a Hearing Officer.Sec. 3. Answer. – The Hearing Panelor Hearing Officer shall furnish therespondent with a copy of the formalcharge, with supporting documents relevantthereto, and shall require him to submit,within ten (10) days from receipt thereof, asworn answer, copy of which shall befurnished the prosecution.The respondent, in his answer, shallspecifically admit or deny all the chargesspecified in the formal charge, includingthe attachments. Failure of the respondentto comment, under oath, on the documentsattached thereto shall be deemed anadmission of the genuineness and dueexecution of said documents.Sec. 4. Waiver. – In the event that therespondent, despite due notice, fails tosubmit an answer within the prescribedperiod, he shall be deemed to have waivedhis right to present evidence. The HearingPanel or Hearing Officer shall issue anOrder to that effect and direct theprosecution to present evidence ex parte.Thereafter, the Hearing Panel or HearingOfficer shall submit a report on the basis ofavailable evidence.Sec. 5. Preliminary Conference.– Uponreceipt of the answer of respondent, theHearing Panel or Hearing Officer shall setthe case for preliminary conference for theparties to consider and agree on theadmission or stipulation of facts and ofdocuments, simplification of issues,identification and marking of evidence andsuch other matters as may aid in the promptand just resolution of the case. Anyevidence not presented and identifiedduring the preliminary conference shall notbe admitted in subsequent proceedings.Sec. 6. Submission of PositionPapers.– After the preliminary conference,the Hearing Panel or Hearing Officer shallissue an Order stating therein the matterstaken up, admissions made by the partiesand issues for resolution. The Order shallalso direct the parties to simultaneouslyQ RegulationsAppendix Q-35 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3508.12.31submit, within ten (10) days from thereceipt of said Order, their respectiveposition papers which shall be limited toa discussion of the issues as defined in theOrder.Sec. 7. Hearing. – After thesubmission by the parties of their positionpapers, the Hearing Panel or HearingOfficer shall determine whether or notthere is a need for a hearing for the purposeof cross-examination of the affiant(s). If theHearing Panel or Hearing Officer findsno necessity for conducting a hearing, heshall issue an Order to the effect.In cases where the Hearing Panel orHearing Officer deems it necessary toallow the parties to conduct crossexamination,the case shall be set forhearing. The affidavits of the parties andtheir witnesses shall take the place of theirdirect testimony.RULE V – PROHIBITED MOTIONSSec. 1. Prohibited Motions. – Nomotion to dismiss or quash, motion for billof particulars and such other dilatorymotions shall be allowed in the casescovered by these Rules.RULE VI – RESOLUTION OF THE CASESec. 1. Contents and Period forSubmission of Report. – Within sixty (60)days after the Hearing Panel or HearingOfficer has issued an Order declaring thatthe case is submitted for resolution, areport shall be submitted to the MonetaryBoard. The report of the Hearing Panel orHearing Officer shall contain clearly anddistinctly the findings of facts andconclusions of law on which it is based.Sec. 2. Rendition and Notice ofResolution. – After consideration of thereport, the Monetary Board shall actthereon and cause true copies of itsResolution to be served upon the parties.Sec. 3. Finality of the Resolution.–The Resolution of the Monetary Boardshall become final after the expiration offifteen (15) days from receipt thereof bythe parties, unless a motion forreconsideration shall have been timelyfiled.Sec. 4. Motion for Reconsideration.–A motion for reconsideration may only beentertained if filed within fifteen (15) daysfrom receipt of the Resolution by theparties. No second motion forreconsideration shall be allowed.RULE VII – APPEALSec. 1. Appeal. – An appeal from theResolution of the Monetary Board may betaken to the Court of Appeals within theperiod and in the manner provided underRule 43 of the Revised Rules of Court.RULE VIII – EXECUTION OFRESOLUTIONSec. 1. Resolution BecomingExecutory. – The Resolution of theMonetary Board shall become executoryupon the lapse of fifteen (15) days fromreceipt thereof by the parties or from thereceipt of the denial of the motion forreconsideration.Sec. 2. Effect of Appeal. – The appealshall not stay the Resolution sought to bereviewed unless the Court of Appeals shalldirect otherwise upon such terms as itmay deem just.Sec. 3. Enforcement of Resolution.–When the Resolution orders theimposition of fines, suspension or removalfrom office of respondent, theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-35 - Page 3

APP. Q-3508.12.31enforcement thereof shall be referred tothe appropriate department of the BSP.RULE IX – MISCELLANEOUSPROVISIONSSection 1. Repeal. – All existing rules,regulations, orders or circulars or any partthereof inconsistent with these Rules arehereby repealed, amended or modifiedaccordingly.Section 2. Separability Clause. – If anypart of these Rules is declaredunconstitutional or illegal, the other partsor provisions shall remain valid.Q RegulationsAppendix Q-35 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3608.12.31FORMAT CERTIFICATION[Appendix to Subsec. 4235Q.12 (2008 - 4211Q.12)]______________________________Name of BankCERTIFICATIONPursuant to the requirements of Subsec. 4235Q.12, I HEREBY CERTIFY that on allbanking days of the semester ended _____ that the ____________________ (quasi-bank)did not enter into any repurchase agreement covering government securities, commercialpapers and other negotiable and non-negotiable securities or instruments that are notdocumented in accordance with existing BSP regulations and that it has strictly compliedwith the pertinent rules of the SEC and the BSP on the proper sale of securities to thepublic and performed the necessary representations and disclosures on the securitiesparticularly the following:1. Informed and explained to the client all the basic features of the security being sold ona without recourse basis, such as, but not limited to:a. Issuer and its financial condition;b. Term and maturity date;c. Applicable interest rate and its computation;d. Tax features (whether taxable, tax paid or tax-exempt);e. Risk factors and investment considerations;f. Liquidity feature of the instrument:f.1. Procedures for selling the security in the secondary market (e.g., OTC or exchange);f.2. Authorized selling agents; andf.3. Minimum selling lots.g. Disposition of the securityg.1. Registry (address and contact numbers)g.2. Functions of the registryg.3. Pertinent registry rules and proceduresh. Collecting and Paying Agent of the principal and interesti. Other pertinent terms and conditions of the security and if possible, a copy of theprospectus or information sheet of the security.2. Informed the client that pursuant to BSP Circular No. 392 dated 23 July 2003 –• Securities sold under repurchase agreements shall be physically delivered, ifcertificated, to a BSP-accredited custodian that is mutually acceptable to the client andthe quasi-bank, or by means of book-entry transfer to the appropriate securities accountof the BSP-accredited custodian in a registry for said securities, if immobilized ordematerialized, andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-36 - Page 1

APP. Q-3608.12.31• Securities sold on a without recourse basis are required to be delivered physicallyto the purchaser, or to his designated custodian duly accredited by the BSP, if certificated,or by means of book-entry transfer to the appropriate securities account of the purchaseror his designated custodian in a registry for said securities if immobilized or dematerialized3. Clearly stated to the client that:a. The quasi-bank does not guarantee the payment of the security sold on a “withoutrecourse basis” and in the event of default by the issuer, the sole credit risk shall beborne by the client; andb. The quasi-bank is not performing any advisory or fiduciary function._______________Name of OfficerPositionDate _____________SUBSCRIBED AND SWORN to before me, this _____ day of _____, affiant exhibitinghis Community Tax Certificate as indicated below:Name Community Tax Date/PlaceCert. No.IssuedNotary PublicQ RegulationsAppendix Q-36 - Page 2Manual of Regulations for Non-Bank Financial Institutions

App. Q-3608.12.31Annex Q-36-aFORMAT CERTIFICATION(Annex to Appendix Q-36)______________________________Name of BankCERTIFICATIONPursuant to the requirements of Subsec 4235Q.12, I hereby certify that as of31 January 2005, the ____________________ (name of quasi-bank) does not have anyoutstanding repurchase agreements covering government securities, commercial papersand other negotiable and non-negotiable securities or instruments that are not documentedin accordance with existing BSP regulations.Name of OfficerPositionSUBSCRIBED AND SWORN to before me, this _____ day of _____, affiant exhibitinghis Community Tax Certificate as indicated below:Name Community Tax Date/PlaceCert. No.IssuedNotary PublicManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-36 - Page 3

APP. Q-3709.12.31DUTIES AND RESPONSIBILITIES OF BANKS AND THEIR DIRECTORS/OFFICERSIN ALL CASES OF OUTSOURCING OF BANKING FUNCTIONS[Appendix to Sec. 4162Q (2008 - 4192Q), 4190S, 4190P and 4190N]a. When outsourcing of bankingfunctions is allowed by law, banks shall:(1) Carry out the same in accordancewith proper standards, ensuring theintegrity of the data, systems and controlsof the banks and subject to thesupervisory, regulatory and administrativeauthority of the BSP over the banks andtheir directors/officers;(2) Be responsible for the performancethereof in the same manner and to the sameextent as it was before the outsourcing;(3) Comply with all laws andregulations governing the quasi-bankingactivities/services performed by thequalified service providers in its behalf suchas, but not limited to, keeping of recordsand preparation of reports, signingauthorities, internal control and clearingregulations; and(4) Manage, monitor and review on anongoing basis the performance by thequalified service providers of the outsourcedbanking activities/services.b. Prohibition against outsourcingcertain banking functions. No bank orany director, officer, employee, or agentthereof shall outsource inherent bankingfunctions.For purposes of this Section,outsourcing of inherent banking functionsshall refer to any contract between the bankand a service provider for the latter tosupply, or any act whereby the lattersupplies, the manpower to service thedeposit substitute transactions of theformer.Banks cannot outsource managementfunctions except as may be authorized bythe Monetary Board when circumstancesjustify.c. Outsourcing of informationtechnology systems/processes. Subject toprior approval of the Monetary Board,banks may outsource all informationtechnology systems and processes exceptfor functions excluded in Item “1”.(1) Certain functions affecting the abilityof the bank to ensure the fit of technologyservices deployed to meet its strategic andbusiness objectives and to comply with allpertinent banking laws and regulations, suchas, but not limited to, strategic planning forthe use of information technology;determination of system functionalities;change management inclusive of qualityassurance and testing; service level andcontract management; and security policyand administration, may not be outsourced.Subject to prior approval of the MonetaryBoard and submission of the samedocumentary requirements in Item “(2)”hereof, consultants and/or service providersmay be engaged to provide assistance/support to the bank personnel assigned toperform such functions.(2) Documentary requirements. Abank intending to outsource informationtechnology systems and processes shallsubmit the following documents to BSPwhich shall treat the same as strictlyconfidential:(a) Proposed contract between thebank and the service provider whichshould, at a minimum, include all thefollowing:(i) Complete description of the work tobe performed or services to be provided;(ii) Fee structure;(iii) Provisions regarding on-linecommunication availability, transmissionline security, and transaction authentication;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-37 - Page 1

APP. Q-3709.12.31(iv) Responsibilities regardinghardware, software and infrastructureupgrades;(v) Provisions governingamendment and pre-termination of contract;(vi) Mandatory notification by theservice provider of all systems changes thatwill affect the bank;(vii) Details of all security proceduresand standards;(viii) Responsibility, fines, penaltiesand accountability of the service providerfor errors, omissions and frauds;(ix) Confidentiality clause coveringall data and information; solidary liabilityof service provider and bank for anyviolation of R.A. No. 1405 (Bank DepositsSecrecy Law) actions that the bank maytake against the service provider for breachof confidentiality or any form of disclosureof confidential information; and theapplicable penalties;(x) Segregation of the data of thebank from that of the service provider andits other clients;(xi) Disaster recovery/businesscontinuity contingency plans andprocedures;(xii) Adequate insurance for fidelityand fire liability;(xiii) Ownership/maintenance ofthe computer hardware, software(program source code), user and systemdocumentation, master and transactiondata files;(xiv) Guarantee that the serviceprovider will provide necessary levels oftransition assistance if the bank decides toconvert to other service providers or otherarrangements;(xv) Access to the financialinformation of the service provider;(xvi) Access of internal and externalauditors to information regarding theoutsourced activities/services which theyneed to fulfill their respectiveresponsibilities;(xvii) Access of BSP to the operationsof the service provider in order to reviewthe same in relation to the outsourcedactivities/services;(xviii) Provision which requires theservice provider to immediately take thenecessary corrective measures to satisfythe findings and recommendations of BSPexaminers and those of the internaland/or external auditors of the bankand/or the service provider; and(xix) Remedies for the bank in theevent of change of ownership, assignment,attachment of assets, insolvency, orreceivership of the service provider.(b) Minutes of meetings of theboard of directors of the bank concernedsigned by majority thereof, certified by thesecretary and attested by the presidentdocumenting their discussions on thefollowing:(i) The benefits and advantages ofoutsourcing with respect to, among others,its role and contribution to theaccomplishment of the strategic andbusiness plans of the bank as well as theeconomy, efficiency and quality of its overalloperations;(ii) The careful and diligentevaluation, prior to selecting the serviceprovider with which it is entering into anoutsourcing contract, by the bank of variousservice providers and their proposals,including their reputation, financialcondition, cost for development,maintenance and support, internal controls,recovery processes, service levelagreements, availability of competent,technically qualified and experiencedpersonnel, strategic or convenient locationof support services and such similar otherconsiderations;(iii) The creation, organization andmembership of a senior managementoversight committee to handle andoversee the efficient implementationand monitoring of the applications/Q RegulationsAppendix Q-37 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3709.12.31operations of the service provider to ensurethat the same is in accordance with theexisting information technology initiatives,policies and guidelines of the bank; the listof the members of such committee, itsorganizational chart, and a detaileddescription of the roles and responsibilitiesof its members must be included in theminutes of the meeting or submitted asattachments thereto;(iv) The creation, organization andmembership of a help desk to resolve allqueries, problems and other concernsarising from the applications/operationsrendered by the service provider; and(v) The systems and user acceptancetests that will be conducted by the serviceprovider before full implementation of theoutsourced systems/processes and theunsatisfactory results of which shall be validground to rescind the contract with theservice provider.(c) Profile of the selected serviceprovider or the non-bank partner, in case ofjoint ventures and other similararrangements, which should include:(i) Most recent and complete financialand operational information;(ii) Track record;(iii) List of clientele, particularly banksand the services provided thereto by theservice provider; and(iv) At the option of the service provideror non-bank partner, other documentsdemonstrative of its competence andreputation in the field of informationtechnology as applied to bankingoperations.d. Outsourcing of other bankingfunctions(1) Subject to prior approval of theMonetary Board, banks may outsource thefollowing functions, services or activities:(a) data imaging, storage, retrieval andother related systems;(b) clearing and processing of checksnot included in the PCHC System;(c) printing of bank deposit statements;(d) credit card services;(e) credit investigation and collection;(f) processing of export, import andother trading transactions;(g) property appraisal;(h) property management services;(i) internal audit, subject to thefollowing conditions:(i) the board of directors and seniormanagement of the regulated entityremain responsible for maintaining aneffective system of internal control and forproviding active oversight of theoutsourced internal audit activities/functions;(ii) the external service provider shallbe an independent external auditorincluded in the list of BSP-selected externalauditors or a parent company which ownsor controls more than fifty percent (50%)of the subscribed capital stock of theoutsourcing entity: Provided, That Item“A2” of the general requirements underAppendix Q-30 shall apply to the parentcompany while Items “A2”, “A4”, “A5”,and “A6” shall apply to the independentexternal auditor;(iii) the contract/service agreementwith the external service provider shall notbe entered into for a period longer than five(5) years;(iv) there shall be a contingency planto mitigate any significant disruption,discontinuity or gap in audit coverage,particularly for high-risk areas;(v) the written engagement contract orservice agreement with the externalservice provider shall, as a minimum:(aa) define the rights, expectations andresponsibilities of both parties;(bb)set the scope and frequency of, andthe fees to be paid for, the work to beperformed by the external serviceprovider;(cc) state that the outsourced internalaudit services are subject to regulatoryManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-37 - Page 3

APP. Q-3709.12.31review and that BSP examiners shall begranted full and timely access to internalaudit reports and related working papers;(dd) state that the external serviceprovider will not perform managementfunctions, make management decisions, oract or appear to act in a capacity equivalentto that of a member of management or anemployee of the institution, and will complywith professional and regulatoryindependence guidelines;(ee) specify that the external serviceprovider must maintain the audit reports andrelated working papers/files for at least five(5) years;(ff) state that internal audit reports arethe property of the institution, that theinstitution will be provided with copies ofrelated working papers/files it deemsnecessary, and any information pertainingto the institution must be kept confidential;and(gg) establish a protocol for changingthe terms of the service contract andstipulations for default and termination ofthe contract;(j) marketing loans, deposits andother bank products and services, providedit does not involve the actual opening ofdeposit accounts;(k) general bookkeeping and accountingservices: Provided, That these activities donot include servicing bank deposits or otherinherent banking functions;(l) offsite records storage services;(m) front/back office functions, i.e.,trade support services and downstreamprocessing activities, by parent to asubsidiary or vice-versa, subject to thefollowing conditions:(i) The bank intending to outsource theaforementioned functions shall certify thatthe front office functions to be done by itsparent/subsidiary (service provider) shall belimited to trade support services;(ii) The bank shall remain a parent/subsidiary of its subsidiary/parent (serviceprovider) and such service provider shallservice only entities belonging to itsbusiness group;(iii) The bank shall certify that noinherent quasi-banking functions involvingdeposit substitute transactions shall beoutsourced to its parent/subsidiary (serviceprovider);(iv) The bank shall submit a ServiceLevel Agreement duly signed by theconcerned parties and any amendmentsthereto, detailing the functions to beoutsourced, the respective responsibilitiesof the bank and its parent/subsidiary(service provider), and a confidentialityclause; and(v) Any breach in any of the aboveconditions shall subject the outsourcing ofthe aforementioned banking functions to allthe requirements of this Appendix;(n) back up and data recoveryoperations;(o) Call center operations for creditcard and bank services provided that suchbank services do not involve inherentbanking functions;(p) loans processing, creditadministration and documentation servicesin favor of subsidiaries, affiliates and othercompanies related to it by at least fivepercent (5%) common ownership;(q) loan documentation services (suchas mortgage registration); and(r) such other activities as may bedetermined by the Monetary Board.(2) Without need of prior MonetaryBoard approval, banks may outsource thefollowing functions, services or activities:(a) printing of loan statements andother non-deposit records, forms andpromotional materials;(b) transfer agent services for debt andequity securities;(c) messenger, courier and postalservices;(d) security guard services;(e) vehicle service contracts;Q RegulationsAppendix Q-37 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3709.12.31(f) janitorial services;(g) public relations services, procurementservices, and temporary staffing: Provided,That these activities do not include servicingbank deposit substitutes or other inherentbanking functions;(h) sorting and bagging of notes andcoins;(i) maintenance of computerhardware, e.g., disk drives, printers,monitors, UPS, network cabling systems;(j) payroll of employees;(k) telephone operator/receptionistservices;(l) sale/disposal of acquired assets(ROPA);(m) human-resource related services(such as personnel training anddevelopment, background investigation andsalary benchmarking service)(n) buildings, ground and otherfacilities maintenance;(o) legal services from local legalcounsel;(p) compliance risk assessment andtesting;(q) tax compliance services; Provided,That the service provider is not also theexternal auditor of the bank;(r) ATM card plastic embossingservice, subject to the following conditions:(i) Only the ATM card number andthe name of the depositor are printed/indicated on the plastic card and stored inthe magstripe; and(ii) Account/Transaction validation isdone at the host level,i.e., the bank’scomputer, as the card number stored inthe magstripe is linked to the depositaccount number residing at the same hostcomputer;(s) ATM incident management service;Provided, That the messages transmitted bythe ATM machines to the service provider’smonitoring system are purely ATM statusesand in no way shall client or transactioninformation be sent; and(t) such other activities as may bedetermined by the Monetary Board.e. Service providers. When allowedby law, banks may enter into outsourcingcontracts only with service providers withdemonstrable technical and financialcapability commensurate to the servicesto be rendered.f. Review of subsisting outsourcingcontracts. Within six (6) months from19 July 2005 –(1) banks should submit a list of alltheir existing contracts with serviceproviders, detailing the:(a) services/activities being outsourced;(b) terms of the contracts;(c) measures, if any, undertaken bythe bank and/or service provider toensure the secrecy and confidentiality ofall other data and information; and(d) such other information as may benecessary to show compliance with thepertinent provisions of this Appendix or berequired by the Monetary Board; and(2) for outsourcing contracts not inaccordance with this Appendix, thefollowing alternative courses of action areavailable to the bank concerned:(a) preterminate said contracts;(b) renegotiate or remedy the sameand submit the amendments thereto ornew contracts to the BSP; or(c) submit a program of compliance tothe BSP.(As amended by Circular Nos. 642 dated 30 January 2009,623 dated 09 October 2008, 621 dated 16 September 2008,610 dated 26 May 2008, 596 dated 11 January 2008,548 dated 25 September 2006 and 543 dated08 September 2006)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-37 - Page 5

APP. Q-3811.12.31IMPLEMENTATION OF THE DELIVERY BY THE SELLER OF SECURITIES TO THEBUYER OR TO HIS DESIGNATED THIRD PARTY CUSTODIAN[Appendix to Secs. 4441Q and 4144N and Subsecs. 4101Q.4, 4235Q.5(2008 - 4211Q.4) and 4103N.3]Section 1. Statement of Policy. Pursuantto the policy of the BSP to promote theprotection of investors in order to gain theirconfidence in the securities market [asenunciated under Circular Nos. 392 and428 dated 23 July 2003 and 27 April 2004,]respectively, the following rules/guidelines shall be observed by banks andNBFI under BSP supervision in theirdealings in securities whether they areacting as seller, buyer, agent or custodian.The disposition of compliance issuesof this Appendix is shown in Appendix 68a.The guidelines on the delivery ofgovernment securities by the sellingbank to an investor’s Principal SecuritiesAccount with the RoSS through the ClientInterface System facility are in Appendix68b.Sec. 2. Distinction Between a Custodianand a Registry. A securities custodian is aBSP-accredited QB/NBFI under BSPsupervision that is authorized to engage ininvestment management (for investmenthouses with quasi-banking authority only)or trust business and is designated by theinvestor to perform the functions ofsafekeeping, holding title to the securitiesin a nominee capacity, reports rendition,mark-to-market valuation, collection andpayment of dividends, interest earnings orproceeds from the sale/redemption/maturityof securities held under custodianship andrepresentation of clients in corporateactions.It may also perform the value addedservice of securities lending as agent,subject to the conditions specified underSubsec. 4441Q.6.Sec. 3. Registry of Scripless Securities ofthe Bureau of Treasury. The Bureau ofTreasury, as operator of the RoSS, whichserves as the official registry for governmentsecurities, is not subject to BSP accreditationand is exempted from the independencerequirement under the existing BSPregulations.Sec. 4. Delivery of Securities. Pursuant toexisting BSP regulations, securities sold ona without recourse basis shall be deliveredby the seller to the purchaser, or to hisdesignated BSP-accredited custodianwhich must not be a subsidiary or affiliateof the issuer or seller.Sec. 5. Mode of Delivery. If the securitiessold are certificated, delivery shall beeffected physically to the purchaser, or tohis designated BSP-accredited custodian.The certificate must be transferred to andregistered under the name of the purchaserand properly recorded in the registry book.On the other hand, delivery ofimmobilized or dematerialized securitiesshall be effected by means of book entrytransfer to the appropriate securitiesaccount of either: (1) the purchaser in aregistry of said securities; or (2) thepurchaser’s designated custodian in aregistry of said securities. Book-entrytransfer to a sub-account for clients underthe primary account of the seller will notbe deemed compliant with thisrequirement. The delivery must besupported by a confirmation of book-entrytransfer to be issued by the securitiesregistry in case of name on registry or by aconfirmation receipt to be issued by theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38 - Page 1

APP. Q-3811.12.31custodian in case of delivery to thepurchaser’s designated custodian.Sec. 6. Client Information. Selling ordealing banks shall inform their clients ofthe requirements under Secs. 3 and 4 above,together with the complete list of all BSPaccreditedcustodians. The selling or dealingbank or NBFI must inform their clients thatthe choice of custodian is the soleprerogative of the securities purchaser. Theseller or dealer may, however, indicate totheir clients their preferred custodian.Attached as Annex “A” is a suggestedtemplate of the letter to the client.Sec. 7. Custodianship Agreement. Thesecurities owner/purchaser shall enter intoa custodianship agreement with a BSPaccreditedthird-party custodian of hischoice. However, the securitiespurchasers/owners may designate/appointthrough a special power of attorney (SPA)a representative or agent for the purposeof opening and maintaining an accountwith the BSP-accredited third-partycustodian: Provided, That if the securitiesseller or dealer is appointed as an agent,its authority shall be limited to the openingof the custodianship account and theexecution of trade transactions (i.e. buyingand selling instructions including relayingof instructions to the custodian to receiveor deliver securities in order toconsummate the buy/sell transactions). Itshall be the responsibility of the custodianto protect the interest of the client byensuring that the agent is acting within thescope of his authority.Sec. 8. Authority of the Securities Owner/Purchaser to Revoke Special Power ofAttorney (SPA). Whenever a securitiesowner/purchaser executes an SPAdesignating/appointing an agent to open andmaintain a custodianship account with aBSP-accredited third party custodianpursuant to Sec. 6 above, said SPA shallclearly stipulate that the appointment of theagent is revocable at the instance of thesecurities owner/purchaser or his agent. Anyrevocation by either party shall be made inwriting and must be given to the other partyand to the custodian. The custodian ishereby enjoined to acknowledge andrespect said right of the client. It is,however, understood that the revocation ofthe SPA shall be without prejudice to anytransaction executed by the agent orcustodian prior to said party’s knowledgeof the revocation. Upon revocation of theSPA, the custodian shall deal directly withthe securities owner or his newly appointedagent. However, the custodian has the rightto impose additional reasonable conditionssimilar to those being imposed on separatecustody accounts maintained directly byindividual or corporate clients.Sec. 9. Reports of theCustodian. Periodic reports of thecustodian on account balances shall berendered at least quarterly and shall reflectthe mark-to-market valuation of the securityin accordance with existing BSPregulations. It shall be delivered, mailedor electronically transmitted directly to thesecurities owner unless the securitiesowner gives a written request or instructiondirectly to the custodian to deliver saidreports to a person/entity named therein.Said request/instruction of the securitiesowner shall indicate that he is appointingan agent/ representative for the purpose,notwithstanding contrary advice of theBSP.Aside from the periodic reports, thecustodian shall also issue confirmation oftransfers of ownership as they occur ineither electronic or printed form delivereddirectly to the securities owner, unless thesecurities owner gives a written requestQ RegulationsAppendix Q-38 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3811.12.31or instruction directly to the custodian todeliver the confirmation reports to aperson/entity named therein.Sec. 10. Right of the Securities Owner toSell his Securities. Subject to therequirements of existing laws andregulations, securities owners shall havethe right to choose the best buyers of hissecurities in the secondary market,without limiting himself to the originalselling or dealing bank that he transactedwith. The securities seller or dealer shallnot impose any condition that will impairthis right of the securities owner or leavehim no alternative except to sell hissecurities exclusively to the selling ordealing bank.Sec. 11. Undelivered Securities. Incases where banks or NBFIs under BSPsupervision maintain custody of securitieswhich were sold prior to the effectivityof Circular No. 457 dated 14 October2004 to clients who are unable orunwilling to take delivery of saidsecurities pursuant to the provisions ofCircular No. 392 dated 23 July 2003 butwho declined to deliver their existingsecurities to a BSP-accredited third partycustodian, said banks/FIs shall:a. report on a quarterly basis to theappropriate department of the SES thevolume of said securities broken downinto maturity dates, type of security, ISINor applicable certificate or referencenumber, and registry; andb. ensure that said securities undercustody are segregated from theirproprietary holdings.Sec. 12. Compliance with the Anti-MoneyLaundering Act of 2001. For purposes ofcompliance with the requirements ofR.A. No. 9160, otherwise known as the“Anti-Money Laundering Act of 2001”, asamended, particularly the provisionsregarding customer identification,recordkeeping and reporting of suspicioustransactions, a BSP-accredited custodianmay rely on referral by the seller/issuer ofsecurities, in lieu of the face-to-face contactwith client, subject to the followingconditions:a. the seller/issuer is also a coveredinstitution;b. the seller/issuer certifies to thecustodian that it has performed its own KYCscreening on the client;c. the custodian has unchallengedaccess to the KYC records/documents ofthe referring seller/issuer pertaining to thereferral client;d. the custodian maintains a record ofthe referral together with the minimuminformation/documents required under thelaw and its implementing rules andregulations; ande. the seller/issuer must provide thecustodian with the following minimuminformation/documents:For individual clients:1. Name;2. Present address;3. Permanent address;4. Date and place of birth;5. Nationality;6. Nature of work and name of employeror nature of self-employment/business;7. Contact numbers;8. Tax identification number, SSSnumber or GSIS number;9. Specimen signature; and10. Source of fund(s);For corporate clients:1. Articles of Incorporation/Partnership;2. By-laws;3. Official address or principalbusiness address;4. List of directors/partners;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38 - Page 3

APP. Q-3811.12.315. List of principal stockholdersowning at least two percent (2%) of thecapital stock;6. Contact numbers;7. Beneficial owners, if any;8. Authorized signatories;9. Board/Partnership Resolution on theauthority of the signatories; and10. Verification of the identification andauthority of the person purporting to act onbehalf of the client.Sec. 13. Safekeeping of Customers’Identification Documents. The BSPaccredited third-party custodian mayentrust to the referring seller/dealer thesafekeeping and maintenance of thecustomer identification documentssupporting its KYC certification: Provided,That:a. The BSP accredited custodian hasreceived a certification from the seller/dealer that it has in its possession allrequired KYC documents and the custodianshall maintain a list of such documents;b. The accredited custodian shallhave unhampered access to the KYCdocuments for its own verification; andc. KYC or customer identificationdocuments shall be made available toregulators for verification upon request.Notwithstanding Secs. 12 and 13, thecustodian is not precluded fromconducting its own KYC activities andmaintaining direct custody of the KYCdocuments of its clients.(Circular No. 524 dated 31 March 2006 and as amended byCircular No. 714 dated 10 March 2011, M-2007-002 dated 23January 2007)Q RegulationsAppendix Q-38 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3811.12.31Annex ATEMPLATE OF LETTER TO INVESTORDear Investor:We wish to inform you that the Bangko Sentral ng Pilipinas (BSP), in July of 2003issued Circular No. 392, Series of 2003, which requires all securities sold by banks on a“without recourse basis” (i.e. the bank has no liability to the buyer of securities in payingthe obligation due on the security) to be delivered to the buyer/purchaser of securitiesthrough any of the following means:(a)(b)If the security is evidenced by a certificate of indebtedness, the certificatemust be transferred in the name of the purchaser/buyer and physically deliveredto the purchaser/buyer or to his designated BSP-accredited third party custodian.If the security is immobilized or dematerialized (i.e., that the security is notevidenced by a certificate of indebtedness and instead security account iscreated in the electronic books of the registry in the name of the purchaser/buyer or his designated custodian):i. The security must be delivered by book-entry transfer to the appropriatesecurities account of the buyer in the registry of said securities which mustbe evidenced by a confirmation in writing by the registrar to the buyer.The confirmation of sale or document of conveyance shall be physicallydelivered by the seller or dealer to the buyer, orii. The security must be delivered by book-entry transfer to the appropriatesecurities account of the BSP-accredited third party custodian designatedby the buyer/purchaser in the registry of said securities which must beevidenced by a confirmation in writing by the registrar to the said BSPaccreditedthird party custodian, who shall in turn issue to the securitiesowner a delivery receipt acknowledging receipt of the securitiesCircular No. 392 is part of a package of reforms to support the development of thedomestic capital market through enhanced investor protection and greater markettransparency. It provides for a more defined role and responsibilities for the custodians andregistrars and a stricter supervision and regulation thereof by the BSP. It aims to provide theclient with the following benefits:a. Full control and possession of the securities purchased;b. Independent validation of the existence of securities purchased;c. Regular reporting of securities holdings; andd. Capability to choose most competitive counter-parties in case of sale, pledge,transfer, and lending of securities.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38 - Page 5

APP. Q-3811.12.31Moreover, Circular No. 392, which amends CBP Circular 437-74, seeks to addressthe changes in the legal framework brought by the developments in the market, i.e., wherepurchase of securities may be evidenced not only by transfer of certificates but also byelectronic book-entry transfer of ownership in the books of the registrar for said security.As an investor, therefore, of securities which is dematerialized or scripless, youhave the option to require your dealer/broker to deliver the securities to you by requiringthem to have the securities registered directly in your name in the registry of said securitiesor by requiring them to have the securities registered in the name of the BSP accreditedthird party custodian of your choice who in turn will credit your securities account withthem.The registry is a BSP-accredited bank or non-bank financial institution (NBFI) designatedor appointed by the Issuer to (1) maintain the securities registry book; (2) record the (a) issuanceof the securities and (b) subsequent transfers of ownership thereof; and (3) issue registryconfirmation to the buyers/holders of security.The custodian, on the other hand, is a BSP-accredited bank or NBFI designated bythe investor to safekeep the security by allowing it to hold title to the security, either in anominee or trustee capacity, to enable it to perform the following administrative functions/services related to investing in a security or various securities: i) Mark to market valuationof security that will enable the client to know the value of his investment at any period intime; ii) compute and collect the interest due on the security; iii) render statements onoutstanding securities under safekeeping; iv) represents the client (per its instruction) in theevents of default or breach of contract of the issuer; and v) lend the security of the clients as“agent” that will enable the client to earn additional income on the security.The registrars and custodians underwent a rigorous evaluation process by the BSPto determine whether they have the following: i) adequate capital to cover for potentialoperating risks related to performing its custody functions; ii) competent management teamto manage the company with responsibility and proper corporate ethics; iii) robusttechnology system to operate the custody business efficiently; and iv) favorable track recordor significant experience in the custody business or related business. They will also undergoregular audit by the BSP to ensure that they comply with BSP rules and regulations and willbe subject to penalties and administrative sanctions for any violation thereof.As of date, BSP has accredited the following registrars and custodians: Bank of thePhilippine Islands, CITIBANK N.A., Deutsche Bank, Hongkong and Shanghai BankingCorporation, Philippine Depository and Trust Corporation, and Standard Chartered Bank.The Registry of Scripless Securities (RoSS) operated by the Bureau of Treasury (BTR)which is acting as a registry for government securities, is automatically accredited as securitiesregistry. However, the BTR, as registry, cannot act as custodian of government securitiespursuant to the opinion of the Secretary of Justice rendered on 17 January 2005 due toirreconcilable conflict of loyalties that is anathema to agency if the same institution were toact as registrar and custodian at the same time.Q RegulationsAppendix Q-38 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3811.12.31The custodian shall render periodic reports on your account balances on a quarterlybasis, or at such interval as you may require. Moreover, the custodian shall issue to you aconfirmation of any transfer of ownership as it occurs, in either electronic or printed forms.Said reports shall be delivered/mailed directly at your address unless you give a writteninstruction directly to the custodian to deliver the said reports to your designated person/entity. You are, however, required to acknowledge in the written instruction that you aredesignating another person/entity to receive the periodic reports from the custodian,notwithstanding contrary advice of the BSP.Please note that the abovementioned arrangements may change once the BSP issuesmore detailed implementing rules and guidelines to the abovementioned circulars. We willupdate you if and when these developments occur.Please fill up and sign the required documentation of your chosen custodian andwe will forward the same to them so that your securities account can be opened as soon aspossible. You may, however, designate/appoint an agent for this purpose. In either case,the custody arrangement may or may not entail additional fees.If you have any further questions, please call us so that we can refer the matter tothe appropriate custodian/registrar.Very truly yours,(Circular No. 524 dated 31 March 2006 and as amended by M-2007-002 dated 23 January 2007)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38 - Page 7

APP. Q-3811.12.31Annex ATEMPLATE OF LETTER TO INVESTORDear Investor:We wish to inform you that the Bangko Sentral ng Pilipinas (BSP), in July of 2003issued Circular No. 392, Series of 2003, which requires all securities sold by banks on a“without recourse basis” (i.e. the bank has no liability to the buyer of securities in payingthe obligation due on the security) to be delivered to the buyer/purchaser of securitiesthrough any of the following means:(a)(b)If the security is evidenced by a certificate of indebtedness, the certificatemust be transferred in the name of the purchaser/buyer and physically deliveredto the purchaser/buyer or to his designated BSP-accredited third party custodian.If the security is immobilized or dematerialized (i.e., that the security is notevidenced by a certificate of indebtedness and instead security account iscreated in the electronic books of the registry in the name of the purchaser/buyer or his designated custodian):i. The security must be delivered by book-entry transfer to the appropriatesecurities account of the buyer in the registry of said securities which mustbe evidenced by a confirmation in writing by the registrar to the buyer.The confirmation of sale or document of conveyance shall be physicallydelivered by the seller or dealer to the buyer, orii. The security must be delivered by book-entry transfer to the appropriatesecurities account of the BSP-accredited third party custodian designatedby the buyer/purchaser in the registry of said securities which must beevidenced by a confirmation in writing by the registrar to the said BSPaccreditedthird party custodian, who shall in turn issue to the securitiesowner a delivery receipt acknowledging receipt of the securitiesCircular No. 392 is part of a package of reforms to support the development of thedomestic capital market through enhanced investor protection and greater markettransparency. It provides for a more defined role and responsibilities for the custodians andregistrars and a stricter supervision and regulation thereof by the BSP. It aims to provide theclient with the following benefits:a. Full control and possession of the securities purchased;b. Independent validation of the existence of securities purchased;c. Regular reporting of securities holdings; andd. Capability to choose most competitive counter-parties in case of sale, pledge,transfer, and lending of securities.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38 - Page 5

APP. Q-3808.12.31Moreover, Circular No. 392, which amends CBP Circular 437-74, seeks to addressthe changes in the legal framework brought by the developments in the market, i.e. wherepurchase of securities may be evidenced not only by transfer of certificates but also byelectronic book-entry transfer of ownership in the books of the registrar for said security.As an investor, therefore, of securities which is dematerialized or scripless, youhave the option to require your dealer/broker to deliver the securities to you by requiringthem to have the securities registered directly in your name in the registry of said securitiesor by requiring them to have the securities registered in the name of the BSP accreditedthird party custodian of your choice who in turn will credit your securities account withthem.The registry is a BSP-accredited bank or non-bank financial institution (NBFI)designated or appointed by the Issuer to (1) maintain the securities registry book; (2) recordthe (a) issuance of the securities and (b) subsequent transfers of ownership thereof; and(3) issue registry confirmation to the buyers/holders of security.The custodian, on the other hand, is a BSP-accredited bank or NBFI designated bythe investor to safekeep the security by allowing it to hold title to the security, either in anominee or trustee capacity, to enable it to perform the following administrative functions/services related to investing in a security or various securities: (i) Mark to market valuationof security that will enable the client to know the value of his investment at any period intime; (ii) compute and collect the interest due on the security; (iii) render statements onoutstanding securities under safekeeping; (iv) represents the client (per its instruction) inthe events of default or breach of contract of the issuer; and (v) lend the security of theclients as “agent” that will enable the client to earn additional income on the security.The registrars and custodians underwent a rigorous evaluation process by the BSPto determine whether they have the following: (i) adequate capital to cover for potentialoperating risks related to performing its custody functions; (ii) competent managementteam to manage the company with responsibility and proper corporate ethics; (iii) robusttechnology system to operate the custody business efficiently; and (iv) favorable trackrecord or significant experience in the custody business or related business. They will alsoundergo regular audit by the BSP to ensure that they comply with BSP rules and regulationsand will be subject to penalties and administrative sanctions for any violation thereof.As of date, BSP has accredited the following registrars and custodians: Bank of thePhilippine Islands, CITIBANK N.A., Deutsche Bank, Hongkong and Shanghai BankingCorporation, Philippine Depository and Trust Corporation, and Standard Chartered Bank.The Registry of Scripless Securities (RoSS) operated by the Bureau of Treasury(BTR) which is acting as a registry for government securities, is automatically accredited assecurities registry. However, the BTR, as registry, cannot act as custodian of governmentsecurities pursuant to the opinion of the Secretary of Justice rendered on 17 January 2005due to irreconcilable conflict of loyalties that is anathema to agency if the same institutionwere to act as registrar and custodian at the same time.Q RegulationsAppendix Q-38 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3808.12.31The custodian shall render periodic reports on your account balances on a quarterlybasis, or at such interval as you may require. Moreover, the custodian shall issue to you aconfirmation of any transfer of ownership as it occurs, in either electronic or printed forms.Said reports shall be delivered/mailed directly at your address unless you give a writteninstruction directly to the custodian to deliver the said reports to your designated person/entity. You are, however, required to acknowledge in the written instruction that you aredesignating another person/entity to receive the periodic reports from the custodian,notwithstanding contrary advice of the BSP.Please note that the abovementioned arrangements may change once the BSPissues more detailed implementing rules and guidelines to the abovementioned circulars.We will update you if and when these developments occur.Please fill up and sign the required documentation of your chosen custodian andwe will forward the same to them so that your securities account can be opened as soon aspossible. You may, however, designate/appoint an agent for this purpose. In either case,the custody arrangement may or may not entail additional fees.If you have any further questions, please call us so that we can refer the matter tothe appropriate custodian/registrar.Very truly yours,(Circular No. 524 dated 31 March 2006, as amended by M-2007-002 dated 23 January 2007)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38 - Page 7

APP. Q-38a08.12.31DISPOSITION OF COMPLIANCE ISSUES ON APPENDIX Q-38[Appendix to Secs. 4441Q and 4144N and Subsecs. 4101Q.4, 4235Q.5(2008 - 4211Q.4) and 4103N.3]A. The Monetary Board, in its ResolutionNo. 581 dated 05 May 2006 approved a thirty(30) calendar day period from 05 June 2006within which banks/non-banks will effectrevisions to non-conforming SPAs issued byinvestor-clients to strictly conform to the limitedauthority provisions of Section 7 of AppendixQ-38, subject to the following conditions:1. The clean-up of SPAs will coverthose issued by clients prior to Circular No.524 dated 31 March 2006;2. Custodians will allow transfers ofsecurities from proprietary accounts ofdealers to their omnibus principal custodyaccounts within the period;3. There will be no penalties imposedfor dealer-banks and accredited securitiescustodians that allowed non-compliant SPAsprior to Circular No. 524 dated 31 March2006 or those issued under Circular Letterdated 4 August 2005 if corrected within thethirty (30)-day period; and4. Non-compliance with other provisionsof Appendix Q-38 are not covered/qualified tobe corrected within the thirty (30)-day periodand are therefore subject to the usual penalty/sanctions under existing regulations.B. The Monetary Board, in its ResolutionNo. 876 dated 06 July 2006 approved thefollowing disposition of compliance issues forthe period of 05 July 2006 - 04 August 2006:1. The sending by a dealing bank toall its clients of:(a) a notice indicating a limitation onthe authority of the dealing bank pursuantto Section 7 of Appendix Q-38; and(b) compliant SPA for execution willbe deemed substantial compliance only asof 05 July 2006. Proof thereof should bepreserved for examination purposes.2. Custodians will be deemed insubstantial compliance as of 05 July 2006 if theyhave obtained confirmation from the dealingbanks that notifications on the limitation of thedealing bank’s authority, together with acompliant SPA for the clients’ signature, havebeen sent to all their clients. Absent confirmationfrom the dealing bank of the sending of noticesand the revised SPA, the custodian shouldimmediately freeze (i.e., no new movementsin the security, except sale or disposition thereof)the account to be considered in substantialcompliance.3. Absent a compliant SPA, thedealing bank and custodian should“freeze” the account of the client.Accordingly, if a client wants to transactwith securities, the dealing bank mustrequire the submission of an executedcompliant SPA before any new transactioncan be entered into. Otherwise, the dealingbank will be subject to the appropriatepenalties prescribed under Subsec.X441.29. However, for the period of 05July 2006 - 04 August 2006, transactionsby the dealing bank with its clients, absenta compliant SPA but to which an adviceon the limitation of the authority of thedealing bank and a compliant SPA forsignature have been sent, will be subjectto a fine of P10,000.00 per transaction/day:Provided, That the total penalty arising fromthat class of violation for the said periodshall not exceed P100,000.00, computedin accordance with Section 37 of RepublicAct No. 7653 (The New Central Bank Act).Furthermore, the Custodian will not besubject to any penalties for acceptingsecurities subject of the transaction.4. Starting on 05 August 2006, thepenalties under Subsec. X441.29 shall beapplied for any violation of the provisions ofAppendix Q-38. Custodians shall be requiredto freeze the securities account for those withouta compliant SPA from the investor.(M-2006-009 dated 18 July 2006 and M-2006-002 dated 05 June 2006)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38a - Page 1

APP. Q-38b08.12.31DELIVERY OF GOVERNMENT SECURITIES TO THE INVESTOR’S PRINCIPALSECURITIES ACCOUNT WITH THE REGISTRY OF SCRIPLESS SECURITIES[Appendix to Secs. 4441Q and 4144N, Subsecs. 4101Q.4, 4235Q.5 (2008 - 4211Q.4)4103N.3, and 4103N.4]The following are the guidelines on thedelivery of government securities by theselling QB and/or NBFI under thesupervision of the BSP to an investor’sPrincipal Securities Account with the RoSSthrough the Client Interface System facilityas compliance with the requirement ofeffective delivery under Secs. 4441Q and4144N, Subsecs. 4101Q.4, 4101Q.5,4235Q.5, 4103N.3 and 4103N.4:(a) QBs/NBFIs, acting either as anaccredited GSEDs or licensed governmentsecurities dealers, shall execute the attachedMemorandum of Agreement (MOA) with theBTr regarding the creation of the PrincipalSecurities Account with the RoSS on or before31 January 2007. The MOA between the BTrand GSED is attached as Annex A.(b) If the dealing QB/NBFI is designatedas the agent of the client/investor, theauthority of the dealing QB/NBFI under theSPA executed by the client/investor shall belimited to the opening of the PrincipalSecurities Account with the RoSS and theexecution of trade transactions (i.e., buyingand selling instructions, including relaying ofinstructions to the BTr, as operator of theRoSS, to receive and deliver securities inorder to consummate the buy/selltransaction).(c) QBs/NBFIs shall require theirclients/investors who have manifested thedesire to have their own PrincipalSecurities Account with the RoSS toexecute (1) an SPA pursuant to Secs.4441Q and 4144N, Subsecs. 4101Q.4,4235Q.5, 4103N.3 and 4103N.4 and (2)the revised Investor’s Undertaking(attached as Annex B) on or before 28February 2007.(d) Absent a compliant Investor’sUndertaking and SPA as of 01 March 2007,the dealing QB/NBFI should freeze theaccount of the client/investor (i.e., no newmovements in the account, except sale/disposition upon written instruction by theclient/investor): Provided, That starting01 March 2007 no new Investors PrincipalSecurities Account shall be created unlessthe investor submits a compliant Investor’sUndertaking and SPA. Otherwise,the dealing QB/NBFI will be subject to theappropriate penalties prescribed under Secs.4441Q and 4144N, and, Subsecs. 4101Q.4,4101Q.5, 4235Q.5, 4103N.3, and 4103N.4.(e) The sub-accounts in the RoSSmaintained by dealing QBs/NBFI for theirclient/investor who either (1) declined inwriting the delivery of his/its securities to adirect registry account under his/its nameor a third-party custodian or (2) have notresponded to the dealer’s letter to the client/investor as regards the disposition of his/itssecurities shall be frozen. However, sale/disposition of securities in the sub-accountsshall be allowed upon written instructionby the client/investor to dispose thesame: Provided, That in case of a client/investor who as of 04 November 2004 hasnot responded to the dealer’s letterregarding the disposition of his/itssecurities, the dealer should be able toobtain from the said client/investor thewritten instruction regarding the client/investor’s inability to take delivery ofexisting securities. For clarity, the subaccountsmaintained by the dealing QBs/NBFIs shall not be considered a violation ofSubsecs. 4101Q.4, 4235Q.5, 4103N.3 and4104N.4: Provided, That (1) the same werecreated on or before 04 November 2004;and (2) no additional securities have beenlodged thereon since 04 November 2004.(M-2007-002 dated 23 January 2007)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38b - Page 1

APP. Q-38b08.12.31Annex AKNOW ALL MEN BY THESE PRESENTS:MEMORANDUM OF AGREEMENTThis agreement made and entered into this ______________________ at_________________________, Philippines by and between:The BUREAU OF THE TREASURY, a duly constituted governmentbureau under the Department of Finance, Republic of the Philippines,with principal office at Palacio del Gobernador Building, Gen. Lunacorner A. Soriano Avenue, Intramuros, Manila, represented herein bythe Treasurer of the Philippines, _______________________________,and hereinafter referred to as “BTr”;-and-__________________________________________, a domestic/international/banking/financial institution organized and existingpursuant to the laws of the Republic of the Philippines/(country ofincorporation), duly licensed by the Securities and ExchangeCommission (SEC) to deal in securities, represented herein by_____________________________________________ in her/hiscapacity as _________________________________________, andhereinafter referred to as the Dealer;(the “BTr” and the “Dealer” may be referred to as a “Party” in the singulartense, as “Parties” in the plural/collective tense)WITNESSETH: THATWHEREAS, the Registry of Scripless Securities (RoSS) is the official registry ofgovernment securities issued by the National Government through the BTr;WHEREAS, the RoSS is an electronic registry of recording ownership of or interestin and transfers of government securities;WHEREAS, the delivery of government securities sold by the Dealer, on a withoutrecourse basis, to the investor’s Principal Securities Account with the RoSS through theClient Interface System (CIS) Facility shall be sufficient compliance with the deliveryrequirement under Subsec. X238.1 of the Bangko Sentral ng Pilipinas (“BSP”) Manual ofRegulations for Banks and Circular No. 524, dated 31 March 2006.WHEREAS, the Dealer is a government securities eligible dealer, accredited bythe BTr to participate in the primary auction of government securities pursuant to FinanceDepartment Order No. 141-95, as amended, and/or a bank/financial institution licensedby the SEC to deal in government securities in the secondary market;Q RegulationsAppendix Q-38b - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-38b08.12.31WHEREAS, investors of government securities purchase/trade the same in thesecondary market through any of the dealers;WHEREAS, recording of ownership of or interest in government securities requiresthe creation/opening of a Principal Securities Account with the RoSS through the CIS Facility;WHEREAS, to promote transparency, investor confidence and deepening of thegovernment bond market, investors must be given adequate assistance in the opening/creation of his/its Principal Securities Account with the RoSS (“Name-on- Registry”);NOW, THEREFORE, in view of the foregoing premises and the mutual covenantshereinafter provided, the parties hereby agree as follows:Section 1. Obligations of BTr.The BTr shall:1. Receive instruction from the Dealer through the RoSS-CIS for the creation/opening of the Principal Securities Account, as indicated in the Special Power ofAttorney executed by the investor in favor of the Dealer for that purpose;2. Create/open in the RoSS a Principal Securities Account for the requesting investorof scripless government securities through which all transactions affecting saidsecurities will be recorded;3. Provide and forward to the investor an electronic confirmation of his/its RoSSPrincipal Securities Account Number and notices and statements of account underany of the modes indicated in the Investor’s Oath of Undertaking submitted to the BTr;4. On relevant coupon/maturity payment dates and for payments made throughthe BSP, instruct the BSP to credit the regular demand deposit account (DDA) ofthe investor’s settlement bank: Provided, That if the coupon/maturity payment datefalls on a Saturday, Sunday, or Holiday or on a day during which business operationsof the BTr is suspended, payment/s shall be made by the BTr on the next businessday, without adjustment in the amount of interest to be paid.5. Ensure that all government securities bought by investors from the Dealer areaccurately recorded under the investor’s Principal Securities Account or to theSecurities Custody Account of the investor’s designated third-party custodian.6. Furnish the investor with Statement(s) of Securities Account, at least quarterlyand whenever there is a movement in the investor’s Principal Securities Account,through the investor’s preferred mode of receipt of notice and/or statement;7. Consistent with BTr Memoranda dated 28 December 2005, 12 January 2006and 31 January 2006 and applicable BSP regulations, disallow any increase in theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38b - Page 3

APP. Q-38b08.12.31holdings of beneficial owners of securities recorded in the sub-account of the Dealer,if any, existing as of 02 February 2006, for beneficial owners of securities whohave either (a) declined in writing the delivery of his/its securities to a direct registryaccount under his or its name or a third-party custodian or (b) not responded to theDealer’s letter to the investor as regards the disposition of his/its securities. Anywithdrawal or sale of the securities, either partial or total, under the sub-account ofthe Dealer for the beneficial owners may only be allowed if the Dealer is authorizedin writing by the client/Investor. Such written authority shall be furnished by theDealer to the BTr prior to the execution of the transaction.Sec. 2. Obligations of the DealerThe Dealer shall:1. Assist the investor to open his/its individual Principal Securities Account (Name-On-Registry) with the RoSS through the CIS facility;2. Conduct the Know your Client (“KYC”) screening of its investors/clients referredto the BTr for the creation of the Principal Securities Account (Name-On-Registry)with the RoSS. In this connection it shall: (a) issue a certification to the BTr that ithas conducted the necessary “KYC” screening; (b) maintain client identificationrecords; (c) report any suspicious transaction in accordance with the provisions ofR.A. No. 9160, otherwise known as the “Anti-Money Laundering Act of 2001”, asamended, and its implementing rules and regulations; and whenever necessary,(d) afford BTr unchallenged access to said KYC records/documents. The same KYCor customer identification documents shall likewise be made available to regulatorsfor verification upon request.3. Transmit the investor’s instructions to the RoSS for the creation/opening of aPrincipal Securities Account. For this purpose, the Dealer shall submit and/or informthe investor to submit to the BTr his/her settlement account maintained in asettlement bank of his/her choice, through which all relevant payments on thesecurities will be made by the BTr;4. Upon the creation of the investor’s Principal Securities Account with the BTr’sRoSS to which the securities subject of a sale will be credited, immediately furnishthe investor with the BTr’s electronic confirmation of its creation. The Dealer shallalso provide to the investor the BTr electronic confirmation that include a statementon the credited amount of securities;5. Ensure that Special Power of Attorney (SPA) executed by client investors in theirfavor as agents of the former be limited, pursuant to BSP Circular No. 524;6. Ensure that all government securities sold to investors are delivered to theirappropriate Principal Securities Account with the RoSS, or to the account of theinvestor’s designated custodian;Q RegulationsAppendix Q-38b - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-38b08.12.317. Undertake not to misuse the investor’s RoSS Account No. which may come intoits possession upon the creation of a Principal Securities Account for the investor oron previous transactions with the investor;8. Acquaint/apprise investors on the rules and procedure prescribed by the BTr inconnection with investment and trading of scripless government securities, includingbut not limited to coupon payment, redemption value/proceeds of the investor’ssecurities, legal encumbrances, and other relevant information relative to investor’ssecurity holdings. As a minimum, investors must be apprised of the Revised RoSSProcedure on Buy and Sell of Securities and recording of transfers through theRoSS-CIS facility found in the BTr website, with particular emphasis on the featureof non-tagging of securities to GSEDs, or non-exclusivity of the selling GSEDs forsubsequent transactions;9. Whenever designated as authorized agent, provide BTr upon reasonable request,all evidence of authority to transact on the securities issued by investor to suchauthorized agent;10. Whenever designated as authorized agent and/or settlement bank, ensureconfidentiality and prompt delivery of all notices and statements of securitiesaccount/s to investors;11. Ensure that all instructions transmitted to BTr concerning the securities accountof clients-investors are legal, valid and duly authorized pursuant to an agreement,a special power of attorney, or any written authority executed by the client-investorin favor of the dealer; and12. Disallow any increase in the securities holdings of clients recorded in its subaccountin the RoSS, with respect to clients who have either (a) declined in writingthe delivery of his/its securities to a direct registry account under his or its name ora third-party custodian or (b) have not responded to the Dealer’s letter to the investoras regards the disposition of his/its securities. The Dealer shall allow the client/investor to withdraw or sell, whether partial or total, from the said securities holdingsrecorded in the Dealer’s sub-account only upon written request/instruction by theinvestor/client: Provided, That in case of investors who have not responded to theDealer’s letter regarding the disposition of his/its securities, the Dealer should beable to obtain from such investor a written advice that he is neither willing to takedelivery nor have his securities delivered to a third-party custodian. The dealer shallfurnish BTr such written request/instruction prior to the execution of the transaction.Sec. 3. Cut Off Period. No transfer of securities shall be allowed (i) during the period oftwo (2) business days ending on (and including) the due date of any redemption paymentof principal and (ii) during the period of two (2) business days ending on (and including) thedue date of any coupon payment date (the “Closed Period”). BTr shall prevent any transferof the securities to be recorded in the RoSS during any Closed Period. Bondholders ofrecord as appearing in the RoSS as of the Closed Period will be treated by BTr as thebeneficial owners of such securities for any relevant payment.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38b - Page 5

APP. Q-38b08.12.31Sec. 4. Settlement Bank. Whenever the Dealer is designated by the investor as his/itssettlement bank, it shall confirm receipt of payments from BTr intended for the investorand shall promptly and punctually credit the investor’s bank account all said relevant paymentson the securities. Upon the crediting of the regular demand deposit account of the Dealer withBSP for the applicable payments, the investor shall be considered as having been fully paid onhis/its securities and the Dealer shall then be responsible to the investor. The BTr, its officersand employees and agents shall not be made liable for any claim, liability, or responsibility fordamages or injury incurred by the investor on account of the Dealer’s failure to pay/credit theinvestor’s settlement account.Sec. 5. Compliance with Anti-Money Laundering Law. The Dealer shall be responsiblefor compliance with the requirements of Anti-Money Laundering Law and other bankinglaws, rules and regulations relative to reporting of suspicious accounts and deposits.Sec. 6. Limitation of Liability. The BTr, its officers, employees and agents shall not be held liablefor any claim, liability or responsibility for damages or injury incurred by the investor on accountof the loss of his/its securities holdings unless the loss or injury was caused by the act or omissionof the BTr. Likewise, the BTr, its officers, employees and agents shall be rendered free andharmless from any liability on account of effecting instruction/s transmitted by the Dealer tothe RoSS which the latter believed in good faith to have emanated from the Dealer.Sec. 7. Sanctions for Fraudulent Transactions. In case the Dealer commits any fraudulentact or transaction in connection with government securities or violates any of its undertakingsherein, the BTr shall have the right to impose administrative sanctions such as but notlimited to dis-accreditation and/or suspension of accreditation as a government securitieseligible dealer, and other administrative sanctions as may be prescribed by competentauthorities without prejudice to civil or criminal prosecution in accordance with law.Sec. 8. Amendment and Repeal. This agreement may be amended, modified or repealedby the parties in writing, by giving 30 days prior written notice.Sec. 9. Effectivity. This agreement shall take effect immediately.IN WITNESS WHEREOF, the parties have hereunto signed these presents this_____________________ at _____________________.BUREAU OF THE TREASURY[Dealer]By:By:______________________________________________Treasurer of the Philippines President & CEOSigned in the presence of:______________________________________________Q RegulationsAppendix Q-38b - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-38b08.12.31Republic of the Philippines)________________________)S.SACKNOWLEDGMENTBEFORE ME, a Notary Public for and in the City of ________________, personallyappeared:Name CTC No. Date & Place IssuedBureau of the TreasuryRep. by the Treasurer of thePhilippines[Dealer]Rep. by ____________________known to me to be the same persons who executed the foregoing instrument consistingof ____ ( ) pages, including this page where this Acknowledgment is written, andacknowledge to me that the same is their free and voluntary act and deed and of theagency/institution they represent.WITNESS MY HAND AND NOTARIAL SEAL this _____________ at__________________, Philippines.NOTARY PUBLICDoc. No.:Page No.:Book No.:Series ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38b - Page 7

APP. Q-38b08.12.31INVESTOR’S UNDERTAKINGAnnex BNOTE: TO BE SUBMITTED TO THEBUREAU OF THE TREASURYI/We,For Individual Investorsof legal ageFor Juridical Entityauthorized to do businessin the PhilippinesName:Address:Civil Status:Name:Principal Office Address:Place of Incorporation:Name of Representative:Capacity/Position of Representative:A. Hereby agree to execute, pursuant to BSP Circular 524, a limited Special Power ofAttorney in favor of either the dealing Government Securities Eligible Dealer 1(GSED) or Securities Dealer 2 for the creation of a Principal Securities Account withthe RoSS or for the execution of trade transactions (i.e. buying and selling instructions,including relaying of instructions to “the CUSTODIAN“ to receive or deliversecurities in order to consummate the buy/sell transactions) and to be bound bythe provisions of a written Authority or a special power of attorney, or any relevantagreement I/we have entered into concerning my/our government securityholdings, thereby confirming my/our authority for BTr-RoSS to carry out and executethe acts or instructions referred to in the aforesaid documents;B. It is understood that the RoSS administered by the BTr is the official registry ofownership of or interest in government securities; that all government securitiesfloated/originated by NG under its scripless policy are recorded in the RoSS aswell as subsequent transfer of the same; and that I/we will abide by the rules andregulations of BTr-RoSS concerning government securities.And further undertake as follows:1. To create/open through the Client Interface System a Principal Securities Accountwith the RoSS to ensure that title of said scripless securities is officially recorded inmy/our name and under my/our control.2. That as a condition for the creation/opening of my/our Principal Securities Accountwith the RoSS, I/we have opened a bank account with(_________________________________________ as Settlement Bank) to whichcoupon and maturity proceeds and any other payments to be made on my/our1Accredited by the Bureau of the Treasury2Licensed by the Securities and Exchange CommissionQ RegulationsAppendix Q-38b - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-38b08.12.31government securities holdings will be credited; undertake to furnish the RoSS ofsaid bank account number; and give notice at least three (3) business days prior toany coupon and/or maturity payment of any change in the Settlement Bank and/orbank account number.3. That no transfer of securities shall be made (i) during the period of two (2) businessdays ending on (and including) the due date of any redemption payment of principaland (ii) during the period of two (2) business days ending on (and including) thedue date of any coupon payment date (the “Closed Period”). I/We furtheracknowledge that the BTr shall prevent any transfer of the securities to be recordedin the RoSS during any Closed Period.4. That in the case of outright sale transactions of government securities, includingthat of RTBs, I/we undertake to sell the same to any of the GSEDs or SecuritiesDealers, save those provided for under existing rules and regulations on governmentsecurities applicable to tax-exempt institutions, government-owned or controlledcorporations and local government units. Otherwise, I/we shall have the saidsecurities delivered to my/our agent/custodian for trading or any other transactionspursuant to a relevant written instruction/authority.5. To receive notices and/or statements of account on a quarterly basis or wheneverthere is a movement in my Principal Securities Account from the RoSS throughany of the following modes:(Please indicate choice)[ ] Pick-up at the RoSS[ ] Registered Mail to Home/Office Address _______________________[ ] Deliver electronically to Agent[ ] Deliver electronically to Settlement Bank (for pick up)[ ] Email - email address_________________In the absence of an indicated choice, I/we understand that the BTr shall electronicallydeliver all Notices and Statements to my/our designated settlement bank.Note: In addition to the indicated manner of receiving notice(s) and statement(s),Investor can directly secure from the BTr written copy of any notice, statement ofaccount, or confirmation report, subject to prior notice to and in accordance withthe procedures of the BTr.I/We hereby agree to abide with the Schedule of Fees and the manner of collection,as may be prescribed by the BTr from time to time.6. That I/we expressly agree and acknowledge that the crediting to the regular demanddeposit account of my/our settlement bank of coupons and/or redemption valuedue my/our scripless securities shall constitute actual receipt of payment byme/us.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38b - Page 9

APP. Q-38b08.12.317. To hold the BTr, its officers, employees and agents free and harmless against allsuits, actions, damages or claims arising from failure of my/our Settlement Bank tocredit my/our bank account for coupons and maturity values on due date.8. That all instructions affecting my/our scripless securities which are transmitted toor received in good faith by the RoSS from myself/ourselves or my/our designatedagent/custodian are covered by relevant documentation indicating my/our expressconsent and authority.9. That I/we expressly warrant and authorize the delivery of copies of all evidence ofauthority granted to my/our designated agent/custodian to transact on my/ourscripless securities upon reasonable demand by BTr.10. That I/we undertake to immediately notify the RoSS of any unauthorized trade ofmy/our scripless securities, and until receipt of such notice, transactions effectedby BTr in good faith are deemed valid.11. To render free and harmless the BTr, its officers, employees and agents for anyclaim or damages with respect to trade instructions carried out in good faith.12. That while it is understood that BTr shall maintain the strict confidentiality of recordsin the RoSS, I/we hereby expressly waive and authorize BTr, to the extent allowed bylaw, to disclose relevant information in compliance with Anti-Money Launderinglaws, rules and regulations.13. To submit to the BTr the relevant special power of attorney or authorizations issuedto my/our agent, upon demand of BTr.IN WITNESS WHEREOF, I/We hereunto affix our hands this _____ day of_______________ at _____________________, Philippines.Conforme:____________________________________Name & Signature of Investor____________________________________Settlement BankQ RegulationsAppendix Q-38b - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-38b08.12.31ACKNOWLEDGMENTBEFORE ME, a Notary Public for and in the City of _____________, personallyappeared:Name: CTC No. Date: Place of Issue:__________________________ ___________ ____________ ________________(Investor or Representative of Juridical Entity)known to me to be the same person who executed the foregoing instrument and he/sheacknowledged to me that the same is his/her free and voluntary act and deed (and the freeact and deed of the entity they represent).WITNESS MY HAND AND NOTARIAL SEAL this ___________ at _________________,Philippines.Doc. No.:Page No.:Book No.:Series ofNOTARY PUBLICManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-38b - Page 11

APP. Q-3909.12.31THE GUIDELINES FOR THE IMPOSITION OF MONETARY PENALTY FORVIOLATIONS/OFFENSES WITH SANCTIONS FALLING UNDER SECTION 37OF R. A. NO. 7653 ON QUASI-BANKS, DIRECTORS AND/OR OFFICERS(Appendix to Secs. 4199Q, 4299Q, 4399Q, 4499Q, 4699Q, 4799Q, 4899Q,4999Q, 4101N.1 and Circular No. 645 dated 13 February 2009)The schedule of penalty, categorized based on: (1) the nature of offenses such as minor,less serious, and/or serious, and (2) the assets size of the quasi-bank, shall be as follows:A. For Serious OffenseAsset SizePenaltyRangeMinimumMediumMaximumUp to P200millionP 5007501, 000Above P200million butnotexceedingP500 millionP 1, 0001, 5002, 000Above P500million butnotexceeding P1billionP 3, 0005, 0007, 000Above P1billion butnotexceedingP10 billionP 10, 00012, 50015, 000Above P10billion butnotexceedingP50 billionP 18, 00020, 00022, 000Above P50billionP 25, 00027, 50030, 000B. For Less Serious OffenseAsset SizePenaltyRangeMinimumMediumMaximumUp to P200millionP 300350400Above P200million butnotexceedingP500 millionP 600700800Above P500million butnotexceeding P1billionP 1, 0001, 2501, 500Above P1billion butnotexceedingP10 billionP 3, 0004, 0005, 000Above P10billion butnotexceedingP50 billionP 7, 0008, 50010, 000Above P50billionP 15, 00017, 50020, 000C. For Minor OffenseAsset SizePenaltyRangeMinimumMediumMaximumUp to P200millionP 150200250Above P200million butnotexceedingP500 millionP 300400500Above P500million butnotexceeding P1billionP 600700800Above P1billion butnotexceedingP10 billionP 1, 0001, 5002, 000Above P10billion butnotexceedingP50 billionP 3, 0004, 0005, 000Above P50billionP 6, 0008, 00010, 000For purposes of this Regulation, the following definition of terms shall mean:1. Serious Offense - This refers to unsafe or unsound quasi-banking practice. An unsafeor unsound practice is one (1) in which there has been some conduct, whether act oromission, which is contrary to accepted standards of prudent quasi-banking operationand may result to the exposure of the quasi-bank and its shareholders to abnormal riskor loss.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-39 - Page 1

APP. Q-3909.12.31In determining the acts or omissions included under the unsafe or unsound bankingpractice, an analysis of the impact thereof on the banks/quasi-banks/trust entities’operations and financial condition must be undertaken, including evaluation ofcapital position, asset condition, management, earnings posture and liquidityposition. The following circumstances shall be considered:(a)(b)(c)(d)The act or omission has resulted or may result in material loss or damage, orabnormal risk or danger to the safety, stability, liquidity or solvency of theinstitution;The act or omission has resulted or may result in material loss or damage orabnormal risk to the institution’s depositors, creditors, investors, stockholders orto the Bangko Sentral or to the public in general;The act or omission has caused any undue injury, or has given unwarrantedbenefits, advantage or preference to the quasi-bank or any party in the dischargeby the director or officer of his duties and responsibilities through manifestpartiality, evident bad faith or gross inexcusable negligence; orThe act or omission involves entering into any contract or transaction manifestlyand grossly disadvantageous to the bank, quasi-bank or trust entity, whether ornot the director or officer profited or will profit thereby.Certain acts or omissions as falling under this classification maybe determinedbased on the guidelines provided under Appendix Q-24.2. Less Serious Offense - These include major acts or omissions defined as quasi-bank/individual’s failure to comply with the requirements of banking laws, rules andregulations, provisions of Manual of Regulations(MOR)/Circulars/Memorandum as wellas Monetary Board directives/instructions having material 1/ impact on quasi-bank’ssolvency, liquidity or profitability and/or those violations classified as major offensesunder the Report of Examination, except those classified under unsafe or unsoundbanking practice.3. Minor Offense - These include acts or omissions which are procedural in nature, canbe corrected immediately and do not have material impact on the solvency, liquidityand profitability of the quasi-bank. All other acts or omissions that cannot be classifiedunder the major offenses/violations will be classified under this category.4. Minimum refers to the range of penalties to be imposed if the mitigating factor(s)outweigh the aggravating circumstances.5. Medium refers to the penalty to be imposed in the absence of any mitigating andaggravating circumstances or if the mitigating factor(s) offset the aggravating factor(s).1/SFAS/IAS defines materiality as any information, which if omitted or misstated, could influence the economic decisions ofusers taken on the basis of the financial statements. Per Financial Accounting Standard Board (FASB), it is defined as themagnitude of an omission or misstatement of accounting information.Q RegulationsAppendix Q-39 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-3909.12.316. Maximum refers to the penalty to be imposed if the aggravating circumstances outweighthe mitigating factor(s).In determining the amount of penalty, a two-stage assessment shall be conducted asfollows:Step 1: Determine the nature of offense whether it is: (a) Serious; (b) Less Serious; or(c) Minor Offense; andStep 2: Determine whether there are aggravating and/or mitigating factors (as listedand defined in Annex A).Both the aggravating and mitigating factors shall be considered for initial penaltyimposition and subsequent requests for reconsideration thereto.The foregoing monetary penalties shall be without prejudice to the imposition ofnon-monetary sanctions, if and when deemed applicable by the Monetary Board.Violations of banking laws and Bangko Sentral regulations with specific penal clauseare not covered by this Regulation.(As amended by Circular Nos. 673 dated 10 December 2009 and 645 dated 13 February 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-39 - Page 3

APP. Q-3908.12.31Annex AAggravating and Mitigating Factors to be Considered in the Imposition of Penalty1. Aggravating Factors:(a) Frequency of the commission ofspecific violation – This pertains tocommission or omission of a specificoffense involving either the same ordifferent transaction. This will also refer toa violation which may have been correctedin the past but found repeated in anothertransaction/account in the subsequentexamination.In determining frequency, the numberof times of commission or omission of aspecific offense during the preceding three(3) - year period shall also be considered.The word “offense” pertains to aviolation that connotes infraction ofexisting BSP rules and regulations as wellas non-compliance with BSP/MB directives.(b) Duration of Violations Prior toNotification – This pertains to the length oftime prior to the latest notification on theviolation. Violations that have been existingfor a long time before it was revealed/discovered in the regular examination or areunder evaluation for a long time due topending requests or correspondences fromQBs on whether a violation has actuallyoccurred shall be dealt with through thiscriterion. Violations outstanding for morethan one (1) year prior to notification, at theminimum, will qualify as violationsoutstanding for a long time.(c) Continuation of offense oromission after notification – This pertainsto the persistence of an act or offense afterthe latest notification on the existence ofthe violation, either from the appropriatedepartment of the SES or from theMonetary Board and/or Deputy Governor,in cases where the violation has beenelevated accordingly. This covers theperiod after the final notification of theexistence of the violation until such timethat the violation has been corrected and/or remedied. The corrective action shallbe reckoned with from the date ofnotification.(d) Concealment – This factor pertainsto the cover up of a violation. In evaluatingthis factor, one shall consider the intentionof the party(ies) involved and whetherpecuniary benefit may accrue accordingly.Intention precedes concealment. Theact of concealing an offense or omissioncarries with it the intention to defraudregulators. Moreover, the amount ofpecuniary benefit, which may or may notaccrue from the offense or omission, shallalso be considered under this factor.Concealment may be apparent in caseswhen QB officers purposely complicatesthe transaction to make it difficult touncover or refuse to provide information/documents that would support theviolation/offense committed.In as much as concealment andintention are speculative matters and maybe difficult to establish, appropriate supportof facts or circumstantial evidence in thisfactor shall be considered.(e) Loss or risk of loss to QB – Inassessing this factor, “potential loss” refersto any time at which the QB was in dangerof sustaining a loss.• Substantial actual loss – The QBhas been exposed to a significant loss ofearnings and capital. The volume ofaccounts involved in the loss is substantial/significant in relation to the institution’sQ RegulationsAppendix Q-39 - Page 4Manual of Regulations for Non-Bank Financial Institutions

App. Q-3908.12.31assets and capital. The QB/individual mayhave substantial/serious violations thatcould impact the reputation and earningsof the QB.• Minimal actual loss or substantialrisk of loss – The QB has incurred minimalloss or will be exposed to substantial risk ofloss of earnings or capital although both donot materially impact financial condition.The volume of accounts involved forminimal loss or substantial risk of loss isreasonable and manageable. While a losswas incurred, the QB could absorb the lossin the normal course of business.Substantial risk of loss includes anypotential losses the aggregate of whichamounts to at least one percent (1%) ofthe capital of the QB 1 .• Minimal risk of loss – The riskexposure on earnings or capital is minimal.QB is not vulnerable to significant loss. Thevolume of accounts involved for potentialloss/risk is minimal/negligible. The risk ofloss would have little impact on the QB orits financial condition. The risk of lossaggregating to less than one percent (1%)of the capital of the QB will fall under thisclassification.(f) Impact to QB/banking industry– Inassessing this factor, it is appropriate toconsider any possible negative impact orharm to the QB. (e.g. A violation of lawinvolving insider abuse may result inadverse publicity for the institution,possibly causing a run on deposits andaffecting the QB’s liquidity). Resultingeffect on the banking industry on theviolation/offenses committed by the QB,if any, will also be considered. Sources ofdata may come from news reports.• Substantial impact on QB. Noimpact on banking industry. This mayinvolve reputational risk of the QB as aresult of negative publicity generated forexample, by involvement of QB’s director/officer in activities not acceptable to theregulatory bodies, e.g. pyramiding,investment scams etc. This may alsoinvolve insider abuse of authority/power.However, the banking industry is notaffected for this isolated case.• Moderate impact on bankingindustry or on public perception ofbanking industry. This may involve poorcorporate governance and mismanagementof QB that may result to erosion of publicconfidence leading to bank run in variousbranches. This may also trigger a bank runin other subsidiaries.• Substantial impact on bankingindustry or on public perception ofbanking industry. This is a worst-casescenario. The violations/irregular activitiesof the QB may totally erode the trust andconfidence of the quasi-banking publicresulting to a nationwide bank run.Pessimistic perception of the banking publicon the banking industry is highly observed.2. Mitigating Factors(a) Good Faith – Good faith is theabsence of intention of the erringindividual/entity in the commission of aviolation.• Full Cooperation - This isdetermined by the actions of the individualand/or QB towards the regulators after oreven before notification of the offense and/or omission. Assistance rendered by theQB during the investigation and/orexamination conducted relative to the citedoffense and/or omission may be viewedfavorably when computing the amount ofpenalty to be imposed on the QB/individual.• With positive measures/actionundertaken although not correctedimmediately. The QB is willing to remedy/1Cir. 410 dated 29 October 2003 provides that external auditors of QBs must report to BSP, among others, any potentiallosses the aggregate of which amounts to at least one percent (1%) of the capital to enable the BSP to take timely andappropriate remedial action.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-39 - Page 5

APP. Q-3908.12.31correct the violation but is being restrainedof its capacity to take immediate actionthus, will undertake a Memorandum ofUndertaking/Commitment for a specifiedperiod as a sign of good faith. The QB hasstarted to rectify the infraction by institutingreforms in their operations or systems.• Voluntary disclosure of offense -Voluntary disclosure of the QB of theoffense committed before it is discoveredby BSP examiners in the regular/specialexamination or in the supervisory work(e.g. submission of reports to the BSPdisclosing the violation committed by theQB based on the internal auditor’s findings)may be considered as the highest level ofmitigation under this factor.The burden of proof, however, falls onthe QB/individual to support its/his/herclaim of good faith and may be used asbasis to mitigate the amount of penalty thatmay be imposed.Q RegulationsAppendix Q-39 - Page 6Manual of Regulations for Non-Bank Financial Institutions

PROMPT CORRECTIVE ACTION FRAMEWORK[Appendix to Secs. 4193Q (2008 - 4192Q), 4192S, 4192P and 4192N]APP. Q-4009.12.31In carrying out its primary objective ofmaintaining price stability conducive to abalanced and sustainable growth of theeconomy 1 , the BSP must necessarilymaintain stability of the financial systemthrough preservation of confidence therein.While preservation of confidence in thefinancial system may call for closure ofmismanaged banks and/or financial entitiesunder its jurisdiction, such closure is notthe only option available to the BSP. Whena bank’s closure, for instance, is adjudgedby the Monetary Board to have adversesystemic consequences, the State may actin accordance with law to avert potentialfinancial system instability or economicdisruption. 2It is recognized that the closure of abank or its intervention can be a costly andpainful exercise. For this reason, the BSP,as supervisor, can enforce PCA 3 as soonas a bank’s condition indicates higher-thannormal risk of failure.PCA essentially involves the BSPdirecting the board of directors of a bank,prior to an open outbreak of crisis, toinstitute strong measures to restore theentity to normal operating condition withina reasonable period, ideally within one (1)year. These measures may include any orall of the following components:(1) Implementation of a capitalrestoration plan;(2) Implementation of a businessimprovement plan; and(3) Implementation of corporategovernance reforms.Capital restoration plan – thiscomponent contains the schedule forbuilding up a bank’s capital base (primarilythrough an increase in Tier 1 capital) to alevel commensurate to the underlying riskexposure and in full compliance withminimum capital adequacy requirement. Inconjunction with this plan, the BSP may alsorequire any one (1), or a combination ofthe following:1. Limit or curtail dividend paymentsto common stockholders;2. Limit or curtail dividend paymentsto preferred stockholders; and3. Limit or curtail fees and/or otherpayments to related parties.Business improvement plan – thiscomponent contains the set of actions to betaken immediately to bring about animprovement in the entity’s operatingcondition, including but not limited to anyone (1), or a combination of the following:1. Reduce risk exposures tomanageable levels;2. Strengthen risk management;3. Curtail or limit the bank’s scope ofoperations including those of its subsidiariesor affiliates where it exercises control;4. Change or replace managementofficials;5. Reduce expenses; and6. Other measures to improve thequality of earnings.Corporate governance reforms – thiscomponent contains the actions to beimmediately taken to improve thecomposition and/or independence of theboard of directors and to enhance thequality of its oversight over the managementand operation of the entity. This alsoincludes measures to minimize potentialshareholder conflicts of interest detrimentalto its creditors, particularly, depositors in a1Section 3 of Republic Act No. 76532Section 17 and 18 of Republic Act No. 3591, as amended3Section 4.6 of Republic Act No. 8791Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-40 - Page 1

APP. Q-4009.12.31bank. This likewise lays down measures toprovide an acceptable level of financialtransparency to all stakeholders. Suchactions could include, but are not limitedto, any one (1), or a combination of thefollowing:1. A change in the composition of theboard of directors or any of the mandatorycommittees (under the MORNBFI);2. An enhancement to the frequencyand/or depth of reporting to the board ofdirectors;3. A reduction in exposures to and/ora termination or reduction of businessrelationships with affiliates that poseexcessive risk or are inherentlydisadvantageous to the supervised FI; and4. A change of external auditor.A bank may be subject to PCAwhenever any or all of the followingconditions obtain:(1) When either of the Total Risk-BasedRatio 1 , Tier 1 Risk-Based Ratio, or LeverageRatio 2 falls below ten percent (10%), sixpercent (6%) and five percent (5%),respectively, or such other minimum levelsthat may be prescribed for the said ratiosunder relevant regulations, and/or thecombined capital account falls below theminimum capital requirement prescribedunder Sec. 4111Q;(2) CAMELS composite rating is less than“3” or a Management component rating of lessthan “3”;(3) A serious supervisory concern hasbeen identified that places a bank at morethan-normalrisk of failure in the opinionof the director of the ExaminationDepartment concerned, which opinion isconfirmed by the Monetary Board. Suchconcerns could include, but are notlimited, to any one (1) or a combinationof the following:a. Finding of unsafe and unsoundactivities that could adversely affect theinterest of depositors and/or creditors;b. A finding of repeat violations of lawor the continuing failure to comply withMonetary Board directives; andc. Significant reporting errors thatmaterially misrepresent the bank’sfinancial condition.The initiation of PCA shall berecommended by the Deputy Governor,SES to the Monetary Board for approval.Any initiation of PCA shall be reported tothe PDIC for notation. Upon PCA initiation,the BSP shall require the bank to enter intoa MOU committing to the PCA plan. TheMOU shall be subject to approval by theMonetary Board.In order to monitor compliance withthe PCA, quarterly progress reports shallbe made. The BSP reserves the right toconduct periodic on-site visits outside ofregular examination to validatecompliance with the PCA plan.Subject to Monetary Board approval,sanctions may be imposed on any banksubject to PCA whenever there isunreasonable delay in entering into a PCAplan or when PCA is not being compliedwith. These may include any or all of thefollowing:(1) monetary penalty on or curtailmentor suspension of privileges enjoyed bythe board of directors or responsibleofficers;(2) restriction on existing activities thatthe supervised FI may undertake;(3) denial of application for branchingand other special authorities;(4) denial or restriction of access toBSP credit facilities; and(5) restriction on declaration ofdividends.On the other hand, if the bank subject toPCA promptly implements a PCA plan andsubstantially complies with its conditions, itmay continue to have access to BSP creditfacilities notwithstanding non-compliancewith standard conditions of access to such1Otherwise known as CAR2Total Capital / Total AssetsQ RegulationsAppendix Q-40 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4009.12.31facilities. The Deputy Governor, SES shallrecommend such exemption to theMonetary Board for approval.In cases where a bank’s problems aredeemed to be exceptionally serious from theoutset, or when a bank is unwilling tosubmit to the PCA or unable to substantiallycomply with an agreed PCA plan, theDeputy Governor, SES may immediatelyrecommend to the Monetary Board moredrastic actions as prescribed under Sec. 29(conservatorship) and Sec. 30 (receivership)of R.A. No. 7653.Subject to Monetary Board approval,the PCA status of a bank may be lifted:Provided, That the bank fully complieswith the terms and conditions of its MOUand: Provided, further, That the DeputyGovernor, SES has determined that thefinancial and operating condition of thebank no longer presents a risk to itself orthe financial system. Such improvedassessment shall be immediately reportedto the PDIC.(Circular No. 523 dated 23 March 2006, as amended by CircularNo. 664 dated 15 September 2009)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-40 - Page 3

APP. Q-4108.12.31GUIDELINES FOR THE CHANGE IN THE MODE OF COMPLIANCE WITH THELIQUIDITY RESERVE REQUIREMENT[Appendix to Subsecs. 4254Q (2008 - 4246Q.1) & 4405Q.5]The following guidelines shall beobserved in implementing the change in themode of compliance with the liquidityreserve requirement from holdinggovernment securities bought directly fromthe BSP:1. Government securities previouslybought from the BSP in compliance with theliquidity reserve requirement shall remaineligible for such purpose until these matureor are sold back to the BSP at yields quotedby the BSP Treasury Department (TD).Only the outstanding ERAP and PEACe bondsshall qualify as eligible securities forliquidity reserves. Future issuances will nolonger carry the liquidity reserve eligibilityunder this section.2. The interest rates applied to theRDA shall be set by the TD at one-halfpercent (1/2%) below the prevailingmarket rate for comparable governmentsecurities;3. Pre-termination of RDAs shall beallowed subject to a reduction in applicableinterest rates, as prescribed by the TD;4. Banks and QBs shall submit onplacement date a written authority (seeAnnex A) to the TD to debit their DDA withthe BSP as payment for the RDA;5. Principal and interest payments atmaturity net of applicable tax shall bemade by the BSP through automatic creditto the institution’s DDA with the BSP. Fullor partial rollover of placements in the RDAshall be settled on a gross basis;6. Any deficiency in the liquidityreserves shall continue to be in the forms ormodes prescribed under existing regulationsfor the composition of required reserves;7. Banks and QBs shall continue tospecify in the prescribed reports to theSDC of the BSP the balance of governmentsecurities held for liquidity reservepurposes. Said balance shall decline overtime as government securities previouslybought from the BSP mature or are soldback to the BSP; and8. To facilitate the adoption of thechange in the mode of compliance with theliquidity reserve requirement, the TD (whilestarting to accept placements in the reservedeposit account) shall continue to sellgovernment securities for liquidity reservepurposes until 29 September 2006.The above guidelines shall take effecton 25 August 2006.(Circular Nos. 551 dated 17 November 2006 and 539 dated09 August 2006)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-41 - Page 1

APP. Q-4108.12.31Annex ADEBIT/CREDIT AUTHORITY FORMATORDINARY WHITE PAPER2 COPIES(COUNTERPARTY’S LETTERHEAD)DATE: ________________TREASURY DEPARTMENTTREASURY SERVICES GROUP – DOMESTICBANGKO SENTRAL NG PILIPINASGENTLEMEN:THIS IS TO CONFIRM OUR RESERVE DEPOSIT ACCOUNT (RDA) PLACEMENT WITH YOUROFFICE, DETAILED AS FOLLOWS:VALUE DATETERMMATURITY DATERATEPRINCIPAL AMOUNTGROSS INTERESTWITHHOLDING TAXLIQUIDITY RESERVES FORDeposit Liabilities & Deposit Substitute(PLEASE CHECK ONE)TOFA - OthersCTFACCORDINGLY, PLEASE DEBIT OUR REGULAR DEMAND DEPOSIT ACCOUNTWITH YOURSELVES ON VALUE DATE FOR THE PRINCIPAL AMOUNT OF (AMOUNT INWORDS) (P) AND CREDIT THE SAME ACCOUNT ON MATURITY DATE THEAMOUNT OF (AMOUNT IN WORDS) (P) REPRESENTING FULL PAYMENT OFTHE PRINCIPAL PLUS INTEREST (NET OF APPLICABLE WITHHOLDING TAX) THEREON.VERY TRULY YOURS,(AUTHORIZED SIGNATORY)1(Circular Nos. 551 dated 17 November 2006 and 539 dated 09 August 2006)(AUTHORIZED SIGNATORY)2Q RegulationsAppendix Q-41 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4208.12.31GUIDELINES ON SUPERVISION BY RISK[Appendix to Secs. 4173Q (2008 - 4193Q), 4193S, 4193P and 4193N]I. BackgroundIt must be recognized that banking is abusiness of taking risks in order to earnprofits. While banking risks historically havebeen concentrated in traditional bankingactivities, the financial services industry hasevolved in response to market-driven,technological, and legislative changes.These changes have allowed FIs to expandproduct offerings, geographic diversity, anddelivery systems. They have alsoincreased the complexity of the FI’sconsolidated risk exposure. Because of thiscomplexity, FIs must evaluate, control, andmanage risk according to its significance.The FI’s evaluation of risk must take intoaccount how non-bank activities within abanking organization affect the FI.Consolidated risk assessments should bea fundamental part of managing the FI.Large FIs assume varied and complex risksthat warrant a risk-oriented supervisoryapproach.II. Statement of policyThe existence of risk is not necessarilya reason for concern. Likewise, theexistence of high risk in any area is notnecessarily a concern, so long asmanagement exhibits the ability toeffectively manage that level of risk. Underthis approach, the BSP will not necessarilyattempt to restrict risk-taking but ratherensure that FIs identify, understand, andcontrol the risks they assume. As anorganization grows more diverse andcomplex, the FI’s risk managementprocesses must keep pace. When risk is notproperly managed, BSP will direct FImanagement to take corrective action suchas reducing exposures, increasing capital,strengthening risk management processesor a combination of these actions. In allcases, the primary concern of the BSP is thatthe FI operates in a safe and sound mannerand maintains capital commensurate withits risks. Further guidance on riskmanagement issues will be addressed insubsequent issuances that are part of theoverall risk assessment program.III. Guidelines for risk managementFor purposes of the discussion of risk,the BSP will evaluate banking risk relativeto its impact on capital and earnings. Froma supervisory perspective, risk is thepotential that events, expected orunanticipated, may have an adverse impacton the FI’s capital or earnings.The BSP-SES has defined eight (8)categories of risk for FI supervisionpurposes. These risks are: credit, market,interest rate, liquidity, operational,compliance, strategic, and reputation.These categories are not mutually exclusive;any product or service may expose the FIto multiple risks. In addition, they can beinterdependent. Increased risk in one (1)category can increase risk in othercategories.Types and definitions of risk1. Credit risk arises fromcounterparty’s failure to meet the terms ofany contract with the FI or otherwiseperform as agreed. Credit risk is found inall activities where success depends oncounterparty, issuer, or borrowerperformance. It arises any time FI funds areextended, committed, invested, orotherwise exposed through actual orimplied contractual agreements, whetherreflected on or off the balance sheet. Creditrisk is not limited to the loan portfolio.2. Market risk is the risk to earningsor capital arising from changes in the valueManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-42 - Page 1

APP. Q-4208.12.31of traded portfolios of financial instruments.This risk arises from market-making, dealing,and position-taking in interest rate, foreignexchange, equity and commodities markets.3. Interest rate risk is the current andprospective risk to earnings or capital arisingfrom movements in interest rates. Interestrate risk arises from differences between thetiming of rate changes and the timing of cashflows (repricing risk); from changing raterelationships among different yield curvesaffecting FI activities (basis risk); fromchanging rate relationships across thespectrum of maturities (yield curve risk); andfrom interest-related options embedded inFI products (options risk).4. Liquidity risk is the current andprospective risk to earnings or capital arisingfrom an FI’s inability to meet its obligationswhen they come due without incurringunacceptable losses. Liquidity risk includesthe inability to manage unplanneddecreases or changes in funding sources.Liquidity risk also arises from the failure torecognize or address changes in marketconditions that affect the ability to liquidateassets quickly and with minimal loss invalue.5. Operational risk is the current andprospective risk to earnings or capital arisingfrom fraud, error, and the inability to deliverproducts or services, maintain a competitiveposition, and manage information. Risk isinherent in efforts to gain strategicadvantage, and in the failure to keep pacewith changes in the financial servicesmarketplace. Operational risk is evident ineach product and service offered.Operational risk encompasses: productdevelopment and delivery, operationalprocessing, systems development,computing systems, complexity of productsand services, and the internal controlenvironment.6. Compliance risk is the current andprospective risk to earnings or capital arisingfrom violations of, or non-conformancewith, laws, rules, regulations, prescribedpractices, internal policies and procedures,or ethical standards. Compliance risk alsoarises in situations where the laws or rulesgoverning certain FI products or activitiesof the FI’s clients may be ambiguous oruntested. This risk exposes the FI to fines,payment of damages, and the voiding ofcontracts. Compliance risk can lead todiminished reputation, reduced franchisevalue, limited business opportunities,reduced expansion potential, and lack ofcontract enforceability.7. Strategic risk is the current andprospective impact on earnings or capitalarising from adverse business decisions,improper implementation of decisions, orlack of responsiveness to industry changes.This risk is a function of the compatibilityof an organization’s strategic goals, thebusiness strategies developed to achievethose goals, the resources deployed againstthese goals, and the quality ofimplementation. The resources needed tocarry out business strategies are bothtangible and intangible. They includecommunication channels, operatingsystems, delivery networks, and managerialcapacities and capabilities. The organization’sinternal characteristics must be evaluatedagainst the impact of economic,technological, competitive, regulatory, andother environmental changes.8. Reputation risk is the current andprospective impact on earnings or capitalarising from negative public opinion. Thisaffects the FI’s ability to establish newrelationships or services or continueservicing existing relationships. This riskmay expose the FI to litigation, financial loss,or a decline in its customer base. In extremecases, FIs that lose their reputation maysuffer a run on deposits. Reputation riskexposure is present throughout theorganization and requires the responsibilityto exercise an abundance of caution indealing with customers and the community.Q RegulationsAppendix Q-42 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4208.12.31IV. FI management of riskBecause market conditions andcompany structures vary, there is no singlerisk management system that works for allFIs. Each FI should tailor its riskmanagement program to its needs andcircumstances. Sound risk managementsystems, however, have several things incommon; for example, they areindependent of risk-taking activities.Regardless of the risk managementprogram’s design, each program should:1. Identify risk: To properly identifyrisks, an FI must recognize and understandexisting risks or risks that may arise fromnew business initiatives, including risksthat originate in non-bank subsidiaries andaffiliates. Risk identification should be acontinuing process, and should occur atboth the transaction and portfolio level.2. Measure risk: Accurate and timelymeasurement of risk is essential toeffective risk management systems. An FIthat does not have a risk measurementsystem has limited ability to control ormonitor risk levels. Further, the morecomplex the risk, the more sophisticatedshould be the tools that measure it. An FIshould periodically conduct tests to makesure that the measurement tools it uses areaccurate. Good risk measurement systemsassess the risks of both individualtransactions and portfolios. During thetransition process in FI mergers andconsolidations, the effectiveness of riskmeasurement tools is often impairedbecause of the technologicalincompatibility of the merging systems orother problems of integration. Therefore,the resulting FI must make a strong effortto ensure that risks are appropriatelymeasured across the consolidated entity.Larger, more complex FIs must assess theimpact of increased transaction volumeacross all risk categories.3. Monitor risk: FIs should monitorrisk levels to ensure timely review of riskpositions and exceptions. Monitoringreports should be frequent, timely,accurate, and informative and should bedistributed to appropriate individuals toensure action, when needed. For large,complex FIs, monitoring is essential toensure that management’s decisions areimplemented for all geographies,products, and legal entities.4. Control risk: The FI shouldestablish and communicate risk limitsthrough policies, standards, andprocedures that define responsibility andauthority. These control limits should bevalid tools that management should beable to adjust when conditions or risktolerances change. The FI should have aprocess to authorize exceptions orchanges to risk limits when warranted. Inmerging or consolidating FIs, the transitionshould be tightly controlled; businessplans, lines of authority, and accountabilityshould be clear. Large, diversified FIsshould have strong risk controls coveringall geographies, products, and legalentities.The Board must establish the FI’sstrategic direction and risk tolerances. Incarrying out these responsibilities, theBoard should approve policies that setoperational standards and risk limits.Well-designed monitoring systems willallow the Board to hold managementaccountable for operating withinestablished tolerances. Capablemanagement and appropriate staffing arealso essential to effective riskmanagement. FI management isresponsible for the implementation,integrity, and maintenance of riskmanagement systems. Management alsomust keep the directors adequatelyinformed. Management must:a. Implement the FI’s strategy;b. Develop policies that define theFI’s risk tolerance and ensure that they arecompatible with strategic goals;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-42 - Page 3

APP. Q-4208.12.31c. Ensure that strategic direction andrisk tolerances are effectivelycommunicated and adhered to throughoutthe organization;d. Oversee the development andmaintenance of management informationsystems to ensure that information istimely, accurate, and pertinent.V. Assessment of risk managementWhen assessing risk managementsystems, the BSP will consider the FI’spolicies, processes, personnel, and controlsystems. Significant deficiencies in any oneof these areas will cause the BSP to expectthe FI to compensate for these deficienciesin their overall risk management process.1. Policies are statements of the FIs’commitment to pursue certain results.Policies often set standards (on risktolerances, for example) and recommendcourses of action. Policies should expressan FI’s underlying mission, values, andprinciples. A policy review should alwaysbe triggered when an FI’s activities or risktolerances change.2. Processes are the procedures,programs, and practices that impose orderon the FI’s pursuit of its objectives.Processes define how daily activities arecarried out. Effective processes areconsistent with the underlying policies, areefficient, and are governed by checks andbalances.3. Personnel are the staff andmanagers that execute or overseeprocesses. Good staff and managersperform as expected, are qualified, andcompetent. They understand the FI’smission, values, policies, and processes.Compensation programs should bedesigned to attract, develop, and retainqualified personnel. In addition,compensation should be structured toreward contributions to effective riskmanagement.4. Control systems include the toolsand information systems (e.g, internal/external audit programs) that FI managersuse to measure performance, makedecisions about risk, and assess theeffectiveness of processes. Feedbackshould be timely, accurate, and pertinent.VI. Supervision by RiskUsing the core assessment standardsof the BSP as guide, an examiner willobtain both a current and prospective viewof an FI’s risk profile. When appropriate,this profile will incorporate potentialmaterial risks to the FI from non-bankaffiliates’ activities conducted by the FI.Subsidiaries and branches of foreign FIsshould maintain sufficient documentationonsite to support the analysis of their riskmanagement. This risk assessment drivessupervisory strategies and activities. It alsofacilitates discussions with FI managementand directors and helps to ensure moreefficient examinations. The coreassessment complements the riskassessment system (RAS). Examinersdocument their conclusions regarding thequantity of risk, the quality of riskmanagement, the level of supervisoryconcern (measured as aggregate risk), andthe direction of risk using the RAS.Together, the core assessment and RASgive the appropriate department of the SESthe means to assess existing and emergingrisks in FIs, regardless of size orcomplexity.Specifically, supervision by riskallocates greater resources to areas withhigher risks. The appropriate departmentof the SES will accomplish this by:1. Identifying risks using commondefinitions. The categories of risk, as theyare defined, are the foundation forsupervisory activities.2. Measuring risks using commonmethods of evaluation. Risk cannot alwaysQ RegulationsAppendix Q-42 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4208.12.31be quantified in pesos. For example,numerous internal control deficienciesmay indicate excessive operational risk.3. Evaluating risk management todetermine whether FI systems andprocesses permit management to manageand control existing and prospective levelsof risk.The appropriate department of the SESwill discuss preliminary conclusionsregarding risks with FI management.Following these discussions, it will adjustconclusions when appropriate. Once therisks have been clearly identified andcommunicated, it can then focussupervisory efforts on the areas of greaterrisk within the FI, the consolidated bankingorganization, and the banking system.To fully implement supervision by risk,the appropriate department of the SES willalso assign CAMELS ratings to the lead FIand all affiliated FIs. It may determine thatrisks in individual FIs are increased,reduced, or mitigated in light of theconsolidated risk profile of the FI as awhole. To perform a consolidated analysis,it obtain pertinent information from FIs andaffiliates, and verify transactions flowingbetween FIs and affiliates.(Circular No. 510 dated 03 February 2006)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-42 - Page 5

APP. Q-4308.12.31GUIDELINES ON MARKET RISK MANAGEMENT[Appendix to Sec. 4174Q (2008 - 4194Q), 4194S, 4194P and 4194N]I. BackgroundThe globalization of financial markets,increased transaction volume and volatility,and the introduction of complex productsand trading strategies have made market riskmanagement take on a more important rolein risk management. FIs now use a widerange of financial products and strategies,ranging from the most liquid fixed incomesecurities to complex derivativeinstruments and structured products. Therisk dimensions of these products andstrategies must be fully understood,monitored, and controlled by a FI.II. Statement of policyFor purposes of these guidelines, FIsrefer to banks and NBFIs supervised by theBSP and their respective financialsubsidiaries. The level of market riskassumed by an FI is not necessarily aconcern, so long as the FI has the ability toeffectively manage the risk. Therefore, theBSP will not restrict the level of riskassumed by an FI, or the scope of itsfinancial market activities, so long as theFI is authorized to engage in such activitiesand:• Understands, measures, monitorsand controls the risk assumed,• Adopts risk management practiceswhose sophistication and effectiveness arecommensurate to the risk being monitoredand controlled, and• Maintains capital commensuratewith the risk exposure assumed.If the BSP determines that an FI’s riskexposures are excessive relative to the FI’scapital, or that the risk assumed is not wellmanaged, the BSP will direct the FI to reduceits exposure to an appropriate level and/orstrengthen its risk management systems.Inevaluating the above parameters, the BSPexpects FIs to have sufficientknowledge, skills and appropriatesystem and technology necessary tounderstand and effectively manage theirmarket risk exposures. The principlesset forth in these guidelines shall be usedin determining the adequacy andeffectiveness of an FI’s market riskmanagement process, the level and trendof market risk exposure and adequacyof capital relative to exposure. The BSPshall consider the following factors:1. The major sources of market riskexposure and the complexity and level ofrisk posed by the assets, liabilities, and offbalance-sheetactivities of the FI;2. The FI’s actual and prospective levelof market risk in relation to its earnings,capital, and risk management systems;3. The adequacy and effectiveness ofthe FI’s risk management practices andstrategies as evidenced by:• The adequacy and effectiveness ofboard and senior management oversight;• Management’s knowledge andability to identify and manage sources ofmarket risk as measured by past andprojected financial performance;• The adequacy of internalmeasurement, monitoring, andmanagement information systems;• The adequacy and effectiveness ofrisk limits and controls that set toleranceson income and capital losses;• The adequacy and frequency of theFI’s internal review and audit of its marketrisk management process.Further, an FI’s market risk managementsystem shall be assessed under the FI’sgeneral risk management framework,consistent with the guidelines onsupervision by risk as set forth underAppendix Q-42.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 1

APP. Q-4308.12.31III. Market risk management processAn FI’s market risk managementprocess should be consistent with itsgeneral risk management framework andshould be commensurate with the level ofrisk assumed. Although there is no singlemarket risk management system thatworks for all FIs, an FI’s market riskmanagement process should:1. Identify market risk. Identifyingcurrent and prospective market riskexposures involves understanding thesources of market risk arising from an FI’sexisting or new business initiatives. An FIshould have procedures in place to identifyand address the risk posed by newproducts and activities prior to initiating thenew products or activities.Identifying market risk also includesidentifying an FI’s desired level of riskexposure based on its ability and willingnessto assume market risk. An FI’s ability toassume market risk depends on its capitalbase and the skills/capabilities of itsmanagement team. In any case, market riskidentification should be a continuingprocess and should occur at both thetransaction and portfolio level.2. Measure market risk. Once thesources and desired level of market risk havebeen identified, market risk measurementmodels can be applied to quantify an FI’smarket risk exposures. However, market riskcannot be managed in isolation. Market riskmeasurement systems should be integratedinto an FI’s general risk measurement systemand results from models should beinterpreted in coordination with other riskexposures. Further, the more complex an FI’sfinancial market activities are, the moresophisticated the tools that measure marketrisk exposures arising from such complexactivities should be.3. Control market risk. Quantifyingmarket risk exposures help an FI alignexisting exposures with the identifieddesired level of exposures. Controllingmarket risk usually involves establishingmarket risk limits that are consistent withan FI’s market risk measurementmethodologies. Limits may be appliedthrough an outright prohibition onexposures above a pre-set threshold, byrestraining activities or deploying strategiesthat alter the risk-return characteristics of onandoff- balance sheet positions.Appropriate pricing strategies may likewisebe used to control market risk exposures.4. Monitor market risk. Ensuring thatmarket risk exposures are adequatelycontrolled requires the timely review ofmarket risk positions and exceptions.Monitoring reports should be frequent,timely and accurate. For large, complex FIs,consolidated monitoring should beemployed to ensure that management’sdecisions are implemented for allgeographies, products, and legal entities.IV. Definition and sources of market riskMarket risk is the risk to earnings orcapital arising from adverse movements infactors that affect the market value ofinstruments, products, and transactions inan institution’s overall portfolio, both on oroff-balance sheet. Market risk arises frommarket-making, dealing, and position-takingin interest rate, foreign exchange, equityand commodities markets.Interest rate risk is the current andprospective risk to earnings or capital arisingfrom movements in interest rates.FX risk refers to the risk to earnings orcapital arising from adverse movementsin FX rates.Equity risk is the risk to earnings orcapital arising from movements in the valueof an institution’s equity-related holdings.Commodity risk is the risk to earningsor capital due to adverse changes in thevalue of an institution’s commodity-relatedholdings.While there are generally four sourcesof market risk, as defined herein, the focusQ RegulationsAppendix Q-43 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31of this Appendix is interest rate risk andFX risk. Nevertheless, the principles setforth in the market risk managementprocess and sound risk managementpractices are generally applicable to allsources of market risk.a. Interest rate riskInterest rate risk is the risk that changesin market interest rates will reduce currentor future earnings and/or the economicvalue of a FI. Accepting interest rate risk isa normal part of financial intermediationand is a major source of profitability andshareholder value. Excessive orinadequately understood and controlledinterest rate risk, however, can pose asignificant threat to an FI’s earnings andcapital. Thus, an effective riskmanagement process that maintains interestrate risk within prudent levels is essentialto the safety and soundness of FIs.1. Sources of interest rate riska. Re-pricing riskThis is the most common type of interestrate risk and arises from differences in thematurity (for fixed-rate instruments) and repricing(for floating-rate instruments) of anFI’s assets, liabilities and off-balance sheetpositions. While such re-pricingmismatches are fundamental to the businessof financial intermediation, they also exposean FI’s earnings and underlying economicvalue to changes based on fluctuations inmarket interest rates.b. Basis riskBasis risk arises from imperfectcorrelations among the various interest ratesearned and paid on financial instruments withotherwise similar re-pricing characteristics. Ashift in the relationship between these ratesor interest rates in different markets can giverise to unexpected changes in the cash flowsand earnings spread between assets, liabilitiesand off-balance sheet instruments of similarmaturities or re-pricing frequencies.c. Yield curve riskYield curve risk is the risk that rates ofdifferent maturities may change by adifferent magnitude. It arises from variationsin the movement of interest rates across thematurity spectrum of the same index ormarket. Yield curves can steepen, flatten oreven invert. Unanticipated shifts of the yieldcurve may have adverse effects on an FI’searnings or underlying economic value.d. Option riskOption risk is the risk that the paymentpatterns of assets and liabilities will changewhen interest rates change. Formally, anoption gives the option holder the right, butnot the obligation to buy, sell, or in somemanner alter the cash flow of an instrumentor financial contract. Options may be standaloneinstruments or may be embeddedwithin otherwise standard instruments.Examples of instruments with embeddedoptions include various types of bonds,notes, loans or even deposits which give acounter-party the right to prepay or evenextend the maturity of an instrument or tochange the rate paid. In some cases, theholder of an option can force a counterpartyto pay additional notional, or to forfeitnotional already paid.The option holder’s ability to choose toalter cash flows creates an asymmetricperformance pattern. If not adequatelymanaged, the asymmetrical pay-offcharacteristics of instruments withoptionality can pose significant riskparticularly to those who sell the options,since the options held, both explicit andembedded, are generally exercised to theadvantage of the holder and thedisadvantage of the seller.2. Measuring the effects of interest rate riskChanges in interest rates affect bothearnings and the economic value of an FI.This has given rise to two separate, butcomplementary, perspectives for evaluatingan FI’s exposure to interest rate risk.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 3

APP. Q-4308.12.31Exposure to earnings typically receivesthe most attention. Many FIs use a modifiedinterest rate gap or earnings simulationmodel to forecast earnings over a runningnext twelve (12) month time horizon undera variety of interest rate scenarios. Giventhat a large portion of a typical FI’s liabilitiesand even assets re-price in less than one (1)year, there is value in such a system. Forexample, earnings are a key measure indetermining if the board of directors iscreating value for the shareholders.However, earnings over the next twelve(12) months do not present a completepicture of an FI’s exposure to interest raterisk. Many FIs hold assets such as bonds andfixed rate loans with extended terms. Thefull effect of changes in interest rates on thevalue of these assets cannot be fullycaptured by a short-term earnings model.Thus, it is also important to consider a morecomprehensive picture of the FI’s exposureto interest rate risk through an assessmentof the FI’s economic value.The BSP will not consider market riskto be “well managed” unless the FI has fullyimplemented an effective risk measurementsystem whose sophistication is commensuratewith the nature and complexity of the riskassumed. Smaller FIs with non-complex singlecurrency balance sheets may be able to use asingle non-complex measurementmethodology, such as re-pricing gap analysisto manage their interest rate risk. However,large commercial or universal banks withcomplex, multi-currency balance sheets, orFIs that accept large exposures of interestrate risk relative to capital will be expectedto measure interest rate risk through acombination of earnings simulation andeconomic value. Trading activities shouldcontinue to be managed through the use ofan effective, and independently validatedValue-at-Risk (VaR) methodology.a. Earnings perspectiveAn FI should consider how changes ininterest rates may affect future earnings. Thefocus of analysis under the earningsperspective is the impact of changes ininterest rates on accrual or reportedearnings. Volatility in earnings should bemonitored and controlled because reducedearnings or outright losses can threaten thefinancial stability of an FI by underminingits capital adequacy. Further, unexpectedvolatility in earnings can undermine an FI’sreputation and result in an erosion of publicconfidence.Fluctuations in interest rates generallyhave the greatest impact on reportedearnings through changes in net interestincome (i.e., the difference between totalinterest income and total interest expense).Thus, the BSP will expect FIs to adoptsystems that are capable of estimatingchanges to net interest income under avariety of interest rate scenarios. Forexample, non-complex FIs with traditionalbusiness lines and balance sheets couldpotentially limit their simulations to a single±100 basis point parallel rate shock.However, FIs that hold significant levels ofderivatives and structured products relativeto capital should incorporate more severerate movements (e.g., ± 100, 200 and 300basis points) to determine what happens ifstrike prices are breached or “events” aretriggered. Further, the BSP will expect an FIto employ alternative scenarios such aschanges to the shape of the yield curve ifthe FI is exposed to significant levels ofyield curve or basis risk.Changes in market interest rates mayalso affect the volume of activities thatgenerate fee income and other non-interestincome. Thus, FIs should incorporate abroader focus on overall net income –incorporating both interest and non-interestincome and expenses – if the FI reportssignificant levels of interest rate sensitivenon-interest income.b. Economic value perspectiveThe economic value of an FI can beviewed as the present value of an FI’sQ RegulationsAppendix Q-43 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31expected net cash flows, defined as theexpected cash flows from assets minusthe expected cash flows from liabilitiesplus the expected net cash flows on offbalancesheet positions. As such, itprovides a more comprehensive view ofthe potential long-term effects of changesin interest rates than is offered by theearnings perspective.While a variety of models are available,the BSP expects that economic valuemodels will incorporate all significantclasses of assets, liabilities and off-balancesheet. As with earnings at risk, the FI shouldincorporate a variety of interest ratescenarios to ensure that any strike prices,caps, limits, or “events” are breached inthe simulation. Also, FIs with significantlevels of basis or yield curve risk areexpected to add scenarios such asalternative correlations between interestrates and/or a flatter or steeper yield curve.Managing earnings and economicexposuresManagement must make certaintrade-offs when immunizing earnings andeconomic value from interest rate risk.When earnings are immunized, economicvalue becomes more vulnerable, and viceversa. The economic value of equity, likethat of other financial instruments, is afunction of the discounted net cash flows itis expected to earn in the future. If an FI hasimmunized earnings, such that expectedearnings remain constant for any change ininterest rates, the discounted value of thoseearnings will be lower if interest rates rise.Hence, its economic value will fluctuatewith rate changes. Conversely, if an FI fullyimmunizes its economic value, its periodicearnings must increase when rates rise anddecline when interest rates fall.b. FX riskFX risk is the risk to earnings or capitalarising from changes in FX rates.In contracting to meet clients’foreign currency needs or simply buyingand selling FX for its own account, a FIundertakes a risk that exchange ratesmight change subsequent to the time thecontract is consummated. FX risk mayalso arise from maintaining an open FXposition. Thus, managing FX riskincludes monitoring an FI’s net FXposition.An FI has a net position in a foreigncurrency when its assets, including spotand future contracts to purchase, and itsliabilities, including spot and futurecontracts to sell, in that currency are notequal. An excess of assets over liabilitiesis called a net “long” position andliabilities in excess of assets, a net “short”position.It should be noted that whenengaging in FX activities, FIs are alsoexposed to other risks including liquidityand credit risks, particularly related to thesettlement of FX contracts. FIs shouldhave an integrated approach to riskmanagement in relation to its FXactivities: FX risk should be reviewedtogether with other risks to determinethe FI’s overall risk profile. Liquidity andsettlement risks related to FX activitiesare outside the scope of these guidelines.Nevertheless, future guidelines may beissued on these risk areas.V. Sound market risk managementpracticesWhen assessing an FI’s market riskmanagement system, the BSP expects an FIto address the four (4) basic elements of asound risk management system:1. Active and appropriate Board andsenior management oversight;2. Adequate risk management policiesand procedures;3. Appropriate risk measurementmethodologies, limits structure, monitoringand management information systems; andManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 5

APP. Q-4308.12.314. Comprehensive internal controlsand independent audits.The specific manner in which an FIapplies these elements in managing itsmarket risk will depend upon thecomplexity and nature of its activities, aswell as the level of market risk exposureassumed. What constitutes adequatemarket risk management practices cantherefore vary considerably. Regardlessof the systems used, the BSP will notconsider market risk to be well managedunless all four of the above elements aredeemed to be at least “satisfactory”.As with other risk factor categories,banking groups (banks and subsidiaries/affiliates) should monitor and manage marketrisk exposures of the group on a consolidatedand comprehensive basis. At the same time,however, FIs should fully recognize any legaldistinctions and possible obstacles to cashflow movements among affiliates and adjusttheir risk management practices accordingly.While consolidation may provide acomprehensive measure in respect ofmarket risk, it may also underestimate riskwhen positions in one affiliate are used tooffset positions in another affiliate. This isbecause a conventional accountingconsolidation may allow theoretical offsetsbetween such positions from which an FImay not in practice be able to benefitbecause of legal or operational constraints.A. Active and appropriate board andsenior management oversight 1Effective board and senior managementoversight of an FI’s market risk activities iscritical to a sound market risk managementprocess. It is important that these individualsare aware of their responsibilities withregard to market risk management and howmarket risk fits within the organization’soverall risk management framework.Responsibilities of the board of directorsThe board of directors has the ultimateresponsibility for understanding the natureand the level of market risk taken by theFI. In order to carry out its responsibilities,the Board should:1. Establish and guide the FI’s strategicdirection and tolerance for market risk.While it is not possible to provide acomprehensive list of documents toconsider, the BSP should see a clear anddocumented pattern whereby the Boardreviews, discusses and approves strategiesand policies with respect to market riskmanagement. In addition, there should beevidence that the Board periodicallyreviews and discusses the overallobjectives of the FI with respect to the levelof market risk acceptable to the FI.2. Identify senior management whohas the authority and responsibility formanaging market risk and ensure thatsenior management takes the necessarysteps to monitor and control market riskconsistent with the approved strategies andpolicies. The BSP should be able to discerna clear hierarchal structure with a clearassignment of responsibility and authority.3. Monitor the FI’s performance andoverall market risk profile, ensuring thatthe level of market risk is maintainedwithin tolerance and at prudent levelssupported by adequate capital. The Boardshould be regularly informed of the marketrisk exposure of the FI and any breachesto established limits for appropriate action.Reporting should be timely and clearly1This section refers to a management structure composed of a board of directors and senior management. The BSP isaware that there may be differences in some FIs as regards the organizational framework and functions of the board ofdirectors and senior management. For instance, branches of foreign banks have board of directors located outside of thePhilippines and are overseeing multiple branches in various countries. In this case, “board-equivalent” committees areappointed. Owing to these differences, the notions of the board of directors and the senior management are used inthese guidelines not to identify legal constructs but rather to label two decision-making functions within a FI.Q RegulationsAppendix Q-43 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31presented. In assessing an FI’s capitaladequacy for market risk, the Board shouldconsider the FI’s current and potentialmarket risk exposure as well as other risksthat may impair the FI’s capital, such ascredit, liquidity, operational, strategic, andreputation risks.4. Ensure that the FI implements soundfundamental principles that facilitate theidentification, measurement, monitoring andcontrol of market risk. The board of directorsshould encourage discussions among itsmembers and senior management – as wellas between senior management and othersin the FI – regarding the FI’s market riskexposures and management process.5. Ensure that adequate resources,both technical and human resources, aredevoted to market risk management.While board members need not havedetailed technical knowledge of complexfinancial instruments, legal issues orsophisticated risk managementtechniques, they have the responsibilityto ensure that the FI has personnelavailable who have the necessarytechnical skills to evaluate and controlmarket risk. This responsibility includesensuring that there is continuous trainingof personnel on market riskmanagement and providing competenttechnical staff for the internal auditfunction.Responsibilities of senior managementSenior management is responsible forensuring that market risk is adequatelymanaged for both long-term and day-todaybasis. In managing the FI’s activities,senior management should:1. Develop and implement policies,procedures and practices that translate theboard’s goals, objectives and risktolerances into operating standards that arewell understood by personnel and that areconsistent with the board’s intent. Seniormanagement should also periodicallyreview the organization’s market riskmanagement policies and procedures toensure that they remain appropriate andsound.2. Ensure adherence to the lines ofauthority and responsibility that the boardhas established for measuring, managing,and reporting market risk exposures.3. Maintain appropriate limitsstructure, adequate systems for measuringmarket risk, and standards for measuringperformance.4. Oversee the implementation andmaintenance of management informationand other systems to identify, measure,monitor, and control the FI’s market risk.5. Establish effective internal controlsover the market risk management process.6. Ensure that adequate resourcesare available for evaluating andcontrolling market risk. Seniormanagement of FIs, including branchesof foreign banks, should ensure thatanalysis and market risk managementactivities are conducted by competentstaff with technical knowledge andexperience consistent with the natureand scope of the FI’s activities. Thereshould be sufficient depth in staffresources to manage these activities andto accommodate the temporary absenceof key personnel and normal succession.In evaluating the quality of oversight,the BSP shall evaluate how the board andsenior management carry out the abovefunctions/responsibilities. Further, soundmanagement oversight is highly related tothe quality of other areas/elements of anFI’s risk management system. Thus, evenif board and senior management exhibitactive oversight, the FI’s policies,procedures, measurement methodologies,limits structure, monitoring andinformation systems, controls and auditmust be considered adequate beforequality of board and senior managementcan be considered at least “satisfactory”.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 7

APP. Q-4308.12.31Lines of responsibility and authorityFIs should clearly define the individualsand/or committees responsible formanaging market risk and should ensurethat there is adequate separation of dutiesin key elements of the risk managementprocess to avoid potential conflicts ofinterest. Management should ensure thatsufficient safeguards exist to minimize thepotential that individuals initiating risktakingpositions may inappropriatelyinfluence key control functions of themarket risk management process. FIsshould therefore have risk measurement,monitoring, and control functions withclearly defined duties that are sufficientlyindependent from position-takingfunctions of the FI and which report riskexposures directly to the board of directors.The nature and scope of safeguards tominimize potential conflicts of interestshould be in accordance with the size andstructure of an FI. Larger or more complexFIs should have a designated independentunit responsible for the design andadministration of the FI’s market riskmeasurement, monitoring and controlfunctions.B. Adequate risk managementpolicies and proceduresAn FI’s market risk policies andprocedures should be clearly defined,documented and duly approved by theboard of directors. Policies and proceduresshould be consistent with the nature andcomplexity of the FI’s activities. Whenreviewing banking groups, the BSP willassess whether adequate and effectivepolicies and procedures have been adoptedand implemented across all levels of theorganization.Policies and procedures shoulddelineate lines of responsibility andaccountability and should clearly defineauthorized instruments, hedging strategies,position-taking opportunities, and themarket risk models used to quantifymarket risk. Market risk policies shouldalso identify quantitative parameters thatdefine the acceptable level of market riskfor the FI. Where appropriate, limitsshould be further specified for certaintypes of instruments, portfolios, andactivities. All market risk policies shouldbe reviewed periodically and revised asneeded. Management should define thespecific procedures to be used foridentifying, reporting and approvingexceptions to policies, limits, andauthorizations.It is important that FIs identify marketrisk, as well as other risks, inherent in newproducts and activities and ensure theseare subject to adequate procedures andcontrols before the new products andactivities are introduced or undertaken.Specifically, new products and activitiesshould undergo a careful pre-acquisitionreview to ensure that the FI understandstheir market risk characteristics and canincorporate them into its risk managementprocess. Major hedging or riskmanagement initiatives should beapproved in advance by the board or itsappropriate delegated committee.Proposals and the subsequent newproduct/activity review should be formaland written. For purposes of managingmarket risk inherent in new products,proposals should, at a minimum, containthe following features:1. Description of the relevantproduct or strategy;2. Use/purpose of the new product/activity;3. Identification of the resourcesrequired and unit/s responsible forestablishing sound and effective marketrisk management of the product or activity;4. Analysis of the reasonableness ofthe proposed activities in relation to theFI’s overall financial condition and capitallevels; andQ RegulationsAppendix Q-43 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.315. Procedures to be used to measure,monitor, and control the risks of theproposed product or activity.C. Appropriate risk measurementmethodologies, limits structure,monitoring, and management informationsystemMarket risk measurement models/methodologiesIt is essential that FIs have market riskmeasurement systems that capture allmaterial sources of market risk and thatassess the effect of changes in market riskfactors in ways that are consistent with thescope of their activities. Depending uponthe size, complexity, and nature ofactivities that give rise to market risk, theability to capture all material sources ofmarket risk in a timely manner mayrequire an FI’s market risk measurementsystem to be interfaced with other systems,such as the treasury system or loan system.The assumptions underlying themeasurement system should be clearlyunderstood by risk managers and seniormanagement.Market risk measurement systemsshould:1. Assess all material market riskassociated with an FI’s assets, liabilities,and off-balance sheet positions;2. Utilize generally acceptedfinancial concepts and risk measurementtechniques; and3. Have well-documented assumptionsand parameters.There are a number of methods/techniques for measuring market risks.Complexity ranges from simple marking-tomarketor valuation techniques to moreadvanced static simulations using currentholdings to highly sophisticated dynamicmodeling techniques that reflect potentialfuture business activities. In designingmarket risk measurement systems, FIsshould ensure that the degree of detailregarding the nature of their positions iscommensurate with the complexity andrisk inherent in those positions.At a minimum, smaller non-complex FIsshould have the ability to mark-to-market orrevalue their investment portfolio andconstruct a simple re-pricing gap. Whenusing gap analysis, the precision of interestrate risk measurement depends in part onthe number of time bands into whichpositions are aggregated. Clearly,aggregation of positions/cash flows into broadtime bands implies some loss of precision.In addition, the use of reasonable and validassumptions is important for a measurementsystem to be precise. In practice, the FI mustassess the significance of the potential lossof precision in determining the extent ofaggregation and simplification to be built intothe measurement approach. Assumptionsand limitations of the measurementapproach, such as the loss of precision,should be documented.On the other hand, banks holding anexpanded derivatives license and FIsengaging in options or structured productswith embedded options cannot capture allmaterial sources of market risk by usingstatic models such as the re-pricing gap.These FIs should have interest rate riskmeasurement systems that assess theeffects of rate changes on both earningsand economic value. These systemsshould provide meaningful measures of anFI’s current levels of interest rate riskexposure, and should be capable ofidentifying any excessive exposures thatmight arise. Pricing models and simulationtechniques will probably be required.There is also a question on the extentto which market risk should be viewed ona whole institution basis or whether thetrading book, which is marked to market,and the accrual book, which is often not,should be treated separately. As a generalrule, it is desirable for any measurementManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 9

APP. Q-4308.12.31system to incorporate market riskexposures arising from the full scope ofan FI’s activities, including both tradingand non-trading sources. A singlemeasurement system can facilitate analysisof market risk exposure. However, thisdoes not preclude different measurementsystems and risk management approachesbeing used for similar or differentactivities. For example, a bank withexpanded derivatives license will usepricing models as basic tools in valuingposition from its derivatives activities andstructured products. In addition, the bankshould use simulation models to assess thepotential effects of changes in market riskfactors by simulating the future path ofmarket risk factors and their impact on cashflows from these activities.Different methodologies may also beapplied to the trading and accrual books.Regardless of the number of models ormeasurement systems used, managementshould have an integrated view of marketrisk across products and business lines.Regardless of the measurementsystem used, the BSP will expect the FI toensure that input data are timely andcorrect, assumptions can be supported andare valid, the methodologies used produceaccurate results, and the results can beeasily understood by senior managementand the board.(1) Model input. All market riskmeasurement methodologies requirevarious types of inputs, including hard data,readily observable parameters such asasset prices, and both quantitatively andqualitatively-derived assumptions. Thisapplies equally to simple gap as well ascomplex simulation models.The integrity and timeliness of data is akey component of the market riskmeasurement process. The BSP expects thatadequate controls will be established toensure that all material positions and cashflows from on- and off- balance sheetpositions are incorporated into themeasurement system on a consistent andtimely basis. Inputs should be verifiedthrough a process that validates dataintegrity. Assumptions and inputs shouldbe subject to control and oversightreview. Any manual adjustments tounderlying data should be documented,and the nature and reasons for theadjustments should also be clearlyunderstood.Critical to model accuracy is thevalidity of underlying assumptions.Assumptions regarding maturity ofdeposits, for example, are critical inmeasuring interest rate risk. The treatmentof positions where behavioral maturity isdifferent from contractual maturity requiresthe use of assumptions and maycomplicate the measurement of interestrate risk exposure, particularly when usingthe economic value approach. The validityof correlation assumptions to aggregatemarket risk exposures is likewiseimportant as breakdowns in correlationsmay significantly affect the validity ofmodel results. Key assumptions shouldtherefore be subject to rigorousdocumentation and review. Any significantchanges should be approved in advanceby the board of directors.(2) Model risk. While accuracy is keyto an effective market risk measurementsystem, methodologies cannot beexpected to flawlessly predict potentiallosses arising from market risk. The use ofmodels introduces the potential for modelrisk. Thus, model risk is the risk of lossarising from inaccurate or incorrectquantification of market risk exposures dueto weaknesses in market riskmethodologies. It may arise from relyingon assumptions that are inconsistent withmarket realities, from employing inputparameters that are unreliable, or fromcalibrating, applying and implementingmodels incorrectly.Q RegulationsAppendix Q-43 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31Model risk is more likely to arise forinstruments that have non-standard oroption-like features. The use ofproprietary models that employunconventional techniques that are notwidely agreed upon by marketparticipants is likewise more sensitive tomodel risk. Even the use of standardmodels may lead to errors if the financialtools are not appropriate for a giveninstrument.The BSP expects FIs to implementeffective policies and procedures tomanage model risk. The scope of policiesand procedures will depend upon the typeand complexity of models developed orpurchased. However, FIs holding anexpanded license or significant levels ofcomplex investments includingstructured products, should at a minimumimplement the following controls:a. Model development/acquisition,implementation and revisions. The BSPexpects larger, complex FIs to adoptpolicies governing development/acquisition, implementation and revisionof market risk models. These policiesshould clearly define the responsibilitiesof staff involved in the development/acquisition process. FIs should ensure thatmodeling techniques and assumptions areconsistent with widely accepted financialtheories and market practices. Policiesand procedures should be duly approvedby the board of directors and properlydocumented. An inventory of the modelsin use should be maintained along withdocumentation explaining how theyoperate.The BSP also expects that revisionsto models will be performed in acontrolled environment by authorizedpersonnel and changes should be madeor verified by a control function. Writtenpolicies should specify when changes tomodels are acceptable and how thoserevisions should be accomplished.b. Model validation. Before modelsare authorized for use, they should bevalidated by individuals who are neitherdirectly involved in the developmentprocess nor responsible for providinginputs to the model. Independent modelvalidation is a key control in the modeldevelopment process and should bespecifically addressed in an FI’s policies.Further, the BSP expects that the staffvalidating the models will have thenecessary technical expertise.A sound validation process shouldrigorously and comprehensively evaluatethe sensitivity of the model to materialsources of model risk and includes thefollowing:1. Tests of internal logic andmathematical accuracy;2. Development of empirical supportfor the model’s assumptions;3. Back-testing. The BSP expects FIsto conduct backtesting of model results.Back-testing is a method of periodicallyevaluating the accuracy and predictivecapability of an FI’s market riskmeasurement system by monitoring andcomparing actual movements in marketprices or market risk factors withprojections produced by the model. To bemore effective, back-testing should beconducted by parties independent of thosedeveloping or using the model. Policiesshould address the scope of the backtestingprocess, frequency of back-testing,documentation requirements, andmanagement responses. Complex modelsshould be back-tested continually whilesimple models can be back-testedperiodically. Significant discrepanciesshould prompt a model review.4. Periodic review of methodologiesand assumptions. The BSP expects thatFIs will periodically review or reassesstheir modeling methodologies andassumptions. Again, the frequency ofreview will depend on the model butManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 11

APP. Q-4308.12.31complex models should be reviewed atleast once a year, when changes are made,or when a new product or activity isintroduced. Model review could also beprompted when there is a need for themodel to be updated to reflect changes inthe FI or market. The review processshould be performed by an independentgroup as it is considered to be part of therisk control and audit function.The use of vendor models can presentspecial challenges, as vendors often claimproprietary privilege to avoid disclosinginformation about their models. Thus, FIsmay be constrained from performingvalidation procedures related to internallogic, mathematical accuracy and modelassumptions. However, vendors shouldprovide adequate information on how themodels were constructed and validated sothat FIs have reasonable assurances thatthe model works as intended.c. Stress testingThe underlying statistical models usedto measure market risk summarize theexposures that reflect the most probablemarket conditions. Regardless of size andcomplexity of activities, the BSP expectsFIs to supplement their market riskmeasurement models with stress tests.Stress testing are simulations that showhow a portfolio or balance sheet mightperform during extreme events or highlyvolatile markets.Stress testing should be designed toprovide information on the kinds ofconditions under which the FI’s strategiesor positions would be most vulnerable.Thus stress tests must be tailored to therisk characteristics of the FI. Possible stressscenarios might include abrupt changes inthe general level of interest rates, changesin the relationships among key marketrates (i.e., basis risk), changes in the slopeand the shape of the yield curve (i.e., yieldcurve risk), changes in the liquidity of keyfinancial markets, or changes in thevolatility of market rates.In addition, stress scenarios shouldinclude conditions under which keybusiness assumptions and parametersbreak down. The stress testing ofassumptions used for illiquid instrumentsand instruments with uncertain contractualmaturities are particularly critical toachieving an understanding of the FI’s riskprofile. When conducting stress tests,special consideration should be given toinstruments or markets whereconcentrations exist. FIs should consideralso “worst case” scenarios in addition tomore probable events.Further, the BSP will expect FIs withmaterial market risk exposure, particularlyfrom derivatives and/or structured productsto supplement their stress testing with ananalysis of their exposure to“interconnection risk.” While stress testingtypically considers the movement of asingle market factor (e.g., interest rates),interconnection risk considers the linkagesacross markets (e.g., interest rates andforeign exchange rates) and across thevarious categories of risk (e.g., credit, andliquidity risk). For example, stress fromone market may transmit shocks to othermarkets and give rise to otherwisedormant risks, such as liquidity risk.Evaluating interconnected risk involvesassessing the total or aggregate impact ofsingular events.Guidelines for performing stresstesting should be detailed in the riskmanagement policy statement.Management and the board of directorsshould periodically review the design,major assumptions, and the results of suchstress tests to ensure that appropriatecontingency plans are in place.(3) Model output. Reports should beprovided to senior management and theBoard as a basis for making decisions.Report content should be clear andstraightforward, indicating the purpose ofthe model, significant limitations, thequantitative level of risk estimated by theQ RegulationsAppendix Q-43 - Page 12Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31simulation, a comparison to Boardapproved limits and a qualitativediscussion regarding the appropriatenessof the FI’s current exposures.Sophisticated simulations should be usedcarefully so that they do not become“black boxes” producing numbers thathave the appearance of precision but maynot be very accurate when their specificassumptions and parameters are revealed.Market limits structureThe FI’s board of directors should setthe institution’s tolerance for market riskand communicate that tolerance to seniormanagement. Based on these tolerances,senior management should establishappropriate risk limits, duly approved bythe Board, to maintain the FI’s exposurewithin the set tolerances over a range ofpossible changes in market risk factorssuch as interest rates.Limits represent the FI’s actualwillingness and ability to accept reallosses. In setting risk limits, the board andsenior management should consider thenature of the FI’s strategies and activities,past performance, and managementskills. Most importantly, the board andsenior management should consider thelevel of the FI’s earnings and capital andensure that both are sufficient to absorblosses equal to the proposed limits. Limitsshould be approved by the board ofdirectors. Furthermore, limits should beflexible to changes in conditions or risktolerances and should be reviewedperiodically.An FI’s limits should be consistentwith its overall approach to measuringmarket risk. At a minimum, FIs usingsimple gap should establish limits onmismatches in each time bucket on astand-alone and cumulative basis. Inaddition, limits should be adopted tocontrol potential losses in the investmentportfolio to a pre-set percentage of capital.Larger, more complex FIs shouldestablish limits on the potential impact ofchanges in market risk factors on reportedearnings and/or the FI’s economic valueof equity. Market risk limits may includelimits on net and gross positions, volumelimits, stop-loss limits, value-at-risk limits,re-pricing gap limits, earnings-at-risk limitsand other limits that capture either notionalor (un)expected loss exposures. Inassigning interest rate risk limits under theearnings perspective, FIs should explorelimits on the variability of net income aswell as net interest income in order to fullyassess the contribution of non-interestincome to the interest rate risk exposureof the FI. Such limits usually specifyacceptable levels of earnings volatilityunder specified interest rate scenarios.For example, interest rate risk limitsmay be keyed to specific scenarios ofmovements in market interest rates suchas an increase or decrease of a particularmagnitude. The rate movements used indeveloping these limits should representmeaningful stress situations taking intoaccount historic rate volatility and the timerequired for management to addressexposures. Limits may also be based onmeasures derived from the underlyingstatistical distribution of interest rates, suchas earnings at risk or economic value-atrisktechniques. Moreover, specifiedscenarios should take account of the fullrange of possible sources of interest raterisk to the FI including re-pricing, yieldcurve, basis, and option risks. Simplescenarios using parallel shifts in interestrates may be insufficient to identify suchrisks. This is particularly important for FIswith significant exposures to these sourcesof market risk.The form of limits for addressing theeffect of rates on an FI’s economic valueof equity should be appropriate for the sizeand complexity of its underlying positions.For FIs engaged in traditional bankingManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 13

APP. Q-4308.12.31activities, relatively simple limits maysuffice. However, for FIs with significantholdings of long-term instruments, options,instruments with embedded options, orother structured instruments, more detailedlimit systems may be required.Depending on the nature of an FI’sholdings and its general sophistication,limits can also be identified for individualbusiness units, portfolios, instrument types,or specific instruments. The level of detailof risk limits should reflect thecharacteristics of the FI’s holdingsincluding the various sources of market riskthe FI is exposed to.The BSP also expects that the limitssystem will ensure that positions thatexceed predetermined levels receiveprompt management attention. Limitexceptions should be communicated toappropriate senior management withoutdelay. Policies should include how seniormanagement will be informed and whataction should be taken by management insuch cases. Particularly important iswhether limits are absolute in the sensethat they should never be exceeded orwhether, under specific circumstances,breaches of limits can be tolerated for ashort period of time. The circumstancesleading to a tolerance of breaches shouldbe clearly described.Market risk monitoring and reportingAn accurate, informative, and timelymanagement information system isessential for managing market riskexposures both to inform management andto support compliance with board policy.Reporting of risk measures should be doneregularly and should clearly comparecurrent exposure to policy limits. Inaddition, past forecasts or risk estimatesshould be compared with actual results toidentify any modeling shortcomings.Reports detailing the market riskexposure of the FI should be reviewed bythe board on a regular basis. While thetypes of reports prepared for the board andfor various levels of management will varybased on the FI’s market risk profile, theyshould at a minimum include thefollowing:1. Summaries of the FI’s aggregateexposures;2. Reports demonstrating the FI’scompliance with policies and limits;3. Summary of key assumptions, forexample, non-maturity deposit behavior,prepayment information, and correlationassumptions;4. Results of stress tests, includingthose assessing breakdowns in keyassumptions and parameters; and5. Summaries of the findings ofreviews of market risk policies,procedures, and the adequacy of themarket risk measurement systems,including any findings of internal andexternal auditors and retained consultants.D. Risk controls and auditAdequate internal controls ensure theintegrity of an FI’s market riskmanagement process. These internalcontrols should be an integral part of theinstitution’s overall system of internalcontrol and should promote effective andefficient operations, reliable financial andregulatory reporting, and compliance withrelevant laws, regulations, and institutionalpolicies. An effective system of internalcontrol for market risk includes:1. A strong control environment;2. An adequate process foridentifying and evaluating risk;3. The establishment of controlactivities such as policies, procedures, andmethodologies;4. Adequate information systems;5. Continual review of adherence toestablished policies and procedures; and6. An effective internal audit andindependent validation process.Q RegulationsAppendix Q-43 - Page 14Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31Policies and procedures should specifythe approval processes, exposure limits,reconciliations, reviews, and other controlmechanisms designed to provide areasonable assurance that the institution’smarket risk management objectives areachieved. Many attributes of a sound riskmanagement process, including riskmeasurement, monitoring, and controlfunctions, are actually key aspects of aneffective system of internal control. FIsshould ensure that all aspects of the internalcontrol system are effective, includingthose aspects that are not directly part ofthe risk management process.An important element of an FI’sinternal control system is regularevaluation and review. The BSP expectsthat FIs will establish a process to ensurethat its personnel are following establishedpolicies and procedures, and that itsprocedures are actually accomplishingtheir intended objectives. Such reviewsand evaluations should also address anysignificant change that may impact theeffectiveness of controls, and thatappropriate follow-up action wasimplemented when limits were breached.Management should ensure that all suchreviews and evaluations are conductedregularly by individuals who areindependent of the function they areassigned to review. When revisions orenhancements to internal controls arewarranted, there should be a mechanismin place to ensure that these areimplemented in a timely manner.Independent reviews of the marketrisk measurement system should alsoinclude assessments of the assumptions,parameters, and methodologies used.Such reviews should seek to understand,test, and document the currentmeasurement process, evaluate thesystem’s accuracy, and recommendsolutions to any identified weaknesses. Ifthe measurement system incorporates oneor more subsidiary systems or processes,the review should include testing aimedat ensuring that the subsidiary systems arewell-integrated and consistent with eachother in all critical respects. The results ofthis review, along with anyrecommendations for improvement,should be reported to senior managementand/or the board.The BSP expects that FIs withcomplex risk exposures should have theirmeasurement, monitoring, and controlfunctions reviewed on a regular basis byan independent party (such as an internalor external auditor). In such cases, reportswritten by external auditors or otheroutside parties should be available to theBSP. It is essential that any independentreviewer ensures that the FI’s riskmeasurement system is sufficient tocapture all material elements of marketrisk, whether arising from on- or offbalance-sheetactivities. Among the itemsthat an audit should review and validateare:1. The appropriateness of the FI’s riskmeasurement system(s) given the nature,scope, and complexity of its activities.2. The accuracy and completeness ofthe data inputs - This includes verifying thatbalances and contractual terms arecorrectly specified and that all majorinstruments, portfolios, and business unitsare captured in the model. The reviewshould also investigate whether dataextracts and model inputs have beenreconciled with transactions and generalledger systems. 13. The reasonableness and validity ofscenarios and assumptions – This includesa review of the appropriateness of the1It is acceptable for parts of the reconciliation to be automated; e.g., routines may be programmed to investigate whetherthe balances being extracted from various transaction systems match the balances recorded on the FI’s general ledger.Similarly, the model itself often contains various audit checks to ensure, for example, that maturing balances do notexceed original balances.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 15

APP. Q-4308.12.31interest rate scenarios as well as customerbehaviors and pricing/volume relationshipsto ensure that these assumptions arereasonable and internally consistent. 14. The validity of the riskmeasurement calculations - The scope andformality of the measurement validationwill depend on the size and complexityof the FI. At large FIs, internal and externalauditors may have their own modelsagainst which the FI’s model is tested. FIswith more complex risk profiles andmeasurement systems should have themodel or calculations audited or validatedby an independent source. At smaller andless complex FIs, periodic comparisons ofactual performance with forecasts may besufficient. 2The frequency and extent to which anFI should re-evaluate its risk measurementmethodologies and models depend, inpart, on the particular market riskexposures created by holdings andactivities, the pace and nature of marketrate changes, and the pace and complexityof innovation with respect to measuringand managing market risk.VI. Capital adequacyIn addition to adequate riskmanagement systems and controls, capitalhas an important role to play in mitigatingand supporting market risk. FIs must holdcapital commensurate with the level ofmarket risk they undertake. As part ofsound market risk management, FIs musttranslate the level of market risk theyundertake whether as part of their tradingor non-trading activities, into their overallevaluation of capital adequacy. Wheremarket risk is undertaken as part of an FI’strading activities, existing capital adequacyratio requirements shall prevail.The BSP will periodically evaluate themarket risk measurement system for theaccrual book to determine if the FI’s capitalis adequate to support its exposure to marketrisk and whether the internal measurementsystems of the FI are adequate. In performingthis assessment, the BSP may requireinformation regarding the market riskexposure of the FI, including re-pricing gaps,earnings and economic value simulationestimates, and the results of stress tests. Thisinformation will typically be found in internalmanagement reports.If an FI’s internal measurement systemdoes not adequately capture the level ofmarket risk, the BSP may require an FI toimprove its system. In cases where an FIaccepts significant market risk in its accrualbook, the BSP expects that a portion of capitalwill be allocated to cover this risk.When performing these evaluations,the BSP will determine if:(a) All material market risk associatedwith an institution’s assets, liabilities, and offbalancesheet positions in the accrual bookare captured by the risk managementsystems;(b) Generally accepted financialconcepts and risk measurement techniquesare utilized. For larger, complex FIs, internalsystems must be capable of measuring riskusing both an earnings and economic valueapproach.(c) Data inputs are adequatelyspecified (commensurate with the nature1Key areas of review include the statistical methods that were used to generate scenarios and assumptions (if applicable),and whether senior management reviewed and approved key assumptions. The review should also compare actualpricing spreads and balance sheet behavior to model assumptions. For some instruments, estimates of value changes canbe compared with market value changes. Unfavorable results may lead the FI to revise model relationships.2The validity of the model calculations is often tested by comparing actual with forecasted results. When doing so, FIs cancompare projected net income results with actual earnings. Reconciling the results of economic valuation systems can bemore difficult because market prices for all instruments are not always readily available, and the FI does not routinelymark all of its balance sheet to market. For instruments or portfolios with market prices, these prices are often used tobenchmark or check model assumptions.Q RegulationsAppendix Q-43 - Page 16Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4308.12.31and complexity of an FI’s holdings) withregard to rates, maturities, re-pricing,embedded options, and other details;(d) The system’s assumptions (used totransform positions into cash flows) arereasonable, properly documented, andstable over time. 1(e) Market risk measurement systemsare integrated into the institution’s daily riskmanagement practices. The output of thesystems should be used in characterizingthe level of market risk to seniormanagement and board of directors.(Circular No. 544 dated 15 September 2006)1This is especially important for assets and liabilities whose behavior differs markedly from contractual maturity or repricing,and for new products. Material changes to assumptions should be documented, justified, and approved bymanagement.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-43 - Page 17

APP. Q-4408.12.31GUIDELINES ON LIQUIDITY RISK MANAGEMENT[Appendix to Sec. 4175Q (2008 - 4195Q), 4195S, 4195P and 4195N]I. BackgroundThe on-going viability of institutions,particularly financial organizations, isheavily influenced by their ability tomanage liquidity. Innovations ininvestment and funding products, growthin off-balance sheet activities andcontinuous competition for consumerfunds have affected the way FI do businessand intensified the need for proactiveliquidity risk management. FIs need to fullyunderstand, measure and control theresulting liquidity risk exposures.II. Statement of PolicyFor purposes of these guidelines, FIsinclude banks, NBFIs supervised by theBSP and their financial subsidiaries.The BSP recognizes the liquidity riskinherent in FI activities and how theseactivities expose an FI to multiple riskswhich may increase liquidity risk. The BSPwill not restrict risk-taking activities as longas FIs are authorized to engage in suchactivities and:1. Understand, measure, monitor andcontrol the risk they assume;2. Adopt risk management practiceswhose sophistication and effectiveness iscommensurate to the risk assumed; and3. Maintain capital commensuratewith their risk exposures.The principles set forth in theseguidelines shall be used to determine thelevel and trend of liquidity risk exposureand adequacy and effectiveness of an FI’sliquidity risk management process. Inevaluating the adequacy of an FI’s liquidityposition, the BSP shall consider the FI’scurrent level and prospective sources ofliquidity as compared to its funding needs.Further, the BSP will evaluate theadequacy of funds management practicesrelative to the FI’s size, complexity, andrisk profile.In general, liquidity risk managementpractices should ensure that an institutionis able to maintain a level of liquiditysufficient to meet its financial obligationsin a timely manner and to fulfill thelegitimate funding needs of its community.Practices should reflect the ability of theinstitution to manage unplanned changesin funding sources, as well as react tochanges in market conditions that affectthe ability to quickly liquidate assets withminimal loss. In addition, fundsmanagementpractices should ensure thatliquidity is not consistently maintained ata high cost, from concentrated sources, orthrough undue reliance on funding sourcesthat may not be available in times offinancial stress or adverse changes inmarket conditions.In evaluating the above parameters,the BSP shall consider the following factors:1. The actual and potential level ofliquidity risk posed by the FI’s products andservices, balance sheet structure and offbalancesheet activities;2. The cost of an FI’s access to moneymarkets and other alternative sources offunding;3. The diversification of fundingsources (on and off-balance sheet);4. The adequacy and effectiveness ofboard and senior management oversight,particularly the Board’s ability to recognizethe effects of interrelated risk areas, suchas market and reputation risks, to liquidityrisk;5. The reasonableness of liquidity risklimits and controls in relation to earnings,as affected by the cost of access to moneymarkets and other alternative sources offunding, and capital;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 1

APP. Q-4408.12.316. The adequacy of measurementmethodologies, monitoring andmanagement information systems;7. The adequacy of foreign currencyliquidity management;8. The appropriateness andreasonableness of contingency plans forhandling liquidity crises;9. The adequacy of internal controlsand audit of liquidity risk managementprocess.The sophistication of liquidity riskmanagement shall depend on the size,nature and complexity of an FI’s activities.However, in all instances, FIs areexpected to measure their liquidityposition on an ongoing basis, analyze netfunding requirements under alternativescenarios, diversify funding sources andadopt contingency funding plans.An FI’s liquidity risk managementsystem shall be assessed under the FI’sgeneral risk management framework,consistent with the guidelines onsupervision by risk as set forth underAppendix Q-42. If an FI’s risk exposuresare deemed excessive relative to the FI’scapital, or that the risk assumed is not wellmanaged, the BSP will direct the FI toreduce its exposure and/or strengthen itsrisk management system.III. Liquidity Risk Management ProcessLiquidity risk management processshould be tailored to an FI’s structure andscope of operations and application canvary across institutions. Regardless of thestructure, an FI’s liquidity riskmanagement process should beconsistent with its general riskmanagement framework and should becommensurate with the level of riskassumed. At a minimum, the processshould:1. Identify liquidity risk. Properidentification of liquidity risk requires thatmanagement understand both existingrisk and prospective risks from newproducts and activities. It involvesdetermining the volume and trends ofliquidity needs and the sources of liquidityavailable to meet these needs. Identifyingliquidity risk necessitates expressing theFI’s desired level of risk exposure basedon its ability and willingness to assumerisk which may primarily depend on theFI’s capital base and access to fundsproviders. Liquidity risk identificationshould be a continuing process and shouldoccur at both the transaction, portfolio andentity level.2. Measure liquidity risk. Adequatemeasurement systems enable FIs toquantify liquidity risk exposures on a perentity basis and across the consolidatedorganization. A relatively largeorganization with extensive scope ofoperations would generally require amore robust management informationsystem to properly measure risk in atimely and comprehensive manner.3. Control liquidity risk. The FIshould establish policies and standards onacceptable product types, activities,counterparties and set risk limits on atransactional, portfolio and aggregate/consolidated basis to control liquidity risk.In setting limits, the FI should recognizeany legal distinctions and possibleobstacles to cash flow movementsamong affiliates or across separate books.Lines of authority and accountabilityshould be clearly defined to ensureliquidity risk exposures remainreasonable and within the risk toleranceexpressed by the board.4. Monitor liquidity risk. Monitoringliquidity risk requires timely review ofliquidity risk positions and exceptions,including day-to-day liquiditymanagement. Monitoring reportsshould be frequent, timely, and accurateand should be distributed to appropriatelevels of management.Q RegulationsAppendix Q-44 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4408.12.31IV. Definition of Liquidity RiskLiquidity risk is generally defined asthe current and prospective risk to earningsor capital arising from an FI’s inability tomeet its obligations when they come duewithout incurring unacceptable losses orcosts. Liquidity risk includes the inabilityto manage unplanned decreases orchanges in funding sources. Liquidity riskalso arises from the failure to recognize oraddress changes in market conditions thataffect the ability to liquidate assets quicklyand with minimal loss in value.In terms of capital markets and tradingactivities, FIs face two (2) types of liquidityrisk: funding liquidity risk and marketliquidity risk. Funding liquidity risk refersto the inability to meet investment andfunding requirements arising from cashflow mismatches without incurringunacceptable losses or costs. This issynonymous with the general definition ofliquidity risk.Market liquidity risk, on the other hand,refers to the risk that an institution cannoteasily eliminate or offset a particularposition because of inadequate liquidity inthe market. The size of the bid/ask spreadof instruments in a market provides ageneral indication of its depth, hence itsliquidity, under normal circumstances.Market liquidity risk is also associated withthe probability that large transactions mayhave a significant effect on market pricesin markets that lack sufficient depth. Inaddition, market liquidity risk is associatedwith structured or complex investments asthe market of potential buyers is typicallysmall. Finally, FIs are exposed to the riskof an unexpected and sudden erosion ofmarket liquidity. This could be the resultof sharp price movement or jump involatility, or internal to the FI such as thatposed by a general loss of marketconfidence. Understanding marketliquidity risk is particularly important forinstitutions with significant holdings ofinstruments traded in financial markets.Market and liquidity risks are highlyinterrelated, particularly during times ofuncertainty when there is a highcorrelation between the need for liquidityand market volatility. Likewise, an FI’sexposure to other risks such as reputation,strategic, and credit risks, can likewisesignificantly affect an institution’s liquidityrisk. It is therefore important that an FI’sliquidity risk management system isconsistent with its general riskmanagement framework.V. Sound Liquidity Risk ManagementPracticesWhen assessing an FI’s liquidity riskmanagement system, the BSP shall considerhow an FI address the four basic elementsof a sound risk management system:1. Active and appropriate board andsenior management oversight;2. Adequate risk managementpolicies and procedures;3. Appropriate risk measurementmethodologies, limits structure,monitoring and management informationsystem; and4. Comprehensive internal controlsand independent auditsEvaluation of the adequacy of the FI’sapplication of the above elements will berelative to the FI’s risk profile. FIs with lesscomplex operations may generally usemore basic practices while larger, and/ormore complex institutions will beexpected to adopt more formal andsophisticated practices. Large organizationsshould likewise take a comprehensiveperspective to measuring and controllingliquidity risk by understanding howsubsidiaries and affiliates can raise orlower the consolidated risk profile.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 3

APP. Q-4408.12.31A. Active and Appropriate Board andSenior Management Oversight 1Effective liquidity risk managementrequires that the Board and seniormanagement be fully informed of the levelof liquidity risk assumed by the FI andensure that the activities undertaken arewithin the prescribed risk tolerance. Seniormanagement should have a thoroughunderstanding of how other risks such ascredit, market, operational and reputationrisks impact the FI’s overall liquiditystrategy. 1Responsibilities of the board of directorsThe Board has the ultimateresponsibility for understanding the natureand level of liquidity risk assumed by theFI and the processes used to manage it.The board of directors should:1. Establish and guide the FI’s strategicdirection and tolerance for liquidity risk byadopting a formal written liquidity/fundingpolicy that specifies quantitative andqualitative targets;2. Approve policies that govern orinfluence the FI’s liquidity risk, includingreasonable risk limits and clear guidelineswhich are adequately documented andcommunicated to all concerned;3. Identify the Senior Managementstaff who has the authority andresponsibility for managing liquidity riskand ensure that this staff takes thenecessary steps to monitor and controlliquidity risk;4. Monitor the FI’s performance andoverall liquidity risk profile in a timelymanner by requiring frequent reports thatoutline the liquidity position of the FI alongwith information sufficient to determine ifthe FI is complying with established risklimits;5. Mandate and track theimplementation of corrective action ininstances of breaches in policies andprocedures;6. Establish, review and to the extentpossible, test contingency plans for dealingwith potential temporary and long-termliquidity disruptions; and7. Ensure that the FI has sufficientcompetent personnel, including internal auditstaff, and adequate measurement systemsto effectively manage liquidity risk.Responsibilities of senior managementSenior management is responsible foreffectively executing the liquidity strategyand overseeing the daily and long-termmanagement of liquidity risk. In managingthe FI’s activities, Senior Managementshould:1. Develop and implementprocedures and practices that translate theBoard’s goals, objectives, and risktolerances into operating standards that aretransmitted to and well understood bypersonnel. Operating standards should beconsistent with the Board’s intent;2. Plan for adequate sources of liquidityto meet current and potential fundingneeds and establish guidelines for thedevelopment of contingency funding plans;3. Adhere to the lines of authority andresponsibility that the Board has establishedfor managing liquidity risk;4. Oversee the implementation andmaintenance of management informationand other systems that identify, measure,monitor, and control the FI’s liquidity risk;and5. Establish effective internal controlsover the liquidity risk management process.In evaluating the quality of oversightprovided by the Board and Senior1This section refers to a management structure composed of a board of directors and senior management. The BSP is awarethat there may be differences in some FIs as regards the organizational framework and functions of the board of directorsand senior management. For instance, branches of foreign banks have board of directors located outside of the Philippinesand are overseeing multiple branches in various countries. In this case, “board-equivalent” committees are appointed.Owing to these differences, the notions of the board of directors and the senior management are used in these guidelinesnot to identify legal constructs but rather to label two decision-making functions within a FI.Q RegulationsAppendix Q-44 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4408.12.31Management, the BSP will evaluate howthe Board and Senior Management carryout the above functions/responsibilities.Further, sound management practices arehighly related to the quality of other areas/elements of risk management system.Thus, even if Board and SeniorManagement exhibit active oversight, theFI’s policies, procedures, measurementmethodologies, limits structure,monitoring and information systems,controls and audit should be adequatebefore quality of Board and SeniorManagement can be considered“satisfactory”.Lines of Responsibility and AuthorityManagement of liquidity risk generallyrequires collaboration from variousbusiness areas of the FI, thus a cleardelineation of responsibilities is necessary.The management structure should clearlydefine the duties of senior levelcommittees, members of which haveauthority over the units responsible forexecuting liquidity-related transactions.There should be a clear delegation of dayto-dayoperating responsibilities toparticular departments such as theTreasury Department.To ensure proper management ofliquidity risk, the FI should designate anindependent unit responsible formeasuring, monitoring and controllingliquidity risk. Said unit should take acomprehensive approach and directlyreport to the board of directors or acommittee thereof.B. Adequate risk management policiesand proceduresAn FI’s liquidity risk policies andprocedures should be comprehensive,clearly defined, documented and dulyapproved by the board of directors. Policiesand procedures should cover the FI’sliquidity risk management system in orderto provide appropriate guidance tomanagement. These policies should beapplied on a consolidated basis and, asappropriate, at the level of individualaffiliates, especially when recognizinglegal distinctions and possible obstacles tocash movements among affiliates.Liquidity risk policies should identifythe quantitative parameters used by the FIto define the acceptable level of liquidityrisk such as risk limits and financial ratiosas well as describe the measurement toolsand assumptions used. Qualitativeguidelines should include description ofthe FI’s acceptable products and activities,including off-balance sheet transactions,desired composition of assets andliabilities, and approach towards managingliquidity in different currencies,geographies and across subsidiaries andaffiliates. Where appropriate, a large FIshould apply these policies on aconsolidated basis to address riskexposures resulting from inter-connectedfunding structures and operations amongmembers of an FI’s corporate group.It is essential that policies include thedevelopment of a formal liquidity riskmeasurement system that addressesbusiness-as-usual scenarios and acontingency funding plan that addresses avariety of stress scenarios. FIs shouldlikewise have specific procedures foraddressing breaches in policies andimplementation of corrective actions.Management should periodicallyreview its liquidity risk policies and ensurethat these remain consistent with the leveland complexity of the FI’s operations.Policies should be updated to incorporateeffects of new products/activities, changesin corporate structure and in light of itsliquidity experience.C. Appropriate risk measurementmethodologies, limits structure, monitoring,and management information systemManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 5

APP. Q-4408.12.31Liquidity risk measurement models/methodologiesAn FI should have a measurementsystem in place capable of quantifying andcapturing the main sources of liquidity riskin a timely and comprehensive manner.Liquidity management requires ongoingmeasurement, from intra-day liquidity tolong-term liquidity positions. Dependingon its risk profile, an FI can use techniquesof simple calculations, static simulationsbased on current holdings or sophisticatedmodels. What is essential is that the FIshould be able to identify and avoidpotential funding shortfalls such that the FIcan consistently meet investment, fundingand/or strategic targets.FIs with simple operations cangenerally use a static approach to liquiditymanagement. Static models are based onpositions at a given point in time. Whilean exact definition of “simple operations”will not be provided, the BSP expects thatbanks using a static approach to liquiditymanagement would limit their operationsto core banking activities such as acceptingplain vanilla deposits and makingtraditional loans. Such banks would nothave active Treasury Departments, wouldnot hold or offer structured products andwould not be exposed to significant levelsof FX risk. Board reporting could be lessfrequent than in more complex banks butin no event should be less than quarterly.Complex FIs, on the other hand, willbe expected to adopt more robustapproaches such as a dynamic maturity/liquidity gap reporting or even simulationmodeling. At a minimum, universal banksshould use maximum cash outflow/liquidity or maturity gap models. FIsengaged in holding or offering significantlevels of structured products and/orderivatives will be expected to have thecapability to model the cash flows fromthese instruments under a variety ofscenarios. Specifically, scenarios should bedesigned to measure the effects of a breachof the triggers (strike price) on theseinstruments.Where the FI’s organizational structureand business practices indicate cash flowmovements and liquidity support amongcorporate group members, the FI shouldadopt consolidated risk measurement toolsto help management assess the group’sliquidity risk exposure. Depending on thedegree of inter-related funding, noncomplexmeasurement and monitoringsystems may be acceptable. However,large, complex FIs that display a highdegree of inter-related and inter-dependentfunding will be expected to utilize moresophisticated monitoring and managementsystems. These systems should enable theBoard of the consolidated entity to simulateand anticipate the funding needs of the FIson both a consolidated basis and in eachof its component parts.Liquidity risk measurementmethodologies/models should bedocumented and approved by the boardand should be periodically independentlyreviewed for reasonableness and tested foraccuracy and data integrity. Assumptionsused in managing liquidity should beperiodically revisited to ensure that theseremain valid.Liquidity models require projecting allrelevant cash flows. As such, FIs engagedin complex activities should have thecapability to model the behavior of allassets, liabilities, and off-balance sheetitems both under normal/business-as usualand a variety of stressed conditions.Stressed conditions may include liquiditycrisis confined within the institution, or asystemic liquidity crisis, in which all FIsare affected. For FIs operating in a globalenvironment, cash flow projections shouldreflect various foreign-currency fundingrequirements.When projecting cash flows,management should also estimateQ RegulationsAppendix Q-44 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4408.12.31customer behavior in addition tocontractual maturities. Many cash flows areuncertain and may not necessarily followcontractual maturities. Cash flows may beinfluenced by interest rates and customerbehavior, or may simply follow a seasonalor cyclical pattern. When modelingliquidity risk, it is important thatassumptions be documented. Assumptionsshould be reasonable and should be basedon past experiences or with considerationof the potential impact of changes inbusiness strategies and market conditions.Measurement tools should include asufficient number of time bands to enableeffective monitoring of both short- and longtermexposures. This expectation appliesnot only to complex simulation modeling,but to the construction of simple liquidityGAP models as well.To sufficiently measure an FI’s liquidityrisk, management should analyze how itsliquidity position is affected by changes ininternal (company-specific) and external(market-related) conditions. Managementwill need to assess how a shift from anormal scenario to various levels ofliquidity crisis can affect its ability to sourceexternal funds and at what cost, liquidatecertain assets at expected prices withinexpected timeframes, or hasten the needto settle obligations (e.g., limited ability toroll-over deposits). Management should, ata minimum, consider stress scenarioswhere securities are sold at prices lowerthan anticipated and credit lines arepartially or wholly cancelled.Regardless of the liquidity risk modelsused, an FI should adopt an appropriatecontingency plan for handling liquiditycrisis. Well before a liquidity crisis occurs,management should carefully plan how tohandle administrative matters in a crisis.Management credibility, which is essentialto maintaining the public’s confidence andaccess to funding, can be gained or lostdepending on how well or poorly someadministrative matters are handled. Acontingency funding/liquidity planensures that an FI is ready to respond toliquidity crisis.The sophistication of a contingency planshould be commensurate with the FI’scomplexity and risk exposure, activities,products and organizational structure. Theplan should identify the types of events thatwill trigger the contingency plan, quantifypotential funding needs and sources andprovide the specific administrative policiesand procedures to be followed in a liquiditycrisis.Specifically, the contingency planshould:1. Clearly identify, quantify and rankall sources of funding by preferenceincluding, but not limited to:• Reducing assets• Modifying the liability structure orincreasing liabilities• Using off-balance-sheet sources,such as securitizations• Using other alternatives forcontrolling balance sheet changes2. Consider asset and liabilitystrategies for responding to liquidity crisisincluding, but not limited to:• Whether to liquidate surplusmoney market assets• When (if at all) HTM securitiesmight be liquidated• Whether to sell liquid securities inthe repo markets• When to sell longer-term assets,fixed assets, or certain lines of business• Coordinating lead bank fundingwith that of the FI’s other banks and nonbankaffiliates• Developing strategies on how tointeract with non-traditional fundingsources (e.g., whom to contact, what typeof information and how much detail shouldbe provided, who will be available forfurther questions, and how to ensure thatcommunications are consistent)Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 7

APP. Q-4408.12.313. Address administrative policiesand procedures that should be used duringa liquidity crisis:• The responsibilities of SeniorManagement during a funding crisis• Names, addresses, and telephonenumbers of members of the crisis team• Where, geographically, teammembers will be assigned• Who will be assigned responsibilityto initiate external contacts with regulators,analysts, investors, external auditors, press,significant customers, and others• How internal communications willflow between management, Asset LiabilityCommittee (ALCO), investment portfoliomanagers, traders, employees, and others• How to ensure that the ALCOreceives management reports that arepertinent and timely enough to allowmembers to understand the severity of theFI’s circumstances and to implementappropriate responses.The above outline of the scope of agood contingency plan is by no meansexhaustive. FIs should devote significanttime and consideration to scenarios that aremost likely, given their activities.Regardless of the strategies employed, anFI should consider the effects of suchstrategies on long-term liquidity positionsand take appropriate actions to ensure thatlevel of risk exposures shall remain or bebrought down within the risk tolerance ofthe Board.Limits structureThe board and senior managementshould establish limits on the nature andamount of liquidity risk they are willing toassume. In setting limits, managementshould consider the nature of the FI’sstrategies and activities, its pastperformance, the level of earnings andcapital available to absorb potential lossesand costs of an FI’s access to moneymarkets and other alternative sources offunding.Limits can take various forms. FIsshould address limits on types of fundingsources and uses of funds, including offbalancesheet positions. In addition,policies should set targets for minimumholdings of liquid assets relative toliabilities. Complex FIs, or FIs engaged incomplex activities should set maximumcumulative cash-flow mismatches overparticular time horizons and establishcounterparty limits. Such limits should beapplied to all currencies to which the FIhas a significant exposure. In particular, FIsshould take into consideration any legaldistinctions and possible obstacles to cashflow movements between the RegularBanking Unit (RBU) and the FCDU.When evaluating a bank’s liquidityposition, the BSP will consider low levelsof liquid assets relative to liabilities, andsignificant negative funding gaps to beindicative of high liquidity risk exposure.Further, negative cash-flow mismatches inthe short term time buckets will receiveheightened scrutiny by the BSP and shouldalso receive the attention of seniormanagement and the board of directors.Before accepting negative fundinggaps, or setting limits that allow negativefunding gaps, the board and seniormanagement should consider the FI’sability to fund these negative gaps. Factorsinclude, but are not limited to: theavailability of on-balance sheet liquidity,the amount of firm credit lines availablefrom commercial sources that can bedrawn to fund the shortfall, and the amountof unencumbered on-balance sheet assetsthat can be sold without excessive loss andin a reasonable time-frame.Further, actual positions and limitsshould reflect the outcome of possiblestress scenarios caused by internal andexternal factors, particularly those relatedto reputation risk. Stress scenarios shouldconsider the possibility that securities maybe sold at a greater discount and/or maytake more time to sell than expected orQ RegulationsAppendix Q-44 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4408.12.31that credit lines and other off-balancesheet sources of funding may becancelled or may be unavailable atreasonable cost.Management should define specificprocedures for the prompt reporting anddocumentation of limit exceptions andthe management approval and actionrequired in such cases.Liquidity risk monitoring and reportingAn adequate managementinformation system is critical in the riskmonitoring process. The system shouldbe able to provide the Board, seniormanagement and other personnel withtimely information on the FI’s liquidityposition in all the major currencies it dealsin, on an individual and aggregate basis,and for various time periods.Effective liquidity risk monitoringrequires frequent routine liquidityreviews and more in-depth andcomprehensive reviews on a periodicbasis. In general, monitoring shouldinclude sufficient information and a clearpresentation such that the reader candetermine the FI’s ongoing degree ofcompliance with risk limits. For example,reports should address fundingconcentrations, funding costs, projectedfunding needs and available fundingsources.Monitoring and board reportingshould be robust. It is not unreasonableto expect complex FIs or FIs engaged incomplex activities to monitor liquidity ona daily basis. Board reporting should beno less frequent than monthly. However,the BSP would expect Board-levelcommittees or sub-committees to receivemore frequent reporting.Comprehensive and accurate internalreports analyzing an FI’s liquidity riskshould be regularly prepared andreviewed by senior management andsubmitted to the board of directors.D. Risk controls and auditAn FI should have adequate internalcontrols in place to protect the integrity ofits liquidity risk management process.Fundamental to the internal control systemis for the Board to prescribe independentreviews to evaluate the effectiveness of therisk management system and checkcompliance with established limits,policies and procedures.An effective system of internal controlsfor liquidity risk includes:1. A strong internal controlenvironment;2. An adequate process for identifyingand evaluating liquidity risk;3. Adequate information systems; and4. Continual review of adherence toestablished policies and procedures.To ensure that risk managementobjectives are achieved, managementneeds to focus on the following areas:appropriate approval processes, limitsmonitoring, periodic reporting, segregationof duties, restricted access to informationsystems and the regular evaluation andreview by independent competentpersonnel.Internal audit reviews should cover allaspects of the liquidity risk managementprocess, including determining theappropriateness of the risk managementsystem, accuracy and completeness ofmeasurement models, reasonableness ofassumptions and stress testingmethodology. Audit staff should have theskills commensurate with thesophistication of the FI’s risk managementsystems. Audit results should be promptlyreported to the board. Deficiencies shouldbe addressed in a timely manner andmonitored until resolved/corrected.E. Foreign currency liquiditymanagementThe principles described in thisAppendix also apply to the managementManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-44 - Page 9

APP. Q-4408.12.31of any foreign currency to which the FImaintains a significant exposure.Specifically, management should ensurethat its measurement, monitoring andcontrol systems account for theseexposures as well. Management needsto set and regularly review limits on thesize of its cash flow mismatches for eachsignificant individual currency and inaggregate over appropriate timehorizons. In addition, an FI shouldconsider effects of other risk areas,particularly settlement risks from its offbalancesheet activities. An FI should alsoconservatively assess its access toforeign exchange markets when settingup its risk limits. As with overall liquidityrisk management, foreign currencyliquidity should be analyzed undervarious scenarios, including stressfulconditions.(Circular No. 545 dated 15 September 2006)Q RegulationsAppendix Q-44 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4508.12.31AUTHORIZATION FORM FOR QUERYING THE BANGKO SENTRALWATCHLIST FILES FOR SCREENING APPLICANTS AND CONFIRMINGAPPOINTMENTS OF DIRECTORS AND OFFICIALS(Appendix to Subsecs. 4143Q.5, 4143S.6, 4143P.6 and 4143N.6)A U T H O R I Z A T I O NI, , after being sworn in accordance with law, dohereby authorize the following, pursuant to the provisions of Subsecs. 4143Q.5(c), 4143S.6(c),4143P.6(c) and 4143N.6(c) of the MORNBFI:a) (Name of NBFI) to conduct a background investigation on myselfrelative to my application for or appointment to the position of (position)in (Name of NBFI) which include, among others, inquiring from the Watchlist Filesof the BSP; andb) The BSP to disclose its findings pertinent to the aforementioned inquiry on the saidwatchlist files to (Name of NBFI) .With the above authorization, I hereby waive my right to the confidentiality of theinformation that will be obtained as a result of the said inquiry, provided that disclosure ofsaid information will be limited for the purpose of ascertaining my qualification or nonqualificationfor the said position.IN WITNESS WHEREOF, I have hereunto set my hand this ________________.______________________________(Signature Over Printed Name)SIGNED IN THE PRESENCE OF:(Witness) (Witness)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-45 - Page 1

APP. Q-4508.12.31ACKNOWLEDGMENTREPUBLIC OF THE PHILIPPINES } S.S._________________CITY }BEFORE ME, this ___ day of _________________200___ in __________________personally appeared the following person:Name Community Tax Place DateCertificateknown to me to be the same person who executed the foregoing instrument and heacknowledged to me to be the same person who executed the foregoing instrument andhe acknowledged to me that the same is his free act and deed.This instrument, consisting of two (2) pages, including the page on which thisacknowledgment is written, has been signed on the left margin of each and every pagethereof by __________________, and his witnesses, and sealed with my notarial seal.IN WITNESS WHEREOF, I have hereunto set my hand, the day, year and placeabove written.Notary PublicDoc. No.:Page No.:Book No.:Series of 200(As amended by CL-2007-001 dated 04 January 2007 and CL-2006-046 dated 21 December 2006)Q RegulationsAppendix Q-45 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31RISK-BASED CAPITAL ADEQUACY FRAMEWORKFOR THE PHILIPPINE BANKING SYSTEM[Appendix to Sec. 4115Q (2008 - 4116Q)]IntroductionThis Appendix outlines the BSPimplementing guidelines of the revisedInternational Convergence of CapitalMeasurement and Capital Standards, orpopularly known as Basel II. Basel II is thenew international capital standards set bythe Basel Committee on BankingSupervision (BCBS) 1 . It aims to replaceBasel I, which was issued in 1988 with anamendment in 1996, to make therisk-based capital framework morerisk-sensitive. Banks are enjoined tosubmit their group-wide (includingsubsidiary banks and QBs) Basel IIimplementation plans from 2007-2010, notlater than 31 December 2006.The guidelines contained in thisAppendix shall take effect on 01 July 2007.(As amended by M-2006-022 dated 24 November 2006)Part I. Risk-based capital adequacy ratio1. The risk-based CAR of UBs and KBsand their subsidiary banks and QBs,expressed as a percentage of qualifyingcapital to risk-weighted assets, shall not beless than ten percent (10%).2. Qualifying capital is computed inaccordance with the provisions of Part II.Risk-weighted assets is the sum of (1) creditrisk-weighted assets (Parts III, IV, and V),(2) market risk-weighted assets (Parts IVand VI), and (3) operational risk-weightedassets (Part VII).3. The CAR requirement will beapplied to all UBs and KBs and theirsubsidiary banks, and QBs on both soloand consolidated bases. The application ofthe requirement on a consolidated basis isthe best means to preserve the integrity ofcapital in banks with subsidiaries byeliminating double gearing. However, asone of the principal objectives ofsupervision is the protection of depositors,it is essential to ensure that capitalrecognized in capital adequacy measuresis readily available for those depositors.Accordingly, individual banks shouldlikewise be adequately capitalized on astand-alone basis.4. To the greatest extent possible, allbanking and other relevant financialactivities (both regulated and unregulated)conducted by a bank and its subsidiarieswill be captured through consolidation.Thus, majority-owned or -controlledfinancial allied undertakings should be fullyconsolidated on a line by line basis.Exemptions from consolidation shall onlybe made in cases where such holdings areacquired through debt previouslycontracted and held on a temporary basis,are subject to different regulation, or wherenon-consolidation for regulatory capitalpurposes is otherwise required by law. Allcases of exemption from consolidationmust be made with prior clearance fromthe BSP.5. Banks shall comply with theminimum CAR at all times notwithstandingthat supervisory reporting shall only be onquarterly basis. Any breach, even if onlytemporary, shall be reported to the bank’sBoard of Directors and to BSP, SES withinthree (3) banking days. For this purpose,banks shall develop an appropriate systemto properly monitor their compliance.1The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by thecentral bank governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisoryauthorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain,Sweden, Switzerland, the United Kingdom, and the United States. It usually meets at the Bank for International Settlements inBasel, Switzerland where its permanent Secretariat is located.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 1

APP. Q-4611.12.316. The BSP reserves the right, uponauthority of the Deputy Governor,SES, toconduct on-site inspection outside of regularor special examination, for the purpose ofascertaining the accuracy of CARcalculations as well as the integrity of CARmonitoring and reporting systems.Part II. Qualifying capital1. Qualifying capital consists of Tier 1(core plus hybrid) capital and Tier 2(supplementary) capital elements, net ofrequired deductions from capital.A. Tier 1 Capital2. Tier 1 capital is the sum of core Tier1 capital and allowable amount of hybrid Tier1 capital, as set in paragraph 12.3. Core Tier 1 capital consists of:a) Paid-up common stock;b) Paid-up perpetual and noncumulativepreferred stock;c) Additional paid-in capital;d) Retained earnings;e) Undivided profits (for domesticbanks only);f) Net gains on fair value adjustmentof hedging instruments in a cash flow hedgeof available for sale equity securities;g) Cumulative foreign currencytranslation; andh) Minority interest in subsidiaryfinancial allied undertakings which are lessthan wholly-owned: Provided, That a bankshall not use minority interests in the equityaccounts of consolidated subsidiaries asavenue for introducing into its capitalstructure elements that might not otherwisequalify as Tier 1 capital or that would, ineffect, result in an excessive reliance onpreferred stock within Tier 1:Less:i. Common stock treasury shares;ii. Perpetual and non-cumulativepreferred stock treasury shares;iii. Net unrealized losses on availablefor sale equity securities purchased;iv. Gains (Losses) resulting fromdesignating financial liabilities at fair valuethrough profit or loss that are due to owncredit worthiness;v. Unbooked valuation reserves andother capital adjustments based on thelatest report of examination as approvedby the Monetary Board;vi. Total outstanding unsecuredcredit accommodations, both direct andindirect, to DOSRI and unsecured loans,other credit accommodations andguarantees granted to subsidiaries andaffiliates;vii. Deferred income tax;viii.Goodwill, including that relating tounconsolidated subsidiary banks, financialallied undertakings, excluding subsidiarysecurities dealers/brokers and insurancecompanies, (on solo basis) andunconsolidated subsidiary securitiesdealers/brokers, insurance companies andnon-financial allied undertakings (on soloand consolidated bases); andix. Gain on sale resulting from asecuritization transaction.4. Hybrid Tier 1 capital in the form ofperpetual preferred stock and perpetualUnSD may be issued subject to prior BSPapproval and to the conditions inparagraph 12.5. In the case of foreign banks, Tier 1capital is equivalent to:a) Assigned capital includingearnings not remitted to the head officewhich the bank elects to consider as partof assigned capital (in which case it canno longer be remitted to the head office);andb) “Net due to” head office,branches, subsidiaries and other officesoutside the Philippines as defined underSubsec. X105.5.d (inclusive of earningsnot remitted to head office per Subsec.Q RegulationsAppendix Q-46 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31X105.5.c, unless considered as part of theassigned capital by the bank), subject tothe limit prescribed under Subsec. X105.6,Less:i. Any balance in the “Net due from”account.(As amended by Circular No. 560 dated 11 January 2007)B. Tier 2 Capital6. Tier 2 capital is the sum of UT2capital and LT2 capital.7. The total amount of LT2 capitalbefore deductions enumerated inparagraph 10 that may be included intotal Tier 2 capital shall be limited to amaximum of fifty percent (50%) of totalTier 1 capital (net of deductionsenumerated in paragraph 3). The totalamount of upper and lower Tier 2 capitalboth before deductions enumerated inparagraph 10 that may be included in totalqualifying capital shall be limited to amaximum of 100% of total Tier 1 capital(net of deductions enumerated inparagraph 3).8. UT2 capital consists of:a) Paid-up perpetual and cumulativepreferred stock;b) Paid-up limited life redeemablepreferred stock issued with the conditionthat redemption thereof shall be allowedonly if the shares redeemed are replacedwith at least an equivalent amount ofnewly paid-in shares so that the total paidincapital stock is maintained at the samelevel prior to redemption;c) Appraisal increment reserve –bank premises, as authorized by theMonetary Board;d) Net unrealized gains on availablefor sale equity securities purchased subjectto a fifty five percent (55%) discount;e) General loan loss provision,limited to a maximum of one percent (1%)of credit risk-weighted assets, and anyamount in excess thereof shall bededucted from the credit risk-weightedassets in computing the denominator ofthe risk-based capital ratio;f) With prior BSP approval, UnSDwith a minimum original maturity of at leastten (10) years issued subject to theconditions in paragraph 13, in an amountequivalent to its carrying amount discountedby the following rates:Remaining maturity Discount factor5 years & above 0%4 years to

APP. Q-4611.12.31Remaining maturity Discount factor5 years & above 0%4 years to

APP. Q-4611.12.31sale debt securities shall be risk-weightednet of specific provisions as provided inparagraph 1 of Part III.A, but withoutconsidering accumulated market gains/losses.D. Eligible instruments under hybrid Tier1 capital12. Perpetual preferred stock andperpetual UnSD issuances of banks shouldcomply with the following minimumconditions in order to be eligible as hybridTier 1 (HT1) capital:a) It must be issued and fully paid-up.Only the net proceeds received from theissuance shall be included as capital;b) The dividends/coupons must benon-cumulative. It is acceptable to paydividends/coupons in scrip or shares ofstock if a cash dividend/coupon is withheld:Provided, That this does not result on issuinglower quality capital: Provided, further, Thatwhere such dividend/coupon stocksettlement feature is included, the bankshould ensure that it has an appropriatebuffer of authorized capital stock andappropriate stockholders and boardauthorization, if necessary, to fulfill theirpotential obligations under such issues;c) It must be available to absorb lossesof the bank without it being obliged to ceasecarrying on business. The agreementgoverning its issuance should specificallyprovide for the dividend/coupon andprincipal to absorb losses where the bankwould otherwise be insolvent, or for itsholders to be treated as if they were holdersof a specified class of share capital in anyproceedings commenced for the windingup of the bank. Issue documentation mustdisclose to prospective investors the mannerby which the instrument is to be treated inloss situation.Alternatively, the agreement governingits issuance can provide for automaticconversion into common shares orperpetual and non-cumulative preferredshares upon occurrence of certain triggerevents, as follows:i. Breach of minimum capital ratio;ii. Commencement of proceedings forwinding up of the bank; oriii. Upon appointment of receiver forthe bank.The rate of conversion must be fixed atthe time of subscription to the instrument.The bank must also ensure that it hasappropriate buffer of authorized capitalstock and appropriate stockholders andboard authorization for conversion/issue totake place anytime;d) Its holders must not have a priorityclaim, in respect of principal and dividend/coupon payments in the event of windingup of the bank, which is higher than or equalwith that of depositors, other creditors ofthe bank and holders of LT2 and UT2 capitalinstruments. Its holder must waive his rightto set-off any amount he owes the bankagainst any subordinated amount owed tohim due to the HT1 capital instrument;e) It must neither be secured norcovered by a guarantee of the issuer orrelated party or other arrangement thatlegally or economically enhances thepriority of the claim of any holder as againstdepositors, other creditors of the bank andholders of LT2 and UT2 capital instruments;f) It must not be redeemable at theinitiative of the holder. It must not berepayable without the prior approval of theBSP: Provided, That repayment may beallowed only in connection with call optionafter a minimum of five (5) years from issuedate: Provided, however, That a call optionmay be exercised within the first five (5) yearsfrom issue date when –i. It was issued for the purpose of amerger with or acquisition by the bank andthe merger or acquisition is aborted;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 5

APP. Q-4611.12.31ii. There is a change in tax status of theHT1 capital instrument due to changes inthe tax laws and/or regulations; oriii. It does not qualify as HT1 capital asdetermined by the BSP:Provided, further, That such repaymentshall be approved by the BSP only if thepreferred share/debt is simultaneouslyreplaced with issues of new capital whichis neither smaller in size nor of lower qualitythan the original issue, unless the bank’scapital ratio remains more than adequateafter redemption.It must not contain any clause whichrequires acceleration of payment ofprincipal, except in the event of insolvency.The agreement governing its issuance mustnot contain any provision that mandates orcreates an incentive for the bank to repaythe outstanding principal of the instrument,e.g., a cross-default or negative pledge or arestrictive covenant, other than a call optionwhich may be exercised by the bank;g) Its main features must be publiclydisclosed by annotating the same on theinstrument and in a manner that is easilyunderstood by the investor;h) The proceeds of the issuance mustbe immediately available without limitationto the bank;i) The bank must have full discretionover the amount and timing of dividends/coupons where the bank –i. Has not paid or declared a dividendon its common shares in the precedingfinancial year; orii. Determines that no dividend is tobe paid on such shares in the currentfinancial year.The bank must have full control andaccess to waived payments;j) Any dividend/coupon to be paidmust be paid only to the extent that the bankhas profits distributable determined inaccordance with existing BSP regulations.The dividend/coupon rate, or theformulation for calculating dividend/couponpayments must be fixed at the time ofissuance and must not be linked to the creditstanding of the bank;k) It may allow only one (1) moderatestep-up in the dividend/coupon rate inconjunction with a call option, only if thestep-up occurs at a minimum of ten (10)years after the issue date and if it results inan increase over the initial rate that is notmore than:i. 100 basis points less the swapspread between the initial index basis andthe stepped-up index basis; orii. fifty percent (50%) of the initialcredit spread less the swap spread betweenthe initial index basis and the stepped-upindex basis.The swap spread should be fixed as ofthe pricing date and reflect the differentialin pricing on that date between the initialreference security or rate and the steppedupreference security or rate.l) It must be underwritten by a thirdparty not related to the issuer bank noracting in reciprocity for and in behalf of theissuer bank;m) It must be issued in minimumdenominations of at least P500,000.00 orits equivalent;n) It must clearly state on its face thatit is not a deposit and is not insured by thePDIC; ando) The bank must submit a writtenexternal legal opinion that theabovementioned requirements, includingthe subordination and loss absorptionfeatures, have been met:Provided, That for purposes of reserverequirement regulation, it shall not betreated as time deposit liability, depositsubstitute liability or other forms ofborrowings: Provided, further, That the totalamount of HT1 capital that may be includedin the Tier 1 capital shall be limited to amaximum of fifteen percent (15%) of totalQ RegulationsAppendix Q-46 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31Tier 1 capital (net of deductionsenumerated in paragraph 3): Provided,furthermore, That the amount of HT1capital in excess of the maximum limitshall be eligible for inclusion in the UT2capital, subject to the limit in total Tier 2capital. To determine the allowableamount of HT1 capital, the amount of totalcore Tier 1 capital (net of deductionsenumerated in paragraph 3) should bemultiplied by seventeen and sixty fivepercent (17.65%), the number derivedfrom the proportion of fifteen percent(15%) to eighty five percent (85%), i.e.,15%/85% = 17.65%.E. Eligible unsecured subordinated debt13. UnSD issuances by banks shouldcomply with the following minimumconditions in order to be eligible as UT2capital:a) It must be issued and fully paid-up.Only the net proceeds received from theissuance shall be included as capital;b) It must be available to absorblosses of the bank without it being obligedto cease carrying on business. Theagreement governing its issuance shouldspecifically provide for the coupon andprincipal to absorb losses where the bankwould otherwise be insolvent, or for itsholders to be treated as if they wereholders of a specified class of sharecapital in any proceedings commenced forthe winding up of the bank. Issuedocumentation must disclose toprospective investors the manner bywhich the instrument is to be treated inloss situation.Alternatively, the agreement governingits issuance can provide for automaticconversion into common shares orperpetual and non-cumulative shares orperpetual and cumulative preferred sharesupon occurrence of certain trigger events,as follows:i. Breach of minimum capital ratio;ii. Commencement of proceedings forwinding up of the bank; oriii. Upon appointment of receiver forthe bank.The rate of conversion must be fixed atthe time of subscription to the instrument.The bank must also ensure that it hasappropriate buffer of authorized capitalstock and appropriate stockholders andboard authorization for conversion/issue totake place anytime;c) Its holders must not have priorityclaim, in respect of principal and couponpayments in the event of winding up ofthe bank, which is higher than or equalwith that of depositors, other creditors ofthe bank, and holders of LT2 capitalinstruments. Its holder must waive his rightto set off any amount he owes the bankagainst any subordinated amount owed tohim due to the UT2 capital instrument;d) It must neither be secured norcovered by a guarantee of the issuer orrelated party or other arrangement thatlegally or economically enhances thepriority of the claim of any holder asagainst depositors, other creditors of thebank and holders of LT2 capitalinstruments;e) It must not be redeemable at theinitiative of the holder. It must not berepayable prior to maturity without theprior approval of the BSP: Provided, Thatrepayment may be allowed only inconnection with a call option after aminimum of five (5) years from issue date:Provided, however, That a call option maybe exercised within the first five (5) yearsfrom issue date when:i. It was issued for the purpose of amerger with or acquisition by the bank andthe merger or acquisition is aborted;ii. There is a change in tax status ofthe UT2 capital instrument due to changesin the tax laws and/or regulations; orManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 7

APP. Q-4611.12.31iii. It does not qualify as UT2 capitalas determined by the BSP:Provided, further, That such repaymentprior to maturity shall be approved by theBSP only if the debt is simultaneouslyreplaced with issues of new capital whichis neither smaller in size nor of lower qualitythan the original issue, unless the bank’scapital ratio remains more than adequateafter redemption.It must not contain any clause whichrequires acceleration of payment ofprincipal, except in the event ofinsolvency. The agreement governing itsissuance must not contain any provisionthat mandates or creates an incentive forthe bank to repay the outstandingprincipal of the instrument, e.g., a crossdefaultor negative pledge or a restrictivecovenant, other than a call option whichmay be exercised by the bank;f) Its main features must be publiclydisclosed by annotating the same on theinstrument and in a manner that is easilyunderstood by the investor;g) The proceeds of the issuance mustbe immediately available withoutlimitation to the bank;h) The bank must have the option todefer any coupon payment where thebank:i. has not paid or declared adividend on its common shares in thepreceding financial year; orii. determines that no dividend is tobe paid on such shares in the currentfinancial year;It is acceptable for the deferredcoupon to bear interest but the interestrate payable must not exceed marketrates;i) The coupon rate, or theformulation for calculating couponpayments must be fixed at the time ofissuance and must not be linked to thecredit standing of the bank;j) It may allow only one (1)moderate step-up in the coupon rate inconjunction with a call option, only if thestep-up occurs at a minimum of ten (10)years after the issue date and if it resultsin an increase over the initial rate that isnot more than:i. 100 basis points less the swapspread between the initial index basis andthe stepped-up index basis; orii. fifty percent (50%) of the initialcredit spread less the swap spreadbetween the initial index basis and thestepped-up index basis.The swap spread should be fixed asof the pricing date and reflect thedifferential in pricing on that date betweenthe initial reference security or rate andthe stepped-up reference security or rate;k) It must be underwritten by a thirdparty not related to the issuer bank noracting in reciprocity for and in behalf ofthe issuer bank;l) It must be issued in minimumdenominations of at least P500,000.00 orits equivalent;m) It must clearly state on its face thatit is not a deposit and is not insured bythe PDIC; andn) The bank must submit a writtenexternal legal opinion that theabovementioned requirements, includingthe subordination and loss absorptionfeatures, have been met:Provided, That it shall be subject to acumulative discount factor of twentypercent (20%) per year during the last five(5) years to maturity [i.e., twenty percent(20%) if the remaining life is four (4) yearsto less than five (5) years, forty percent(40%) if the remaining life is three (3)years to less than four (4) years, etc.]:Provided, further, That where it isdenominated in a foreign currency, it shallQ RegulationsAppendix Q-46 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31be revalued in accordance with PAS 21:Provided, furthermore, That for purposesof reserve requirement regulation, it shallnot be treated as time deposit liability,deposit substitute liability or other formsof borrowings.14. UnSD issuances by banks shouldcomply with the following minimumconditions in order to be eligible as LT2capital:a) It must be issued and fully paid-up.Only the net proceeds received from theissuance shall be included as capital;b) Its holders must not have priorityclaim, in respect of principal and couponpayments in the event of winding up of thebank, which is higher than or equal withthat of depositors and other creditors of thebank. Its holder must waive his right to setoffany amount he owes the bank againstany subordinated amount owed to him dueto the LT2 capital instrument;c) It must neither be secured norcovered by a guarantee of the issuer orrelated party or other arrangement thatlegally or economically enhances thepriority of the claim of any holder as againstdepositors and other creditors of the bank;d) It must not be redeemable at theinitiative of the holder. It must not berepayable prior to maturity without theprior approval of the BSP:Provided, That repayment may beallowed only in connection with a calloption after a minimum of five (5) yearsfrom issue date: Provided, however, Thata call option may be exercised within thefirst five (5) years from issue date when:i. It was issued for the purpose of amerger with or acquisition by the bank andthe merger or acquisition is aborted;ii. There is a change in tax status ofthe LT2 capital instrument due to changesin the tax laws and/or regulations; oriii. It does not qualify as LT2 capitalas determined by the BSP:Provided, further, That such repaymentprior to maturity shall be approved by theBSP only if the debt is simultaneouslyreplaced with issues of new capital whichis neither smaller in size nor of lowerquality than the original issue, unless thebank’s capital ratio remains more thanadequate after redemption.It must not contain any clause whichrequires acceleration of payment ofprincipal, except in the event of insolvency.The agreement governing its issuance mustnot contain any provision that mandatesor creates an incentive for the bank to repaythe outstanding principal of the instrument,e.g., a cross-default or negative pledge or arestrictive covenant, other than a calloption which may be exercised by thebank;e) Its main features must be publiclydisclosed by annotating the same on theinstrument and in a manner that is easilyunderstood by the investor;f) The proceeds of the issuance mustbe immediately available withoutlimitation to the bank;g) The coupon rate, or the formulationfor calculating coupon payments must befixed at the time of issuance and must notbe linked to the credit standing of the bank;h) It may allow only one (1) moderatestep-up in the coupon rate in conjunctionwith a call option, only if the step-up occursat a minimum of five (5) years after the issuedate and if it results in an increase over theinitial rate that is not more than:i. 100 basis points less the swapspread between the initial index basis andthe stepped-up index basis; orii. fifty percent (50%) of the initialcredit spread less the swap spread betweenthe initial index basis and the stepped-upindex basis.The swap spread should be fixed as ofManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 9

APP. Q-4611.12.31the pricing date and reflect the differentialin pricing on that date between the initialreference security or rate and the steppedupreference security or rate;i) It must be underwritten by a thirdparty not related to the issuer bank noracting in reciprocity for and in behalf of theissuer bank;j) It must be issued in minimumdenominations of at least P500,000.00 orits equivalent;k) It must clearly state on its face thatit is not a deposit and is not insured by thePDIC; andl) The bank must submit a writtenexternal legal opinion that theabovementioned requirements, includingthe subordination features, have been met:Provided, That it shall be subject to acumulative discount factor of twenty percent(20%) per year during the last five (5) yearsto maturity [i.e., twenty percent (20%) if theremaining life is four (4) years to less thanfive (5) years, forty percent (40%) if theremaining life is three (3) years to less thanfour (4) years, etc.]: Provided, further, Thatwhere it is denominated in a foreigncurrency, it shall be revalued in accordancewith PAS 21: Provided, furthermore, Thatfor purposes of reserve requirementregulation, it shall not be treated as timedeposit liability, deposit substitute liabilityor other forms of borrowings.15. Capital instruments issued by QBsstarting 01 January 2011 should complywith the minimum conditions specified inAppendix Q-46c in order to be eligible asHybrid Tier 1 or Lower Tier 2 capital.(As amended by Circular Nos.716 dated 25 March 2011 and709 dated 10 January 2011)Part III. Credit risk-weighted assetsA. Risk-weighting1. Banking book exposures shall berisk-weighted based on third party creditassessment of the individual exposure givenby eligible external credit assessmentinstitutions listed in Part III.C. The tablebelow sets out the mapping of external creditassessments with the corresponding riskweights for banking book exposures.Exposures related to credit derivatives andsecuritizations are dealt with in Parts IV andV, respectively. Exposures should be riskweightednet of specific provisions.STANDARDIZED CREDIT RISK WEIGHTSCredit Assessment 1 AAA AA+ to A+ BBB+ to BB+ to B+ BelowAA- to A- BBB- BB- to B- B- UnratedSovereigns 0% 0% 20% 50% 100% 100% 150% 100%MDBs 0% 20% 50% 50% 100% 100% 150% 100%Banks 20% 20% 50% 50% 100% 100% 150% 100% 2Interbank call loans 20%Local government units 20% 20% 50% 50% 100% 100% 150% 100% 2Government corporations 20% 20% 50% 100% 100% 150% 150% 100% 2Corporates 20% 20% 50% 100% 100% 150% 150% 100% 2Housing loans 50%MSME qualified portfolio 75%Defaulted exposuresHousing loans 100%Others 150%ROPA 150%All other assets 100%12The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized externalrating agencies is in Part III.COr risk weight applicable to sovereign of incorporation, whichever is higherQ RegulationsAppendix Q-46 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31Sovereign Exposures2. These include all exposures tocentral governments and central banks. AllPhilippine peso (Php) denominatedexposures to the Philippine NationalGovernment (NG) and the BSP shall be riskweightedat zero percent (0%). Foreigncurrency denominated exposures to the NGand the BSP, however, shall be riskweightedaccording to the table above:Provided, That only one-third(1/3) of the applicable risk weight shall beapplied from 01 July 2007, two-thirds (2/3)from 01 January 2008, and the full riskweight from 01 January 2009 1 . Exposuresto the Bank for International Settlements(BIS), the International Monetary Fund (IMF),and the European Central Bank (ECB) andthe European Community (EC) shall alsoreceive zero percent (0%) risk weight.(As amended by Circular No. 588 dated 11 December 2007)MDB Exposures3. These include all exposures tomultilateral development banks. Exposures tothe World Bank Group comprised of theIBRD and the IFC, the ADB, the AfDB, theEBRD, the IADB, the EIB, the EuropeanInvestment Fund (EIF), the NIB, the CDB,the Islamic Development Bank (IDB), andthe CEDB currently receive zero percent(0%) risk weight. However, it is theresponsibility of the bank to monitor theexternal credit assessments of multilateraldevelopment banks to which they have anexposure to reflect in the risk weights anychange therein.Bank Exposures4. These include all exposures toPhilippine-incorporated banks/QBs, as wellas foreign-incorporated banks.Interbank Call Loans5. Interbank call loans refer tointerbank loans that pass through theInterbank Call Loan Funds Transfer Systemof the BSP, the BAP, and the PCHC.Exposures to Local Government Units6. These include all exposures tonon-central government public sectorentities. Bonds issued by Philippine localgovernment units (LGU Bonds), which arecovered by Deed of Assignment of InternalRevenue Allotment of the LGU andguaranteed by the LGU GuaranteeCorporation shall be risk-weighted at thelower of fifty percent (50%) or theappropriate risk weight indicated in the tableabove.Exposures to Government Corporations7. These include all exposures tocommercial undertakings owned by centralor local governments. Exposures toPhilippine GOCCs that are not explicitlyguaranteed by the Philippine NG are alsoincluded in this category.Corporate Exposures8. These include all exposures tobusiness entities, which are not consideredas micro, small, or medium enterprises(MSME), whether in the form of acorporation, partnership, or soleproprietorship.These also include allexposures to FIs, including securitiesdealers/brokers and insurance companies,not falling under the definition of Bank inparagraph 4.Housing Loans9. These include all current loans toindividuals for housing purpose, fullysecured by first mortgage on residentialproperty that is or will be occupied by theborrower.Micro, Small, and Medium Enterprises10. An exposure must meet thefollowing criteria to be considered as an1The capital treatment of QB's holdings of ROP Global Bonds paired with Warrants under the BSP's revised risk-basedcapital adequacy framework is contained in Appendix Q-46a.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 11

APP. Q-4611.12.31MSME exposure:a) The exposure must be to an MSMEas defined under existing BSP regulations;andb) The exposure must be in the formof direct loans, or unavailed portion ofcommitted credit lines and other businessfacilities such as outstanding guaranteesissued and unused letters of credit: Provided,That the credit equivalent amounts thereofshall be determined in accordance with themethodology for off-balance sheet items.Qualified portfolio11. For a bank’s portfolio of MSMEexposures to be considered as qualified, itmust be a highly diversified portfolio, i.e., ithas at least 500 borrowers that aredistributed over a number of industries. Inaddition, all MSME exposures in the qualifiedportfolio must be current exposures. Allnon-current MSME exposures are excludedfrom count and are to be treated as ordinarynon-performing loans. Current MSMEexposures not qualifying under highlydiversified MSME portfolio will be riskweightedbased on external rating and shallbe risk-weighted in the same manner ascorporate exposures.Defaulted Exposures12. A default is considered to haveoccurred in the following cases:a) If a credit obligation is considerednon-performing under existing rules andregulations. For non-performing debtsecurities, they shall be defined as follows:i. For zero-coupon debt securities, anddebt securities with quarterly, semi-annual,or annual coupon payments, they shall beconsidered non-performing when principaland/or coupon payment, as may beapplicable, is unpaid for thirty (30) days ormore after due date; andii. For debt securities with monthlycoupon payments, they shall be considerednon-performing when three (3) or morecoupon payments are in arrears: Provided,however, That when the total amount ofarrearages reaches twenty percent (20%) ofthe total outstanding balance of the debtsecurity, the total outstanding balance of thedebt security shall be considered as nonperforming.b) If a borrower/obligor has sought orhas been placed in bankruptcy, has beenfound insolvent, or has ceased operationsin the case of businesses;c) If the bank sells a credit obligationat a material credit-related loss, i.e.,excluding gains and losses due to interestrate movements. Banks’ board-approvedinternal policies must specifically definewhen a material credit-related loss occurs;andd) If a credit obligation of a borrower/obligor is considered to be in default, allcredit obligations of the borrower/obligorwith the same bank shall also be consideredto be in default.Housing loans13. These include all loans toindividuals for housing purpose, fullysecured by first mortgage on residentialproperty that is or will be occupied by theborrower, which are considered to be indefault in accordance with paragraph 12.Others14. These include the total amounts orportions of all other defaulted exposures,which are not secured by eligible collateralor guarantee as defined in Part III.B.ROPA15. All real and other propertiesacquired and classified as such underexisting regulations.Other Assets16. The standard risk weight for allQ RegulationsAppendix Q-46 - Page 12Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31other assets, including bank premises,furniture, fixtures and equipment, will be100%, except in the following cases:a) Cash on hand and gold, which shallbe risk-weighted at zero percent (0%); andb) Checks and other cash items, whichshall be risk-weighted at twenty percent(20%).Accruals on a claim shall be classifiedand risk-weighted in the same way as theclaim. Bills purchased shall be classifiedand risk-weighted as claims on the draweebank. The treatments of credit derivativesand securitization exposures are presentedseparately in Parts IV and V, respectively.Investments in equity or other regulatorycapital instruments issued by banks or otherfinancial/non-financial allied/non-alliedundertakings will be risk-weighted at 100%,unless deductible from the capital base asrequired in Part II.Off-balance sheet items17. For off-balance sheet items, the riskweightedamount shall be calculated usinga two-step process. First, the creditequivalent amount of an off-balance sheetitem shall be determined by multiplying itsnotional principal amount by the appropriatecredit conversion factor, as follows:a) 100% credit conversion factor - thisshall apply to direct credit substitutes, e.g.,general guarantees of indebtedness(including standby letters of credit servingas financial guarantees for loans andsecurities) and acceptances (includingendorsements with the character ofacceptances), and shall include:i. Guarantees issued other thanshipside bonds/airway bills;ii. Financial standby letters of creditb) Fifty percent (50%) creditconversion factor – this shall apply to certaintransaction-related contingent items, e.g.,performance bonds, bid bonds, warrantiesand standby letters of credit related toparticular transactions, and shall include:i. Performance standby letters ofcredit (net of margin deposit), establishedas a guarantee that a business transactionwill be performed;This shall also apply to –i. Note issuance facilities andrevolving underwriting facilities; andii. Other commitments, e.g., formalstandby facilities and credit lines with anoriginal maturity of more than one (1) year,and this shall also include UnderwrittenAccounts Unsold.c) Twenty percent (20%) creditconversion factor – this shall apply to shortterm,self-liquidating trade-relatedcontingencies arising from movement ofgoods, e.g., documentary creditscollateralized by the underlying shipments,and shall include:i. Trade-related guarantees:- Shipside bonds/airway bills- Letters of credit – confirmedii. Sight letters of credit outstanding (netof margin deposit);iii. Usance letters of credit outstanding(net of margin deposit);iv. Deferred letters of credit (net ofmargin deposit); andv. Revolving letters of credit (net ofmargin deposit) arising from movement ofgoods and/or services;This shall also apply to commitmentswith an original maturity of up to one (1)year, and shall include Committed CreditLine for Commercial Paper Issued.d) Zero percent (0%) credit conversionfactor – this shall apply to commitmentswhich can be unconditionally cancelled atany time by the bank without prior notice,and shall include Credit Card Lines.This shall also apply to those notinvolving credit risk, and shall include:i. Late deposits/payments received;Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 13

APP. Q-4611.12.31ii. Inward bills for collection;iii. Outward bills for collection;iv. Travelers’ checks unsold;v. Trust department accounts;vi. Items held for safekeeping/custodianship;vii. Items held as collaterals;viii.Deficiency claims receivable; andix. Others.18. For derivative contracts, the creditequivalent amount shall be the sum of thecurrent credit exposure (or replacementcost) and an estimate of the potential futurecredit exposure (or add-on). However, thefollowing shall not be included in thecomputation:a) Instruments which are traded in anexchange where they are subject to dailyreceipt and payment of cash variationmargin; andb) Exchange rate contract with originalmaturity of fourteen (14) calendar days orless.19. The current credit exposure shall bethe positive mark-to-market value of thecontract (or zero if the mark-to-market valueis zero or negative). The potential futurecredit exposure shall be the product of thenotional principal amount of the contractmultiplied by the appropriate potentialfuture credit conversion factor, as indicatedbelow:Interest ExchangeResidual Maturity Rate Rate EquityContract Contract ContractOne (1) year or less 0.0% 1.0% 6.0%Over one (1) year tofive (5) years 0.5% 5.0% 8.0%Over five (5) years 1.5% 7.5% 10.0%Provided, That:a) For contracts with multipleexchanges of principal, the factors are to bemultiplied by the number of remainingpayments in the contract;b) For contracts that are structured tosettle outstanding exposure followingspecified payment dates and where theterms are reset such that the market valueof the contract is zero on these specifieddates, the residual maturity would be setequal to the time until the next reset date,and in the case of interest rate contracts withremaining maturities of more than one (1)year that meet these criteria, the potentialfuture credit conversion factor is subject toa floor of one-half percent (1/2%); andc) No potential future credit exposureshall be calculated for single currencyfloating/floating interest rate swaps, i.e., thecredit exposure on these contracts wouldbe evaluated solely on the basis of theirmark-to-market value.20. The credit equivalent amount shallbe treated like any on-balance sheet asset,and shall be assigned the appropriate riskweight, i.e., according to the third partycredit assessment of the counterpartyexposure.B. Credit risk mitigation (CRM)21. Banks use a number of techniquesto mitigate the credit risks to which theyare exposed. For example, exposures maybe collateralized by first priority claims, inwhole or in part with cash or securities, ora loan exposure may be guaranteed by athird party. Physical collateral, such as realestate, buildings, machineries, andinventories are not recognized at this timefor credit risk mitigation purposes in linewith Basel II recommendations.22. In order for banks to obtain capitalrelief for any use of CRM techniques, alldocumentation used in collateralizedtransactions and for documentingguarantees must be binding on all partiesand legally enforceable in all relevantjurisdictions. Banks must have conductedsufficient legal review to verify this and havea well-founded legal basis to reach thisQ RegulationsAppendix Q-46 - Page 14Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31conclusion, and undertake such furtherreview as necessary to ensure continuingenforceability.23. The effects of CRM will not bedouble counted. Therefore, no additionalsupervisory recognition of CRM forregulatory capital purposes will be grantedon claims for which an issue-specific ratingis used that already reflects that CRM.Principal-only ratings will not be allowedwithin the framework of CRM.24. While the use of CRM techniquesreduces or transfers credit risk, itsimultaneously may increase other risks(residual risks). Residual risks includelegal, operational, liquidity and marketrisks. Therefore, it is imperative that banksemploy robust procedures and processesto control these risks, including strategy;consideration of the underlying credit;valuation; policies and procedures;systems; control of roll-off risks; andmanagement of concentration risk arisingfrom the bank’s use of CRM techniquesand its interaction with the bank’s overallcredit risk profile.25. The disclosure requirements underPart VIII of this document must also beobserved for banks to obtain capital relief(i.e., adjustments in the risk weights ofcollateralized or guaranteed exposures) inrespect of any CRM techniques.Collateralized transactions26. A collateralized transaction is onein which:a) banks have a credit exposure orpotential credit exposure; andb) that credit exposure or potentialcredit exposure is hedged in whole or inpart by collateral posted by a counterparty 1or by a third party in behalf of thecounterparty.27. In addition to the generalrequirement for legal certainty set out inparagraph 22, the legal mechanism by whichcollateral is pledged or transferred mustensure that the bank has the right to liquidateor take legal possession of it, in a timelymanner, in the event of default, insolvencyor bankruptcy (or one or more otherwisedefinedcredit events set out in thetransaction documentation) of thecounterparty (and, where applicable, of thecustodian holding the collateral).Furthermore, banks must take all stepsnecessary to fulfill those requirements underthe law applicable to the bank’s interest inthe collateral for obtaining and maintainingan enforceable security interest, e.g., byregistering it with a registrar, or forexercising a right to net or set off in relationto title transfer collateral.28. In order for collateral to provideprotection, the credit quality of thecounterparty and the value of the collateralmust not have a material positive correlation.For example, securities issued by thecounterparty – or by any related group entity– would provide little protection and sowould be ineligible.29. Banks must have clear and robustprocedures for the timely liquidation ofcollateral to ensure that any legalconditions required for declaring thedefault of the counterparty and liquidatingthe collateral are observed, and thatcollateral can be liquidated promptly.30. Where the collateral is required tobe held by a custodian, the BSP will onlyrecognize the collateral for regulatorycapital purposes if it is held by BSPauthorizedthird party custodians.31. A capital requirement will beapplied to a bank on either side of thecollateralized transaction: for example, bothrepos and reverse repos will be subject tocapital requirements. Likewise, both sidesof a securities lending and borrowingtransaction will be subject to explicit capital1Counterparty refers to a party to whom a bank has an on- or off-balance sheet credit exposure or a potential credit exposure.Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 15

APP. Q-4611.12.31charges, as will the posting of securities inconnection with a derivative exposure orother borrowing.Banking book32. Where banks take eligible collateral,as listed in paragraph 34, and satisfies therequirements under paragraphs 27 to 31,they are allowed to apply the risk weight ofthe collateral to the collateralized portionof the credit exposure (equivalent to the fairmarket value of recognized collateral),subject to a floor of twenty percent (20%).The twenty percent (20%) floor shall notapply and a zero percent (0%) risk weightcan be applied when the exposure and thecollateral are denominated in the samecurrency, and either:a) The collateral is cash as defined inparagraph 34.a; orb) The collateral is a sovereign debtsecurity eligible for zero percent (0%) riskweight, or a Php-denominated debtobligation issued by the Philippine NG orthe BSP, which fair market value has beendiscounted by twenty percent (20%).33. For collateral to be recognized,however, the collateral must be pledged forat least the life of the exposure and it mustbe marked to market and revalued with aminimum frequency of every six (6) months.34. The following are the eligiblecollateral instruments:a) Cash (as well as certificates ofdeposit or comparable instruments issuedby the lending bank) on deposit with thebank which is incurring the counterpartyexposure;b) Gold;c) Debt obligations issued by thePhilippine NG or the BSP;d) Debt securities issued by centralgovernments and central banks (and PSEstreated as sovereigns) of foreign countriesas well as MDBs with at least investmentgrade external credit ratings;e) Other debt securities with externalcredit ratings of at least BBB- or itsequivalent;f) Unrated senior debt securitiesissued by banks with an issuer rating of atleast BBB- or its equivalent, or with otherdebt issues of the same seniority with a ratingof at least BBB- or its equivalent;g) Equities included in the main indexof an organized exchange; andh) Investments in Unit InvestmentTrust Funds (UITF) and the Asian BondFund 2 (ABF2) duly approved by the BSP.Trading book35. A credit risk capital requirementshould also be applied to banks’counterparty exposures in the trading book(e.g., repo-style transactions, OTCderivatives contracts). Where banks takeeligible collateral for these trading booktransactions, as listed in paragraph 34, andsatisfies the requirements under paragraphs27 to 31, they are to compute for the creditrisk capital requirement according to thefollowing paragraphs: Provided, That, forrepo-style transactions in the trading book,all instruments which are included in thetrading book may be used as eligiblecollateral.36. For collateralized transactions in thetrading book, the exposure amount after riskmitigation is calculated as follows:E* = max {0, [E x (1 + H e ) – C x (1 – H c –H fx )]}Where:E* = the exposure value after riskmitigationE = the current value of the exposureH e = haircut appropriate to the exposureC = the current value of the collateralreceivedH c =H fx =haircut appropriate to the collateralhaircut appropriate for currencymismatch between the collateralQ RegulationsAppendix Q-46 - Page 16Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31and exposure set at 8% (based on a10-business day holding period anddaily marking to market)37. The treatment of transactionswhere there is a maturity mismatchbetween the maturity of the counterpartyexposure and the collateral is given inparagraphs 50 to 54.38. These are the haircuts to be used(based on a 10-business day holdingperiod, daily marking to market anddaily remargining), expressed aspercentages:HaircutSovereign Other(and PSEs Issuerstreated asIssue rating for Residual sovereign)debt securities 1 maturity and MDB(with 0%risk weight)issuersPhp – denomi- 1 yr. to < 5 yrs. 2Philippine NGand BSP> 5 years 41 yr. to < 5 yrs. 2 4> 5 years 4 8A+ to BBB-/ 1 yr. to < 5 yrs. 3 6debt securitiesas defined in> 5 years 6 12paragraph 34.fEquities inclu- 15ded in the mainindex and goldUITF and ABF2 Highest haircutapplicable to anysecurity in whichthe fund can investCash per parag- 0raph 34.a in thesame currencyOther financial 25instruments inthe tradingbook (appliesto repo-styletransactionsin the tradingbook only)39. Where the collateral is a basket ofassets, the haircut on the basket will beH =Sa i H i , where a i is the weight of theasset in the basket and H i is the haircutapplicable to that asset.40. For collateralized OTC derivativestransactions in the trading book, the creditequivalent amount will be computedaccording to paragraphs 18 to 19, butadjusted by deducting the volatility adjustedcollateral amount as computed accordingto paragraphs 36 to 39.41. The exposure amount after riskmitigation will be multiplied by the riskweight of the counterparty to obtain the riskweightedasset amount for the collateralizedtransaction.Guarantees42. Where guarantees are direct,explicit, irrevocable and unconditional,banks may be allowed to take account ofsuch credit protection in calculating capitalrequirements.43. A guarantee must represent a directclaim on the protection provider and mustbe explicitly referenced to specificexposures or a pool of exposures, so thatthe extent of the cover is clearly defined andincontrovertible.Other than non- paymentby a protection purchaser of money due inrespect of the credit protection contract, theguarantee must be irrevocable; there mustbe no clause in the contract that wouldallow the protection provider unilaterally tocancel the credit cover or that wouldincrease the effective cost of cover as a resultof deteriorating credit quality in the hedgedexposure. It must also be unconditional;there should be no clause in the protectioncontract outside the direct control of thebank that could prevent the protectionprovider from being obliged to pay out in atimely manner in the event that the originalcounterparty fails to make the payment(s) due.44. In addition to the legal certaintyrequirement in paragraph 22, in order for a1The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized external ratingagencies is in Part III.CManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 17

APP. Q-4611.12.31guarantee to be recognized, the followingconditions must be satisfied:a) On the qualifying default/non-payment of the counterparty, the bankmay in a timely manner pursue the guarantorfor any monies outstanding under thedocumentation governing the transaction.The guarantor may make one lump sumpayment of all monies under suchdocumentation to the bank, or the guarantormay assume the future payment obligationsof the counterparty covered by theguarantee. The bank must have the right toreceive any such payments from theguarantor without first having to take legalactions in order to pursue the counterpartyfor payment;b) The guarantee is an explicitlydocumented obligation assumed by theguarantor; andc) The guarantee must cover all typesof payments the underlying obligor isexpected to make under the documentationgoverning the transaction, for example,notional amount, margin payments, etc.Where a guarantee covers payment ofprincipal only, interests and other uncoveredpayments should be treated as an unsecuredamount.45. Where the bank’s exposure isguaranteed by an eligible guarantor, as listedin paragraph 47, and satisfies therequirements under paragraphs 42 to 44, thebank is allowed to apply the risk weight ofthe guarantor to the guaranteed portion ofthe credit exposure.46. The treatment of transactions wherethere is a mismatch between the maturityof the counterparty exposure and theguarantee is given in paragraphs 50 to 54.47. The following are the eligibleguarantors:a) Philippine NG and the BSP;b) Central governments and centralbanks and PSEs of foreign countries as wellas MDBs with a lower risk weight than thecounterparty;c) Banks with a lower risk weight thanthe counterparty; andd) Other entities with external creditassessment of at least A- or its equivalent.48. Where a bank provides a creditprotection to another bank in the form of aguarantee that a third party will perform onits obligations, the risk to the guarantor bankis the same as if the bank had entered intothe transaction as a principal. In suchcircumstances, the guarantor bank will berequired to calculate capital requirement onthe guaranteed amount according to the riskweight corresponding to the third partyexposure. In this instance, and provided thecredit protection is deemed to be legallyeffective, the credit risk is consideredtransferred to the bank providing creditprotection. However, the bank receivingcredit protection on its exposure to a thirdparty shall recognize a corresponding riskweightedcredit exposure to the bankproviding credit protection.49. An exposure that is covered by aguarantee that is counter-guaranteed by thePhilippine NG or BSP, may be consideredas covered by the guarantee of thePhilippine NG or BSP: Provided, That:a) the counter-guarantee covers allcredit risk element of the exposure;b) both the original guarantee and thecounter-guarantee meet all operationalrequirements for guarantees, except that thecounter guarantee need not be direct andexplicit to the original exposure; andc) the cover is robust and that nohistorical evidence suggests that thecoverage of the counter-guarantee is lessthan effectively equivalent to that of a directguarantee of the Philippine NG and BSP.Currently, Php-denominated exposuresto the extent guaranteed by IndustrialGuarantee and Loan Fund (IGLF), HomeQ RegulationsAppendix Q-46 - Page 18Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31Guaranty Corporation (HGC), and Trade andInvestment Development Corporation of thePhilippines (TIDCORP), which guaranteesare counter-guaranteed by the PhilippineNG receive zero percent (0%) risk weight.Maturity mismatch50. For collateralized transactions in thetrading book and guaranteed transactions,the credit risk mitigating effects of suchtransactions will still be recognized even ifa maturity mismatch occurs between thehedge and the underlying exposure, subjectto appropriate adjustments.51. For purposes of calculatingrisk-weighted assets, a maturity mismatchoccurs when the residual maturity of ahedge is less than that of the underlyingexposure.52. The maturity of the hedge and thematurity of the underlying exposure shouldboth be defined conservatively. For thehedge, embedded options which mayreduce the term of the hedge should betaken into account so that the shortestpossible effective maturity is used. Wherea call is at the discretion of the guarantor/protection seller, the maturity will alwaysbe at the first call date. If the call is at thediscretion of the protection buying bankbut the terms of the arrangement atorigination of the hedge contain a positiveincentive for the bank to call the transactionbefore contractual maturity, the remainingtime to the first call date will be deemed tobe the effective maturity. For example,where there is a step-up in cost inconjunction with a call feature or wherethe effective cost of cover increases overtime even if credit quality remains the sameor increases, the effective maturity will bethe remaining time to the first call. Theeffective maturity of the underlying, on theother hand, should be gauged as the longestremaining time before the counterparty isscheduled to fulfill its obligation, taking intoaccount any applicable grace period.53. Hedges with maturity mismatchesare only recognized when their originalmaturities are greater than or equal to oneyear. As a result, the maturity of hedges forexposures with original maturities of lessthan one (1) year must be matched to berecognized. In all cases, hedges will nolonger be recognized when they have aresidual maturity of three months or less.54. When there is a maturity mismatchwith recognized credit risk mitigants, thefollowing adjustment will be applied.Pa = P x (t – 0.25)/(T – 0.25)Where:Pa = value of the credit protectionP =adjusted for maturity mismatchcredit protection (e.g., collateralamount, guarantee amount)adjusted for any haircutst = min (T, residual maturity of thecredit protection arrangement)expressed in yearsT =min (5, residual maturity of theexposure) expressed in yearsC. Use of third party credit assessments55. The following third party creditassessment agencies are recognized by theBSP for regulatory capital purposes:International credit assessment agencies:a) Standard & Poor’s;b) Moody’s;c) Fitch Ratings; andd) Such other rating agencies as maybe approved by the Monetary Board.Domestic credit assessment agencies:a) PhilRatings; andb) Such other rating agencies as maybe approved by the Monetary Board.56. The tables below set out the mappingof ratings given by the recognized creditassessment agencies for purposes ofdetermining the appropriate risk weights:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 19

APP. Q-4611.12.31Agency INTERNATIONAL RATINGSS&P AAA AA+ AA AA- A+ A A-Moody’s Aaa Aa1 Aa2 Aa3 A1 A2 A3Fitch AAA AA+ AA AA- A+ A A-Agency DOMESTIC RATINGSPhilRatings AAA Aa+ Aa Aa- A+ A A-Agency INTERNATIONAL RATINGSS&P BBB+ BBB BBB- BB+ BB BB- B+Moody’s Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1Fitch BBB+ BBB BBB- BB+ BB BB- B+Agency DOMESTIC RATINGSPhilRatings Baa+ Baa Baa- Ba+ Ba Ba- B+Agency INTERNATIONAL RATINGSS&P B B-Moody's B2 B3Fitch B B-AgencyPhilRatings B B-DOMESTIC RATINGS57. The BSP will issue the mapping ofratings of other rating agencies as soon as itis recognized by the BSP for regulatorycapital purposes.National Rating Systems58. With prior BSP approval,international credit rating agencies may havenational rating systems developedexclusively for use in the Philippines usingthe Philippine sovereign as reference highestcredit quality anchor.Multiple Assessments59. If an exposure has only one ratingby any of the BSP recognized creditassessment agencies, that rating shall beused to determine the risk weight of theexposure; in cases where there are two ormore ratings which map into different riskweights, the higher of the two lowest riskweights should be used.Issuer versus issue assessments60. Any reference to credit rating shallrefer to issue-specific rating; the issuer ratingmay be used only if the exposure being riskweightedis:a) an unsecured senior obligation ofthe issuer and is of the same denominationapplicable to the issuer rating (e.g., localcurrency issuer rating may be used for riskweighting local currency denominatedsenior claims);b) short-term; andc) in cases of guarantees.61. For loans, risk weighting shalldepend on either the rating of the borroweror the rating of the unsecured seniorobligation of the borrower: Provided, Thatin case of the latter, the loan is of the samecurrency denomination as the unsecuredQ RegulationsAppendix Q-46 - Page 20Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31senior obligation.Domestic versus international debtissuances62. Domestic debt issuances may berated by BSP-recognized domestic creditassessment agencies or by internationalcredit assessment agencies which havedeveloped a national rating systemacceptable to the BSP. Internationallyissueddebt obligations shall be rated byBSP-recognized international creditassessment agencies only.Level of application of the assessment63. External credit assessments for oneentity within a corporate group cannot beused to proxy for the credit assessment ofother entities within the same group. Suchother entities should secure their ownratings.Part IV. Credit Derivatives1. This Part sets out the capitaltreatment for credit derivatives. Banks mayuse credit derivatives to mitigate its creditrisks or to acquire credit risks. For creditderivatives that are used as credit riskmitigants (CRM), the general requirementsfor the use of CRM techniques inparagraphs 21 to 25, Part III.B, have to besatisfied, in addition to the specificoperational requirements for creditderivatives in paragraphs 8 to 14.2. The contents of this Part are justthe general rules to be followed incomputing capital requirements for creditderivatives. A bank, therefore, is expectedto consult the BSP-SES when there isuncertainty about the computation ofcapital requirements, or even aboutwhether a given transaction should betreated under the credit derivativesframework.A. Definitions and general terminology3. Credit derivative – a contractwherein one party called the protectionbuyer or credit risk seller transfers the creditrisk of a reference asset or assets issued bya reference entity or entities, which it mayor may not own, to another party called theprotection seller or credit risk buyer. Inreturn, the protection buyer pays a premiumor interest-related payments to the protectionseller reflecting the underlying credit risk ofthe reference asset/s. Credit derivatives mayrefer to credit default swaps (CDS), totalreturn swaps (TRS), and credit-linked notes(CLN) and similar products.4. Credit default swap – a creditderivative wherein the protection buyer mayexchange the reference asset or anydeliverable obligation of the reference entityfor cash equal to a specified amount, or getcompensated to the extent of the differencebetween the par value and market value ofthe asset upon the occurrence of a definedcredit event.5. Total return swap – a creditderivative wherein the protection buyerexchanges the actual collections andvariations in the prices of the reference assetwith the protection seller in return for a fixedpremium.6. CLn – a pre-funded credit derivativewherein the note holder acts as a protectionseller while the note issuer is the protectionbuyer. As such, the repayment of theprincipal to the note holder is contingentupon the non-occurrence of a defined creditevent. All references to CLNs shall be takento generically include similar instruments,such as credit-linked deposits (CLDs).7. Special purpose vehicle – refers toan entity specifically established to issueCLNs of a single, homogeneous risk classthat are fully collateralized as to principalby eligible collateral instruments listed inparagraph 34, Part III.B, and which areManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 21

APP. Q-4611.12.31purchased out of the proceeds of the noteissuance.B. Operational requirements for creditderivatives8. A credit derivative must represent adirect claim on the protection seller andmust be explicitly referenced to specificexposures or a pool of exposures, so thatthe extent of the cover is clearly defined andincontrovertible. Other than non-paymentby a protection buyer of money due inrespect of the credit derivative contract, itmust be irrevocable; there must be no clausein the contract that would allow theprotection seller unilaterally to cancel thecredit cover or that would increase theeffective cost of cover as a result ofdeteriorating credit quality in the hedgedexposure. It must also be unconditional;there should be no clause in the creditderivative contract outside the directcontrol of the protection buyer that couldprevent the protection seller from beingobliged to pay out in a timely manner inthe event of a defined credit event.9. The credit events specified by thecontracting parties must at a minimumcover:a) failure to pay the amounts dueunder terms of the underlying obligationthat are in effect at the time of such failure(with a grace period that is closely in linewith the grace period in the underlyingobligation);b) bankruptcy, insolvency or inabilityof the obligor to pay its debts, or its failureor admission in writing of its inabilitygenerally to pay its debts as they becomedue, and analogous events; andc) restructuring of the underlyingobligation involving forgiveness orpostponement of principal, interest or feesthat results in a credit loss event (i.e.,charge-off, specific provision or othersimilar debit to the profit and lossaccount).10. The credit derivative shall notterminate prior to expiration of any graceperiod required for a default on theunderlying obligation to occur as a result ofa failure to pay, subject to the provisions ofparagraph 52 of Part III.B.11. Credit derivatives allowing forcash settlement are recognized for capitalpurposes insofar as a robust valuationprocess is in place in order to estimateloss reliably. There must be a clearlyspecified period for obtaining post-creditevent valuations of the underlyingobligation.12. If the protection buyer’s right orability to transfer the underlying obligationto the protection seller is required forsettlement, the terms of the underlyingobligation must provide that any requiredconsent to such transfer may not beunreasonably withheld.13.The identity of the partiesresponsible for determining whether acredit event has occurred must be clearlydefined. This determination must not bethe sole responsibility of the protectionseller. The bank as protection buyer musthave the right/ability to inform theprotection seller of the occurrence of acredit event.14. Asset mismatches (underlyingobligation is different from the obligationused for purposes of determining cashsettlement or the deliverable obligation,or from the obligation used for purposesof determining whether a credit event hasoccurred) are permissible if:a) the obligation used for purposesof determining cash settlement or thedeliverable obligation, or the obligationused for purposes of determining whethera credit event has occurred ranks paripassu with or is junior to the underlyingQ RegulationsAppendix Q-46 - Page 22Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31obligation; andb) both obligations share the sameobligor (i.e., the same legal entity) andlegally enforceable cross-default or crossaccelerationclauses are in place.C. Capital treatment for protection buyers15. A bank that enters into a creditderivative transaction as a protection buyerin order to hedge an existing exposure inthe banking book may only get capital reliefif all the general requirements for the use ofCRM techniques in paragraphs 21 to 25,Part III.B and the conditions in paragraphs8 to 14 are satisfied. In addition, only theeligible guarantors listed in paragraph 47,Part III.B are considered as eligibleprotection sellers.16. If all of the conditions in paragraph15 are satisfied, banks that are protectionbuyers may apply the risk weight of theprotection seller to the protected portion ofthe exposure being hedged. The risk weightof the protection seller should therefore belower than the risk weight of the exposurebeing hedged for capital relief to berecognized. Exposures that are protectedthrough the issuance of CLNs will be treatedas transactions collateralized by cash and azero percent (0%) risk weight is applied tothe protected portion. The uncoveredportion shall retain the risk weight of thebank’s underlying counterparty.17. The protected portion of anexposure is measured as follows:a) The fixed amount, if such is to bepaid upon the occurrence of a credit event;orb) The notional value of the contract ifeither (1) par is to be paid in exchange forphysical delivery of the reference asset, or(2) par less market value of the asset is to bepaid upon the occurrence of a credit event.18. A bank may obtain credit protectionfor a basket of reference entities where thecontract terminates and pays out on the firstentity to default. In this case, the bank maysubstitute the risk weight of the protectionseller for the risk weight of the asset withinthe basket with the lowest risk-weightedamount, but only if the notional amount isless than or equal to the notional amountof the credit derivative.19. Where the contract terminates andpays out on the n th (other than the first)entity to default, the bank will only be ableto recognize any reductions in the riskweight of the underlying asset if (n-1) thdefault-protection has also been obtainedor when n-1 of the assets within the baskethas already defaulted.20. Where the contract is referenced toentities in the basket proportionately,reductions in the risk weight will only applyto the extent of the underlying asset’s shareof protection in the contract.21. When a bank conducts an internalhedge using a credit derivative (i.e., hedgingthe credit risk of an exposure in the bankingbook with a credit derivative booked in thetrading book), in order for the bank toreceive any reduction in the capitalrequirement for the exposure in the bankingbook, the credit risk in the trading bookmust be transferred to an outside third party(i.e., an eligible protection seller).22. Where a bank buys creditprotection through a TRS and records thenet payments received on the swap as netincome, but does not record offsettingdeterioration in the value of the asset thatis protected (either through reductions infair value or by an addition to reserves),the credit protection will not be recognized.23. Materiality thresholds on paymentsbelow which no payment is made in theevent of loss are equivalent to retained firstloss positions and must be deducted in fullfrom the capital of the bank buying the creditprotection.24. Where the credit protection isdenominated in a currency different fromManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 23

APP. Q-4611.12.31that in which the exposure is denominated– i.e., there is a currency mismatch – theprotected portion of the exposure will bereduced by the application of a haircut, asfollows:Ga = G x (1 – H fx )Where:Ga = adjusted protected portion of theexposureG = protected portion of the exposure priorto haircutH fx = haircut appropriate for currencymismatch between the credit protectionand underlying obligation set at eightpercent (8%) (based on a 10-businessday holding period and daily markingto market)25. Where a maturity mismatch occursbetween the credit protection and theunderlying exposure, the protected portionof the exposure adjusted for maturitymismatch will be computed according toparagraph 50 to 54, Part III.B.D. Capital treatment for protection sellers26. Where a bank is a protection sellerin a CDS or TRS transaction, it mustcalculate a capital requirement on thereference asset as if it were a directinvestor in the reference asset. The riskweight of the reference asset is multipliedby the nominal amount of the protectionprovided by the credit derivative to obtainthe risk-weighted exposure.27. For a bank holding a CLN, creditexposure is acquired on two fronts. Assuch, the on-balance sheet exposurearising from the note should be weightedby adding the risk weights of the referenceentity and the risk weight of the noteissuer. The amount of exposure is thecarrying amount of the note. If the CLNprincipal is fully collateralized by aneligible collateral listed in paragraph 34,Part III.B, and which satisfies therequirements in paragraphs 27 to 31, PartIII.B, the risk weight of the note issuer issubstituted with the risk weight associatedwith the relevant collateral.28. When the credit derivative isreferenced to a basket of reference entitiesand the contract terminates and pays outon the first entity to default in the basket,capital should be held to consider thecumulative risk of all the reference entitiesin the basket. This means that the riskweights of all the reference entities areadded up and multiplied by the amountof the protection provided by the creditderivative to obtain the risk-weightedexposure to the basket. However, the riskweightedexposure is capped at ten (10)times the protection provided under thecontract. Accordingly, the maximumcapital charge is 100% of the protectionprovided under the contract. Themultiplier ten (10) is the reciprocal of theBSP-required minimum CAR of tenpercent (10%). For CLNs, the risk weightof the issuer is likewise included in thesumming of the risk weights.29. When the contract terminates andpays out on the n th (other than the first)entity to default, the treatment above shallapply except that in aggregating the riskweights of the reference entities, the riskweight/s of the n-1 lowest risk-weightedentity/ies is/are excluded from thecomputation. For CLNs, the risk weightof the issuer is likewise included in thesumming of the risk weights.30. When a first or an n th -to-defaultcredit derivative has an external credit ratingacceptable to the BSP, the risk weight inparagraph 21, Part V.F will be applied.31. A contract that is referenced toentities in the basket proportionatelyshould be risk-weighted according to eachreference entity’s share of protectionunder the contract.Q RegulationsAppendix Q-46 - Page 24Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31E. Credit derivatives in the trading book32. The following describes thepositions to be reported for credit derivativetransactions for purposes of calculatingspecific risk and general market risk chargesunder the standardized approach.33. A CDS creates a notional positionin the specific risk of the referenceobligation. A TRS creates notional positionson the specific and general market risks ofthe reference obligation, and an oppositenotional position on a zero coupongovernment security representing the fixedpayments or premium under the TRS. A CLNcreates a notional position in the specificrisk of the reference obligation, a positionon the specific risk associated with theissuer, and a position on the general marketrisk of the note.Specific risk34. The specific risk position/s on thereference obligation/s created by creditderivatives are reported as short positionsby protection buyers and long positions byprotection sellers. In addition, holders ofCLNs should report a long position on thespecific risk of the note issuer.35. The protection buyer in a first-todefaulttransaction should report a shortposition in the reference obligation with thelowest specific risk charge. A protectionbuyer in an n th (other than the first)-to-defaulttransaction shall only be allowed to reporta short position in a reference obligationonly if n-1 obligations in the reference baskethas/have already defaulted.36. When a credit derivative isreferenced to multiple entities and thecontract terminates and pays out on the firstobligation to default in the basket, thetransaction should be reported by theprotection seller as long positions in eachof the reference obligations in the basket. ACLN should likewise be reported as a longposition on the note issuer. The total capitalcharge is capped at the notional amount ofthe derivative or, in the case of a CLN, thecarrying amount of the note.37. When the contract terminates andpays out on the n th (other than the first) entityto default in the basket, the treatment aboveshall apply except that the protection sellermay exclude the long position/s on n-1reference obligations with the lowest riskweightedexposures in its report. A CLNshould likewise be reported as a longposition on the note issuer. The total capitalcharge is capped at the notional amount ofthe derivative or, in the case of a CLN, thecarrying amount of the note.38. When an n th -to-default creditderivative has an external credit ratingacceptable to the BSP, the specific riskweights in Part VI.B will be applied.39. When the contract is referenced tomultiple obligations under a proportionatestructure, positions in the referenceobligations should be reported according totheir respective proportions in the contract.General market risk40. A protection buyer/seller in a TRSshould report a short/long notional positionon the reference obligation and a long/shortnotional position on a zero coupongovernment security representing the fixedpayment under the contract.41. A protection buyer/seller in a CLNshould report a short/long position on thenote.Counterparty credit risk42. CDS and TRS transactions in thetrading book attract counterparty credit riskcharges. A five percent (5%) add-on factorfor the computation of the potential futurecredit exposure shall be used by bothprotection buyers and protection sellers ifthe reference obligation has an externalManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 25

APP. Q-4611.12.31credit rating of at least BBB- or its equivalent.A ten percent (10%) add-on factor appliesto all other reference obligations. However,a protection seller in a CDS shall only besubject to the add-on factor if it is subject tocloseout upon the insolvency of theprotection buyer while the underlying is stillsolvent. The add-on in this case should becapped to the amount of unpaid premiums.43. Where the credit derivative is a firstto default transaction, the add-on will bedetermined by the lowest credit qualityunderlying in the basket, i.e., if there are anynon-investment grade or unrated items inthe basket, the ten percent (10%) add-onshould be used. For second and subsequentto default transactions, underlying assetsshould continue to be allocated accordingto the credit quality, i.e., the second lowestcredit quality will determine the add-on fora second to default transaction, etc.44. Where the credit derivative isreferenced proportionately to multipleobligations, the add-on factor will follow theadd-on factor applicable for the obligationwith the biggest share. If the protection isequally proportioned, the highest add-onfactor should be used.Part V. Securitization1. Banks must apply the securitizationframework for determining regulatory capitalrequirements on their securitizationexposures. Securitization exposures caninclude but are not restricted to thefollowing: asset-backed securities, mortgagebackedsecurities, credit enhancements,liquidity facilities, interest rate or currencyswaps, and credit derivatives. Underlyinginstruments in the pool being securitizedmay include but are not restricted to thefollowing: loans, commitments, assetbackedand mortgage-backed securities,corporate bonds, equity securities, andprivate equity investments.2. Since securitizations may bestructured in many different ways, the capitaltreatment of a securitization exposure mustbe determined on the basis of its economicsubstance rather than its legal form. Thecontents of this Part are just the general rulesto be followed in computing capitalrequirements for securitization exposures.A bank should therefore consult the BSP-SES when there is uncertainty about thecomputation of capital requirements, oreven about whether a given transactionshould be considered a securitization.A. Definitions and general terminology3. Traditional securitization – astructure where the cash flow from anunderlying pool of exposures is used toservice at least two (2) different stratifiedrisk positions or tranches reflecting differentdegrees of credit risk. Payments to theinvestors depend upon the performance ofthe specified underlying exposures, asopposed to being derived from anobligation of the entity originating thoseexposures. The stratified/tranched structuresthat characterize securitizations differ fromordinary senior/subordinated debtinstruments in that junior securitizationtranches can absorb losses withoutinterrupting contractual payments to moresenior tranches, whereas subordination ina senior/subordinated debt structure is amatter of priority of rights to the proceedsof liquidation.4. Synthetic securitization – a structurewith at least two (2) different stratified riskpositions or tranches that reflect differentdegrees of credit risk where credit risk ofan underlying pool of exposures istransferred, in whole or in part, through theuse of funded (e.g., credit-linked notes) orunfunded (e.g., credit default swaps) creditderivatives or guarantees that serve to hedgethe credit risk of the portfolio. Accordingly,the investors’ potential risk is dependentQ RegulationsAppendix Q-46 - Page 26Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31upon the performance of the underlyingpool.5. Originating bank – a bank thatoriginates directly or indirectly underlyingexposures included in the securitization.6. Clean-up call – an option thatpermits the securitization exposures to becalled before all of the underlyingexposures or securitization exposures havebeen repaid. In the case of traditionalsecuritizations, this is generallyaccomplished by repurchasing theremaining securitization exposures oncethe pool balance or outstanding securitieshave fallen below some specified level. Inthe case of a synthetic transaction, the cleanupcall may take the form of a clause thatextinguishes the credit protection.7. Credit enhancement – a contractualarrangement in which the bank retains orassumes a securitization exposure and, insubstance, provides some degree of addedprotection to other parties to thetransaction.8. Early amortization provisions –mechanisms that, once triggered, allowinvestors to be paid out prior to theoriginally stated maturity of the securitiesissued. For risk-based capital purposes, anearly amortization provision will beconsidered either controlled or noncontrolled.A controlled early amortizationprovision must meet all of the followingconditions:a) The bank must have an appropriatecapital/liquidity plan in place to ensure thatit has sufficient capital and liquidityavailable in the event of an earlyamortization;b) Throughout the duration of thetransaction, including the amortizationperiod, there is the same pro rata sharingof interest, principal, expenses, losses andrecoveries based on the bank’s andinvestors’ relative shares of the receivablesoutstanding at the beginning of each month;c) The bank must set a period foramortization that would be sufficient for atleast ninety percent (90%) of the total debtoutstanding at the beginning of the earlyamortization period to have been repaid orrecognized as in default; andd) The pace of repayment should notbe any more rapid than would be allowedby straight-line amortization over the periodset out in criterion (c).An early amortization provision thatdoes not satisfy the conditions for acontrolled early amortization provision willbe treated as non-controlled earlyamortization provision.9. Eligible liquidity facilities – an offbalancesheet securitization exposure shallbe treated as an eligible liquidity facility ifthe following minimum requirements aresatisfied:a) The facility documentation mustclearly identify and limit the circumstancesunder which it may be drawn. Draws underthe facility must be limited to the amountthat is likely to be repaid fully from theliquidation of the underlying exposures andany seller-provided credit enhancements. Inaddition, the facility must not cover anylosses incurred in the underlying pool ofexposures prior to a draw, or be structuredsuch that draw-down is certain (as indicatedby regular or continuous draws);b) The facility must be subject to anasset quality test that precludes it from beingdrawn to cover credit risk exposures thatare considered non-performing underexisting BSP regulations. In addition,liquidity facilities should only fundexposures that are externally ratedinvestment grade at the time of funding;c) The facility cannot be drawn afterall applicable (e.g., transaction-specific andprogram-wide) credit enhancements fromwhich the liquidity would benefit have beenManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 27

APP. Q-4611.12.31exhausted; andd) Repayment of draws on the facility(i.e., assets acquired under a purchaseagreement or loans made under a lendingagreement) must not be subordinated to anyinterests of any note holder in the programor subject to deferral or waiver.10. Eligible servicer cash advancefacilities – cash advance that may beprovided by servicers to ensure anuninterrupted flow of payments to investors.The servicer should be entitled to fullreimbursement and this right is senior toother claims on cash flows from theunderlying pool of exposures.11. Excess spread – generally defined asgross finance charge collections and otherincome received by the trust or specialpurpose entity (SPE, specified in paragraph13) minus certificate interest, servicing fees,charge-offs, and other senior trust or SPEexpenses.12. Implicit support – arises when abank provides support to a securitization inexcess of its predetermined contractualobligation.13. Special purpose entity – acorporation, trust, or other entity organizedfor a specific purpose, the activities of whichare limited to those appropriate toaccomplish the purpose of the SPE, and thestructure of which is intended to isolate theSPE from the credit risk of an originator orseller of exposures. SPEs are commonly usedas financing vehicles in which exposures aresold to a trust or similar entity in exchangefor cash or other assets funded by debtissued by the trust.B. Operational requirements for therecognition of risk transference intraditional securitizations14. An originating bank may excludesecuritized exposures from the calculationof risk-weighted assets only if all of thefollowing conditions have been met. Banksmeeting these conditions, however, muststill hold regulatory capital against anysecuritization exposures they retain.a) Significant credit risk associatedwith the securitized exposures has beentransferred to third parties.b) The transferor does not maintaineffective or indirect control over thetransferred exposures. The assets are legallyisolated from the transferor in such a way(e.g., through the sale of assets or throughsubparticipation) that the exposures are putbeyond the reach of the transferor and itscreditors, even in bankruptcy orreceivership. These conditions must besupported by an opinion provided by aqualified legal counsel.The transferor is deemed to havemaintained effective control over thetransferred credit risk exposures if it:i. is able to repurchase from thetransferee the previously transferredexposures in order to realize their benefits;orii. is obligated to retain the risk of thetransferred exposures.The transferor’s retention of servicingrights to the exposures will not necessarilyconstitute indirect control of the exposures.c) The securities issued are notobligations of the transferor. Thus, investorswho purchase the securities only haveclaim to the underlying pool of exposures.d) The transferee is an SPE and theholders of the beneficial interests in thatentity have the right to pledge or exchangethem without restriction.e) Clean-up calls must satisfy theconditions set out in paragraph 17.f) The securitization does not containclauses that (i) require the originating bankto alter systematically the underlyingexposures such that the pool’s weightedaverage credit quality is improved unlessQ RegulationsAppendix Q-46 - Page 28Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31this is achieved by selling assets toindependent and unaffiliated third partiesat market prices; (ii) allow for increases in aretained first loss position or creditenhancement provided by the originatingbank after the transaction’s inception; or (iii)increase the yield payable to parties otherthan the originating bank, such as investorsand third-party providers of creditenhancements, in response to a deteriorationin the credit quality of the underlying pool.C. Operational requirements for therecognition of risk transference insynthetic securitizations15. For synthetic securitizations, the useof CRM techniques (i.e., collateral,guarantees and credit derivatives) forhedging the underlying exposure may berecognized for risk-based capital purposesonly if the conditions outlined below aresatisfied:a) Credit risk mitigants must complywith the requirements as set out in Part III.Band Part IV of this Framework.b) Eligible collateral is limited to thatspecified in paragraph 34, Part III.B. Eligiblecollateral pledged by SPEs may berecognized.c) Eligible guarantors are defined inparagraph 47, Part III.B. SPEs are notrecognized as eligible guarantors in thesecuritization framework.d) Banks must transfer significantcredit risk associated with the underlyingexposure to third parties.e) The instruments used to transfercredit risk must not contain terms orconditions that limit the amount of creditrisk transferred, such as those providedbelow:i. Clauses that materially limit thecredit protection or credit risk transference(e.g., significant materiality thresholdsbelow which credit protection is deemednot to be triggered even if a credit eventoccurs or those that allow for thetermination of the protection due todeterioration in the credit quality of theunderlying exposures);ii. Clauses that require the originatingbank to alter the underlying exposures toimprove the pool’s weighted average creditquality;iii. Clauses that increase the banks’cost of credit protection in response todeterioration in the pool’s quality;iv. Clauses that increase the yieldpayable to parties other than the originatingbank, such as investors and third-partyproviders of credit enhancements, inresponse to a deterioration in the creditquality of the reference pool; andv. Clauses that provide for increases ina retained first loss position or creditenhancement provided by the originatingbank after the transaction’s inception.f) An opinion must be obtained froma qualified legal counsel that confirms theenforceability of the contracts in all relevantjurisdictions.g) Clean-up calls must satisfy theconditions set out in paragraph 17.16. For synthetic securitizations, theeffect of applying CRM techniques forhedging the underlying exposure are treatedaccording to Part III.B and Part IV of thisFramework. In case there is a maturitymismatch, the capital requirement will bedetermined in accordance with paragraphs50 to 54, Part III.B. When the exposures inthe underlying pool have different maturities,the longest maturity must be taken as thematurity of the pool. Maturity mismatchesmay arise in the context of syntheticsecuritizations when, for example, a bankuses credit derivatives to transfer part or allof the credit risk of a specific pool of assetsto third parties. When the credit derivativesunwind, the transaction will terminate. ThisManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 29

APP. Q-4611.12.31implies that the effective maturity of thetranches of the synthetic securitization maydiffer from that of the underlying exposures.Originating banks of syntheticsecuritizations with such maturitymismatches must deduct all retainedpositions that are unrated or rated belowinvestment grade. Accordingly, whendeduction is required, maturity mismatchesare not taken into account. For all othersecuritization exposures, the bank mustapply the maturity mismatch treatment setforth in paragraphs 50 to 54, Part III.B.D. Operational requirements andtreatment of clean-up calls17. For securitization transactions thatinclude a clean-up call, no capital will berequired due to the presence of a clean-upcall if the following conditions are met: (i)the exercise of the clean-up call must notbe mandatory, in form or in substance, butrather must be at the discretion of theoriginating bank; (ii) the clean-up call mustnot be structured to avoid allocating lossesto credit enhancements or positions held byinvestors or otherwise structured to providecredit enhancement; and (iii) the clean-upcall must only be exercisable when tenpercent (10%) or less of the originalunderlying portfolio, or securities issuedremain, or, for synthetic securitizations,when ten percent (10%) or less of theoriginal reference portfolio value remains.18. Securitization transactions thatinclude a clean-up call that does not meetall of the criteria stated in paragraph 17 resultin a capital requirement for the originatingbank. For a traditional securitization, theunderlying exposures must be treated as ifthey were not securitized. Additionally,banks must not recognize in regulatorycapital any gain-on-sale, as defined inparagraph 23. For synthetic securitization,the bank purchasing protection must holdcapital against the entire amount of thesecuritized exposures as if they did notbenefit from any credit protection. Sametreatment applies for syntheticsecuritization that incorporates a call, otherthan a clean-up call, that effectivelyterminates the transaction and thepurchased credit protection on a specifieddate.19. If a clean-up call, when exercised,is found to serve as a credit enhancement,the exercise of the clean-up call must beconsidered a form of implicit supportprovided by the bank and must be treatedin accordance with paragraph 26.E. Operational requirements for use ofexternal credit assessments20. The following operational criteriaconcerning the use of external creditassessments apply in the securitizationframework:a) To be eligible for risk-weightingpurposes, the external credit assessmentmust take into account and reflect the entireamount of credit risk exposure the bankhas with regard to all payments owed toit. For example, if a bank is owed bothprincipal and interest, the assessment mustfully take into account and reflect the creditrisk associated with timely repayment ofboth principal and interest.b) The external credit assessmentsmust be from an eligible ECAI asrecognized by the bank’s nationalsupervisor in accordance with Part III.C.An eligible credit assessment must bepublicly available. In other words, a ratingmust be published in an accessible formand included in the ECAI’s transitionmatrix. Consequently, ratings that are madeavailable only to the parties to a transactiondo not satisfy this requirement.c) Eligible ECAIs must have ademonstrated expertise in assessingsecuritizations, which may be evidencedby strong market acceptance.Q RegulationsAppendix Q-46 - Page 30Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31d) A bank must apply external creditassessments from eligible ECAIsconsistently across a given type ofsecuritization exposure. Furthermore, abank cannot use the credit assessmentsissued by one ECAI for one or moretranches and those of another ECAI forother positions (whether retained orpurchased) within the same securitizationstructure that may or may not be rated bythe first ECAI. Where two or more eligibleECAIs can be used and these assess thecredit risk of the same securitizationexposure differently, paragraph 59 of PartIII.C will apply.e) Where CRM is provided directlyto an SPE by an eligible guarantor definedin paragraph 47 of Part III.B and isreflected in the external credit assessmentassigned to a securitization exposure(s),the risk weight associated with thatexternal credit assessment should be used.In order to avoid any double counting, noadditional capital recognition is permitted.If the CRM provider is not an eligibleguarantor, the covered securitizationexposures should be treated as unrated.f) In the situation where a credit riskmitigant is not obtained by the SPE but ratherapplied to a specific securitization exposurewithin a given structure (e.g., ABS tranche),the bank must treat the exposure as if it isunrated and then use the CRM treatmentoutlined in Part III.B to recognize the hedge.F. Risk-weighting21. The risk-weighted asset amount ofa securitization exposure is computed bymultiplying the amount of the position bythe appropriate risk weight determined inaccordance with the following table. For offbalancesheet exposures, banks must applya credit conversion factor (CCF) and thenrisk weight the resultant credit equivalentamount.Credit AAA to A+ to A- BBB+to Below BBBassessment1 AA- BBB- and unratedRisk weight 20% 50% 100% Deductionfrom capital(50% fromTier 1 and50% fromTier 2)22. The capital treatment of implicitsupport, liquidity facilities, securitizationsof revolving exposures, and credit riskmitigants are identified separately.23. Banks must deduct from Tier 1capital any increase in equity capitalresulting from a securitization transaction,such as that associated with expected futuremargin income resulting in a gain-on-salethat is recognized in regulatory capital. Suchan increase in capital is referred to as a“gain-on-sale” for the purposes of thesecuritization framework.24. Credit enhancing interest only, netof the amount that must be deducted fromTier 1 as in paragraph 23, are to be deductedfifty percent (50%) from Tier 1 capital andfifty percent (50%) from Tier 2 capital.25. Deductions from capital may becalculated net of any specific provisionstaken against the relevant securitizationexposures.26. When a bank provides implicitsupport to a securitization, it must, at aminimum, hold capital against all of theexposures associated with the securitizationtransaction as if they had not beensecuritized. Additionally, banks would notbe permitted to recognize in regulatorycapital any gain-on-sale, as defined inparagraph 23. Furthermore, the bank isrequired to disclose publicly that (a) it hasprovided non-contractual support and (b) thecapital impact of doing so.27. As a general rule, off-balance sheetsecuritization exposures will receive a CCFof 100%, except in the cases below.1The notations follow the rating symbols used by Standard & Poor's. The mapping of ratings of all recognized external ratingagencies is in Part III.CManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 31

APP. Q-4611.12.3128. A CCF of twenty percent (20%)and fifty percent (50%) will be applied toeligible liquidity facilities as defined inparagraph 9 above with original maturityof one year or less and more than one year,respectively. However, if an externalrating of the facility itself is used for riskweighting the facility, a 100% CCF mustbe applied. A zero percent (0%) CCF maybe applied to eligible liquidity facilitiesthat are only available in the event of ageneral market disruption (i.e.,whereupon more than one SPE acrossdifferent transactions are unable to rollover maturing commercial paper, and thatinability is not the result of an impairmentin the SPE’s credit quality or in the creditquality of the underlying exposures). Toqualify for this treatment, the conditionsprovided in paragraph 9 must be satisfied.Additionally, the funds advanced by thebank to pay holders of the capital marketinstruments (e.g., commercial paper)when there is a general market disruptionmust be secured by the underlying assets,and must rank at least pari passu with theclaims of holders of the capital marketinstruments.29. A CCF of zero percent (0%) willbe applied to undrawn amount of eligibleservicer cash advance facilities, as definedin paragraph 10 above, that areunconditionally cancellable without priornotice.30. An originating bank is required tohold capital against the investors’ interest(i.e., against both the drawn and undrawnbalances related to the securitizedexposures) when:a) It sells exposures into a structurethat contains an early amortizationfeature; andb) The exposures sold are of arevolving nature. These involve exposureswhere the borrower is permitted to varythe drawn amount and repayments withinan agreed limit under a line of credit (e.g.,credit card receivables and corporate loancommitments).31. Originating banks, though, are notrequired to calculate a capital requirementfor early amortizations in the followingsituations:a) Replenishment structures wherethe underlying exposures do not revolveand the early amortization ends the abilityof the bank to add new exposures;b) Transactions of revolving assetscontaining early amortization features thatmimic term structures (i.e., where the riskof the underlying facilities does not returnto the originating bank);c) Structures where a banksecuritizes one or more credit line(s) andwhere investors remain fully exposed tofuture draws by borrowers even after anearly amortization event has occurred;andd) The early amortization clause issolely triggered by events not related tothe performance of the securitizedassets or the selling bank, such asmaterial changes in tax laws orregulations.32. As described below, the CCFsdepend upon whether the earlyamortization repays investors through acontrolled or non-controlledmechanism. They also differ accordingto whether the securitized exposuresare uncommitted retail credit lines (e.g.,credit card receivables) or other creditlines (e.g., revolving corporatefacilities). A line is considereduncommitted if it is unconditionallycancelable without prior notice.33. For uncommitted retail credit lines(e.g., credit card receivables) that haveeither controlled or non-controlled earlyamortization features, banks mustQ RegulationsAppendix Q-46 - Page 32Manual of Regulations for Non-Bank Financial Institutions

compare the three-month averageexcess spread defined in paragraph 11to the point at which the bank isrequired to trap excess spread aseconomically required by the structure(i.e., excess spread trapping point). Incases where such a transaction does notrequire excess spread to be trapped, theAPP. Q-4611.12.31trapping point is deemed to be 4.5percentage points.34. The bank must divide the excessspread level by the transaction’s excessspread trapping point to determine theappropriate segments and apply thecorresponding conversion factors, asoutlined in the following tables:Controlled Non-controlled3-month average Credit conversion 3-month average Credit conversionexcess spread- factor (CCF) excess spread- factor (CCF)credit conversion credit conversionfactor (CCF) factor (CCF)Uncommitted Committed Uncommitted CommittedRetail credit lines 133.33% of 90% CCF 133.33% of 100% CCFtrapping point or trapping point ormore – 0% CCF more – 0% CCFless than 133.33% less than 133.33%to 100% of trappingto 100% of trappingpoint – 1% CCF point – 5% CCFless than 100% to less than 100% to75% of trapping 75% of trappingpoint – 2% CCF point – 15% CCFless than 75% toless than 75% to50% of trapping 50% of trappingpoint - 10% CCFpoint - 50% CCFless than 50% toless than 50% of25% of trapping trapping point -point - 20% CCF100% CCFless than 25% oftrapping point -40%Non-retail 90% CCF 90% CCF 100% CCF 100%CCFcredit lines35. All other securitized revolvingexposures with controlled andnon-controlled early amortization featureswill be subject to CCFs of ninety percent(90%) and 100%, respectively, against theoff-balance sheet exposures.36. The CCF will be applied to theamount of the investors’ interest. Theresultant credit equivalent amount shallthen be applied a risk weight applicableto the underlying exposure type, as if theexposures had not been securitized.37. For a bank subject to the earlyamortization treatment, the total capitalcharge for all of its positions will besubject to a maximum capital requirement(i.e., a ‘cap’) equal to the greater of (i) thatrequired for retained securitizationexposures, or (ii) the capital requirementthat would apply had the exposures notbeen securitized. In addition, banks mustdeduct the entire amount of any gain-onsaleand credit enhancing interest onlyarising from the securitization transactionManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 33

APP. Q-4611.12.31in accordance with paragraphs 23 and 25.G. Credit risk mitigation38. The treatment below applies to abank that has obtained or given a creditrisk mitigant on a securitization exposure.Credit risk mitigants include collateral,guarantees, and credit derivatives.Collateral in this context refers to that usedto hedge the credit risk of a securitizationexposure rather than the underlyingexposures of the securitizationtransaction.Collateral39. Eligible collateral is limited to thatrecognized in paragraph 34, Part III.B.Collateral pledged by SPEs may berecognized.Guarantees and credit derivatives40. Credit protection provided by theentities listed in paragraph 47, Part III.Bmay be recognized. SPEs cannot berecognized as eligible guarantors.41.Where guarantees or creditderivatives fulfill the minimum operationalrequirements as specified in Part III.B andPart IV, respectively, banks can takeaccount of such credit protection incalculating capital requirements forsecuritization exposures.42.Capital requirements for thecollateralized or guaranteed/protectedportion will be calculated according toPart III.B and Part IV.43. A bank other than the originatorproviding credit protection to asecuritization exposure must calculate acapital requirement on the coveredexposure as if it were an investor in thatsecuritization. A bank providingprotection to an unrated creditenhancement must treat the creditprotection provided as if it were directlyholding the unrated credit enhancement.Maturity mismatches44.For the purpose of settingregulatory capital against a maturitymismatch, the capital requirement willbe determined in accordance withparagraphs 50 to 54, Part III.B, exceptfor synthetic securitizations which willbe determined in accordance withparagraph 16.Part VI. Market risk-weighted assets1. Market risk is defined as the riskof losses in on- and off-balance sheetpositions arising from movements inmarket prices. The risks addressed in theseguidelines are:a) The risks pertaining to interest raterelatedinstruments and equities in thetrading book; andb) Foreign exchange risk throughoutthe bank.A. Definition of the trading book2. A trading book consists ofpositions in financial instruments heldeither with trading intent or in order tohedge other elements of the tradingbook. To be eligible for trading bookcapital treatment, financial instrumentsmust either be free of any restrictivecovenants on their tradability or ableto be hedged completely. In addition,positions should be frequently andaccurately valued, and the portfolioshould be actively managed.3. A financial instrument is anycontract that gives rise to both afinancial asset of one entity and afinancial liability or equity instrumentof another entity. Financial instrumentsinclude both primary financialinstruments (or cash instruments) andQ RegulationsAppendix Q-46 - Page 34Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31derivative financial instruments. Afinancial asset is any asset that is cash,the right to receive cash or anotherfinancial asset; or the contractual rightto exchange financial assets onpotentially favorable terms, or an equityinstrument. A financial liability is thecontractual obligation to deliver cashor another financial asset or toexchange financial liabilities underconditions that are potentiallyunfavorable.4. Positions held with tradingintent are those held intentionally forshort-term resale and/or with the intentof benefiting from actual or expectedshort-term price movements or to lockin arbitrage profits, and may include forexample proprietary positions,positions arising from client servicing(e.g. matched principal brokering) andmarket making.5. The following will be the basicrequirements for positions eligible toreceive trading book capital treatment:a) Clearly documented tradingstrategy for the position/instrument orportfolios, approved by seniormanagement (which would includeexpected holding horizon);b) Clearly defined policies andprocedures for the active managementof the position, which must include:i. positions are managed on atrading desk;ii. position limits are set andmonitored for appropriateness;iii. dealers have the autonomy toenter into/manage the position withinagreed limits and according to theagreed strategy;iv. positions are marked to marketat least daily, and when marking tomodel the parameters must be assessedon a daily basis;v. positions are reported to seniormanagement as an integral part of theinstitution’s risk management process;andvi. positions are actively monitoredwith reference to market informationsources (assessment should be made ofthe market liquidity or the ability tohedge positions or the portfolio riskprofiles). This would include assessingthe quality and availability of marketinputs to the valuation process, level ofmarket turnover, sizes of positionstraded in the market, etc.c) Clearly defined policy andprocedures to monitor the positionsagainst the bank’s trading strategyincluding the monitoring of turnoverand stale positions in the bank’s tradingbook.6. The documentations of the basicrequirements of paragraph 5 should besubmitted to the BSP.7. In addition to the abovedocumentation requirements, the bankshould also submit to the BSP adocumentation of its systems andcontrols for the prudent valuation ofpositions in the trading book includingthe valuation methodologies.B. Measurement of capital charge8. The market risk capital chargeshall be computed according to themethodology set under Subsec. 1115.2of the MORB, subject to certainmodifications as outlined in thesucceeding paragraphs.9. The specific risk weights fortrading book positions in debtsecurities and debt derivatives shalldepend on the third party creditassessment of the issue or the type ofissuer, as may be appropriate, asfollows:Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 35

APP. Q-4611.12.31Credit ratings of debt Credit ratings of debt Credit ratings of debt Unadjustedsecurities/derivatives securities/derivatives securities/derivatives specificissued by sovereigns 1 issued by MDBs issued by other entities risk weightPhp-denominated debt securities/derivatives issued by the Philippine NG and BSP 0.00%LGU Bonds covered by Deed of Assignment of Internal Revenue Allotment and guaranteedby LGU Guarantee Corporation 4.00%AAA to AA- AAA 0.00%A+ to BBB- AA+ to BBB- AAA to BBB-Residual maturity < Residual maturity < Residual maturity < 0.25%6 months 6 months 6 monthsResidual maturity > Residual maturity > Residual maturity >6 months, < 24 months 6 months, < 24 months 6 months, < 24 months 1.00%Residual maturity > Residual maturity > Residual maturity >24 months 24 months 24 months 1.60%All other debt securities/derivatives 8.00%10. Foreign currency denominated debtsecurities/derivatives issued by thePhilippine NG and BSP 2 shall berisk-weighted according to the table above:Provided, That only one-third (1/3) of theapplicable risk weight shall be applied from01 July 2007, two-thirds (2/3) from 01January 2008, and the full risk weight from01 January 2009.11. A security, which is the subject of arepo-style transaction, shall be treated as ifit were still owned by the seller/lender ofthe security, i.e., to be reported by the seller/lender.12. In addition to capital charge forspecific and general market risk, a credit riskcapital charge should be applied to banks’counterparty exposures in repo-styletransactions and OTC derivatives contracts.The computation of the credit risk capitalcharge for counterparty exposures arisingfrom trading book positions are discussedin paragraphs 35 to 41 of Part III.B.(As amended by Circular No. 605 dated 05 March 2008)C. Measurement of risk-weighted assets13. Market risk-weighted assets aredetermined by multiplying the market riskcapital charge by ten (10) [i.e., the reciprocalof the minimum capital ratio of ten percent(10%)].Part VII. Operational risk-weightedassetsA. Definition of operational risk1. Operational risk is defined as therisk of loss resulting from inadequate orfailed internal processes, people andsystems or from external events. Thisdefinition includes legal risk, but excludesstrategic and reputational risk.2. Banks should be guided by theBasel Committee on Banking Supervision’srecommendations on Sound Practices for theManagement and Supervision ofOperational Risk (February 2003). The samemay be downloaded from the BIS website(www.bis.org).B. Measurement of capital charge3. In computing for the operationalrisk capital charge, Banks may use eitherthe basic indicator approach or thestandardized approach.4. Under the basic indicator approach,banks must hold capital for operational riskequal to fifteen percent (15%) of the average1The notations follow the rating symbols used by Standard & Poor’s. The mapping of ratings of all recognized external ratingagencies is in Part III.C. For purposes of this framework, debt securities/derivatives issued by sovereigns include foreigncurrency denominated debt securities/derivatives issued by the Philippine NG.2Warrants paired with ROP Global Bonds shall be exempted from capital charge for market risk only to the extent of bank'sholdings of bonds paired with warrants equivalent to not more than fifty (50%) of total qualifying capital, as defined underPart II of this Appendix.Q RegulationsAppendix Q-46 - Page 36Manual of Regulations for Non-Bank Financial Institutions

gross income over the previous three (3)years of positive annual gross income.Figures for any year in which annual grossincome is negative or zero should beexcluded from both the numerator anddenominator when calculating the average.5. Banks that have the capability tomap their income accounts into the variousbusiness lines given in paragraph 7 may usethe standardized approach subject to priorBSP approval 1 . In order to qualify for use ofthe standardized approach, a bank mustsatisfy BSP that, at a minimum:a) Its board of directors and seniormanagement are actively involved in theoversight of the operational riskmanagement framework;b) It has an operational risk managementsystem that is conceptually sound and isAPP. Q-4611.12.31implemented with integrity; andc) It has sufficient resources in the useof the approach in the major business linesas well as the control and audit areas.6. Operational risk capital charge iscalculated as the three (3)-year average ofthe simple summation of the regulatorycapital charges across each of the businesslines in each year. In any given year, negativecapital charges (resulting from negativegross income) in any business line may offsetpositive capital charges in other businesslines without limit. However, where theaggregate capital charge across all businesslines within a given year is negative, thenfigures for that year shall be excluded fromboth the numerator and denominator.7. The business lines and theircorresponding beta factors are listed below:Business lines Activity Groups Beta factorsLevel 1 Level 2Corporate Finance Mergers and acquisitions, underwriting, 18%Corporate financeMunicipal/Govern- privatizations, securitization, research, debtment Finance (government, high yield), equity, syndications, IPO,Advisory Services secondary private placementsSales Fixed income, equity, foreign exchanges, 18%Market Making commodities, credit, funding, own position securities,Trading and Sales Proprietary lending and repos, brokerage, debt, prime brokeragePositionsTreasuryRetail Banking Retail lending and deposits, banking services, trust 12%and estatesRetail BankingPrivate Banking Private lending and deposits, banking services,trust and estates, investment adviceCard Services Merchant/commercial/corporate cards, privatelabels and retailCommercial Commercial Project finance, real estate, export finance, trade 15%Banking Banking finance, factoring, leasing, lending, guarantees,bills of exchangePayment and External Clients Payments and collections, funds transfer, clearing 18%Settlement and settlementCustody Escrow, depository receipts, securities lending 15%Agency Services(customers) corporate actionsCorporate Agency Issuer and paying agentsCorporate TrustDiscretionary Fund Discretionary and non-discretionary fund 12%Asset ManagementManagement management, whether pooled, segregated, retail,Non-Discretionary institutional, closed, open, private equityFund ManagementRetail Brokerage Retail brokerage Execution and full service 12%Manual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 371Refer to Appendix Q-46b for the Guidelines on the Use of the Standardized Approach in Computing the Capital Charge forOperational Risk

APP. Q-4611.12.318. Gross income, for the purpose ofcomputing for operational risk capitalcharge, is defined as net interest incomeplus non-interest income. This measureshould:a) be gross of any provisions forlosses on accrued interest income fromfinancial assets;b) be gross of operating expenses,including fees paid to outsourcing serviceproviders;c) include fees and commissions;d) exclude gains/(losses) from thesale/redemption/derecognition of nontradingfinancial assets and liabilities;e) exclude gains/(losses) from sale/derecognition of non-financial assets; andf) include other income (i.e., rentalincome, miscellaneous income, etc.)C. Measurement of risk-weighted assets9. The resultant operational riskcapital charge is to be multiplied by 125%before multiplying by ten (10) [i.e., thereciprocal of the minimum capital ratio often percent (10%)].(As amended by M-2007-019 dated 21 June 2007)Part VIII. Disclosures in the AnnualReports and Published Statement ofCondition1. This section lists the specificinformation that banks have to disclose, ata minimum, in their Annual Reports, exceptItem "h", paragraph 4 which should alsobe disclosed in banks’ quarterly PublishedStatement of Condition. These enhanceddisclosures shall commence with AnnualReports for financial year 2007 andquarterly published statement of conditionfrom end-September 2007.2. Full compliance of these disclosurerequirements is a prerequisite before bankscan obtain any capital relief (i.e.,adjustments in the risk weights ofcollateralized or guaranteed exposures) inrespect of any credit risk mitigationtechniques.A. Capital structure and capital adequacy3. The following information withregard to banks’ capital structure and capitaladequacy shall be disclosed in banks’Annual Reports, except Item "h" belowwhich should also be disclosed in banks’quarterly published statement of condition:a) Tier 1 capital and a breakdown ofits components (including deductions solelyfrom Tier 1);b) Tier 2 capital and a breakdown ofits components;c) Deductions from Tier 1 fifty percent(50%) and Tier 2 fifty percent (50%) capital;d) Total qualifying capital;e) Capital requirements for credit risk(including securitization exposures);f) Capital requirements for marketrisk;g) Capital requirements foroperational risk; andh) Total and Tier 1 CAR on both soloand consolidated bases.B. Risk exposures and assessments4. For each separate risk area (credit,market, operational, interest rate risk in thebanking book), banks must describe theirrisk management objectives and policies,including:a) Strategies and processes;b) The structure and organization of therelevant risk management function;c) The scope and nature of riskreporting and/or measurement systems;andd) Policies for hedging and/ormitigating risk, and strategies and processesfor monitoring the continuing effectivenessof hedges/mitigants.Q RegulationsAppendix Q-46 - Page 38Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4611.12.31Credit risk5. Aside from the general disclosurerequirements stated in paragraph 4, thefollowing information with regard to creditrisk have to be disclosed in banks’ AnnualReports:a) Total credit risk exposures (i.e.,principal amount for on-balance sheet andcredit equivalent amount for off-balancesheet, net of specific provision) brokendown by type of exposures as defined inPart III;b) Total credit risk exposure after riskmitigation, broken down by:i. type of exposures as defined in PartIII; andii. risk buckets, as well as those thatare deducted from capital;c) Total credit risk-weighted assetsbroken down by type of exposures asdefined in Part III;d) Names of external credit assessmentinstitutions used, and the types of exposuresfor which they were used;e) Types of eligible credit risk mitigantsused including credit derivatives;f) For banks with exposures tosecuritization structures, aside from thegeneral disclosure requirements stated inparagraph 4, the following minimuminformation have to be disclosed:i. Accounting policies for theseactivities;ii. Total outstanding exposuressecuritized by the bank; andiii. Total amount of securitizationexposures retained or purchased, brokendown by exposure type;g) For banks that provide creditprotection through credit derivatives, asidefrom the general disclosure requirementsstated in paragraph 4, total outstandingamount of credit protection given by thebank broken down by type of referenceexposures should also be disclosed; andh) For banks with investments in othertypes of structured products, aside from thegeneral disclosure requirements stated inparagraph 4, total outstanding amount ofother types of structured products issued orpurchased by the bank broken down by typeshould also be disclosed.Market risk6. Aside from the general disclosurerequirements stated in paragraph 4, thefollowing information with regard to marketrisk have to be disclosed in banks’ AnnualReports:a) Total market risk-weighted assetsbroken down by type of exposures (interestrate, equity, foreign exchange, and options);andb) For banks using the internal modelsapproach, the following information haveto be disclosed:i. The characteristics of the modelsused;ii. A description of stress testingapplied to the portfolio;iii. A description of the approach usedfor backtesting/validating the accuracy andconsistency of the internal models andmodeling processes;iv. The scope of acceptance by the BSP;andv. A comparison of VaR estimates withactual gains/losses experienced by the bank,with analysis of important outliers inbacktest results.Operational risk7. Aside from the general disclosurerequirements stated in paragraph 4, bankshave to disclose their operationalrisk-weighted assets in their Annual Reports.Interest rate risk in the banking book8. Aside from the general disclosurerequirements stated in paragraph 4, theManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 39

APP. Q-4611.12.31following information with regard to interestrate risk in the banking book have to bedisclosed in banks’ Annual Reports:a) Internal measurement of interest raterisk in the banking book, includingassumptions regarding loan prepaymentsand behavior of non-maturity deposits, andfrequency of measurement; andb) The increase (decline) in earnings oreconomic value (or relevant measure usedby management) for upward and downwardrate shocks according to internalmeasurement of interest rate risk in thebanking book.Part IX. EnforcementA. Sanctions for non-reporting of CARbreaches1. It is the responsibility of the bankCEO to cause the immediate reporting ofCAR breaches both to its Board and to theBSP. It is likewise the CEO’s responsibilityto ensure the accuracy of CAR calculationsand the integrity of the associatedmonitoring and reporting system. Anywillful violation of the above will beconsidered as a serious offense forpurposes of determining the appropriatemonetary penalty that will be imposed onthe CEO. In addition, the CEO shall besubject to the following non-monetarysanctions:a) First offense – warning;b) Second offense – reprimand;c) Third offense – 1 month suspensionwithout pay; andd) Further offense – disqualification.B. Sanctions for non-compliance withrequired disclosures2. Willful non-disclosure orerroneous disclosure of any item requiredto be disclosed under this framework ineither the Annual Report or the PublishedStatement of Condition shall beconsidered as a serious offense forpurposes of determining the appropriatemonetary penalty that will be imposed onthe bank. In addition, the CEO and theBoard shall be subject to the followingnon-monetary sanctions:a) First offense – warning on CEO andthe Board;b) Second offense – reprimand on CEOand the Board;c) Third offense – 1 month suspensionof CEO without pay; andd) Further offense – possibledisqualification of the CEO and/or the Board.(Circular No. 538 dated 04 August 2006, as amended byCircular Nos. 717 dated 25 March 2011, 713 dated 14 February2011, 709 dated 10 January 2011, 605 dated 05 March 2008,588 dated 11 December 2007, M-2007-019 dated 21 June 2007,Circular No. 560 dated 31 January 2007 and M-2006-022 dated24 November 2006)Q RegulationsAppendix Q-46 - Page 40Manual of Regulations for Non-Bank Financial Institutions

APP. Q-46a08.12.31GUIDELINES ON THE CAPITAL TREATMENT OF BANKS’ HOLDINGS OFREPUBLIC OF THE PHILIPPINES GLOBAL BONDS PAIRED WITH WARRANTS[Appendix to Sec. 4115Q (2008 - 4116Q) and 4116Q]A QB’s holdings of ROP Global Bondsthat are paired with Warrants (pairedBonds), which give the QB the option orright to exchange its holdings of ROPGlobal Bonds into Peso-denominatedgovernment securities upon occurrence ofa predetermined credit event, shall be riskweighted at zero percent (0%): Provided,That the zero percent (0%) risk weight shallbe applied only to QB’s holdings of pairedBonds equivalent to not more than fiftypercent (50%) of the total qualifying capital,as defined under Appendix Q-46.(Circular 588 dated 11 December 2007)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-46a - Page 1

GUIDELINES ON THE USE OF THE STANDARDIZED APPROACH INCOMPUTING THE CAPITAL CHARGE FOR OPERATIONAL RISKS[Appendix to Sec. 4115Q (2008 - 4116Q) and 4116Q]APP. Q-46b08.12.31QBs applying for the use of theStandardized Approach (TSA) mustsatisfy the following requirements/criteria:General Criteria1. The use of TSA shall beconditional upon the explicit priorapproval of the BSP.2. The BSP will only give approvalto an applicant QB if at a minimum:a. Its board of directors and seniormanagement are actively involved in theoversight of the operational riskmanagement framework;b. It has an operational riskmanagement system that is conceptuallysound and is implemented with integrity;and,c. It has sufficient resources in theuse of the approach in the major businesslines as well as in the control and auditareas.3. The above criteria should besupported by a written documentationof the board-approved operational riskmanagement framework of the QB whichshould cover the following:a. Overall objectives and policiesb. Strategies and processesc. Operational risk managementstructure and organizationd. Scope and nature of risk reporting/assessment systemse. Policies and procedure formitigating operational risk4. This operational risk managementframework of the QB should be disclosedin its annual report, as provided underAppendix Q-46.Mapping of Gross Income5. QBs using TSA in computingoperational risk capital charge mustdevelop specific written policies andcriteria for mapping gross income of theircurrent business lines into the standardbusiness lines prescribed under AppendixQ-46. They must also put in place a reviewprocess to adjust these policies and criteriafor new or changing business activities orproducts as appropriate.6. QBs must adopt the followingprinciples for mapping their businessactivities to the appropriate business lines:(a) Activities or products must bemapped into only one (1) of the eight (8)standard business lines, as follows:(1) Corporate finance- This includesarrangements and facilities [e.g., mergers andacquisitions, underwriting, privatizations,securitization, research, debt (government,high yield), equity, syndications, InitialPublic Offering (IPO), secondary privateplacements] provided to large commercialenterprises, multinational companies, NBFIs,government departments, etc.(2) Trading and sales- This includestreasury operations, buying and selling ofsecurities, currencies and others forproprietary and client account.(3) Retail banking- This includesfinancing arrangements for privateindividuals, retail clients and smallbusinesses such as personal loans, creditcards, auto loans, etc. as well as otherfacilities such as trust and estates andinvestment advice.(4) Commercial banking- This includesfinancing arrangements for commercialenterprises, including project finance, realManual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-46b - Page 1

APP. Q-46b08.12.31estate, export finance, trade finance,factoring, leasing, guarantees, bills ofexchange, etc.(5) Payment and settlement - Thisincludes activities relating to payments andcollections, inter-bank funds transfer,clearing and settlement.(6) Agency services - This refers toactivities of QBs acting as issuing and payingagents for corporate clients, providingcustodial services, etc.(7) Asset management - This includesmanaging funds of clients on a pooled,segregated, retail, institutional, open orclosed basis under a mandate.(8) Retail brokerage - This includesbrokering services provided to customersthat are retail investors rather thaninstitutional investors.(a) Any activity or product whichcannot be readily mapped into one (1) ofthe standardized business lines but whichis ancillary 1 to a business line shall beallocated to the business line to which it isancillary. If the activity is ancillary to two(2) or more business lines, an objectivecriteria or qualification must be made toallocate the annual gross income derivedfrom that activity to the relevant businesslines.(b) Any activity that cannot be mappedinto a particular business line and is not anancillary 1 activity to a business line shall bemapped into one (1) of the business lineswith the highest associated beta factoreighteen percent (18%). Any ancillaryactivity to that activity will follow the samebusiness line treatment.(c) QBs may use internal pricingmethods to allocate gross income betweenbusiness lines: Provided, That the sum ofgross income for the eight business linesmust still be equal to the gross income aswould be recorded if the QB uses the BasicIndicator Approach (BIA).(d) The process by which QBs maptheir business activities into thestandardized business lines must beregularly reviewed by party independentfrom that process.7. In computing the gross income ofthe QB, the amounts of the incomeaccounts reported in the operational risktemplate 2 must be equal to the year-endbalance reported in the FRP. Anydiscrepancy must be properly accountedand supported by a reconciliationstatement.Application Process for the Use of TSA8. QBs applying for the use of TSAshould submit the following documents totheir respective Central Points of Contact(CPCs) of the BSP:(a) An application letter signed by thepresident/CEO of the QB signifying itsintention to use TSA in computing thecapital charge for operational risk;(b) Written documentation of theBoard-approved operational riskmanagement framework as described inparagraph 3.(c) Written policies and criteria formapping business activities and theircorresponding gross income into thestandard business lines as described inparagraphs 5 to 7.(d) An overall roll-out plan of the QBincluding project plans and executionprocesses, with the appropriate time lines.Initial Monitoring Period9. The BSP may require a six (6)-monthperiod of initial monitoring of a QB’s TSAbefore it is used for supervisory capitalpurposes.Reversion from TSA to BIA10. A QB which has been approved touse TSA in computing its capital charge1Ancillary function is an activity/function that is not the main activity of a given business line but only as a support activity2Part V of the revised CAR report templateQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-46b - Page 2

APP. Q-46b08.12.31for operational risk will not be allowed torevert to the simpler approach, i.e., theBIA. However, if the BSP determines thatthe QB no longer meets the qualifyingcriteria for TSA, it may require the QB torevert to BIA. The QB shall be required torepeat the whole application processshould it opt to return to the use of TSA,but only after a year of using the BIA.These guidelines shall take effect on21 July 2007.(M-2007-019 dated 21 June 2007)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-46b - Page 3

APP. Q-4708.12.31GUIDELINES FOR TRUST DEPARTMENTS’ PLACEMENTS IN THE SPECIALDEPOSIT ACCOUNT FACILITY OF THE BANGKO SENTRAL(Appendix to Subsec. 4409Q.2)The following are the guidelinesgoverning the trust deparments’ placementsin the SDA facility of BSP.1. Access to the subject BSP facilityshall be granted upon receipt by the BSPTreasury Department (BSP-TD) of a letterof request (Appendix 78 Annex 1) foraccount opening together with the followingrequirements:a. Internal approvals allowing the trustdepartment to invest in the BSP SDAfacility;b. A list of authorized signatories;c. A list of authorized traders; andd. Contact details for the front and backoffices.2. The trust department shall use adepository institution that is a PhilPASSmember when placing its funds in the SDAfacility. On transaction date, the trustdepartment shall instruct said depositoryinstitution to debit their account in favor oftheir SDA with the BSP. Similarly, the trustdepartment shall specify a PhilPASSmember to which its principal and interestwill be credited at maturity of the SDAplacement.3. Trading hours shall be from I0:00am to 3:00 pm for all business days. Alltrades shall settle on trade date.4. Applicable tenors and pricing shallbe based on published rates (i.e., inBloomberg’s CBPHI and Reuters BANGKOpage).5. The existing tiering scheme, asdetailed below shall be applied to the SDAplacements of the trust departmentsseparately from the placements of their bankproper.Tier Tiered RateAmounts less than or BSP published rateequal to P5.0 billionTier Tiered RateAmounts in excess of BSP published rate lessP5.0 billion up to 2%PI0.0 billionAmounts in excess of BSP published rate lessPI0.0 billion 4%6. The minimum placement is P10.0million with the additional amounts inincrements of PI .0 million.7. Trust departments may place onlyonce per tenor per day8. Trust departments may preterminatetheir SDA placements, either fullyor partially. If the holding period of the SDAplacement when it is rate pre-terminated isless than fifty percent (50%) of the originaltenor of the said placement, the applicableinterest rate for the pre-terminated amount willbe the rate dealt on value date less two percent(2%) p.a. If the holding period is fifty percent(50%) or more of the original tenor, theapplicable interest rate for the pre-terminatedamount will be the rate dealt on value dateless one percent (1%) p.a. The pre-terminationrate shall apply only to the amount preterminated.9. The income from the SDA is subjectto a twenty percent (20%) final withholdingtax10. Depository institution shallgenerally follow the existing settlementprocess for SDA placements with BSP ofQBs. The trust department will be requiredto send the transaction confirmation directlyto the BSP-TD back office. A sampleconfirmation is attached as Appendix Q-47Annex 1 and Annex 2.11. Trust departments may request astatement from the BSP-TD for theiroutstanding SDA placement as of a specifieddate.(M-2007-011 dated 08 May 2007)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-47 - Page 1

APP. Q-4708.12.31Annex 1(Institution’s Letterhead)Date:_____________________Mrs. Ma. Ramona GDT SantiagoManaging DirectorTreasury DepartmentBangko Sentral ng PilipinasDear Madam:Pursuant to Monetary Board Resolution Nos. 433 and 518 dated 19 April 2007 and03 May 2007, allowing trust departments to place their funds in the BSP’s Special DepositAccount (SDA) facility, the trust department of (name of institution) respectfully request thecreation of an account for the said facility.Please find attached the following documents, as required:a. Internal approvals allowing the trust department to invest in the SDAfacility;b. A list of authorized signatories;c. A list of authorized traders; andd. Contract details for the front and back offices.For your kind attention.Very truly yours,__________________________(AUTHORIZED SIGNATORY)1__________________________(AUTHORIZED SIGNATORY)2Q RegulationsAppendix Q-47 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4708.12.31Annex 2(Institution’s Letterhead)Date:_________________TREASURY DEPARTMENTTreasury Services Group - DomesticBangko Sentral ng PilipinasGentlemen:This is to confirm our Special Deposit Account placement to yourselves asfollows:VALUE DATETERMMATURITY DATERATEPRINCIPAL AMOUNTGROSS INTERESTWITHHOLDING TAXNET MATURITY VALUEOn value date, our funds will come from Regular Demand Deposit account of(name of depository QB).Accordingly, please CREDIT the Regular Demand Deposit Account of(name of depository QB) on maturity date the amount of ____________PESOS (P___________),representing full payment of the principal plus interest (net of applicable withholding tax)thereon.Very truly yours,___________________________(AUTHORIZED SIGNATORY)1___________________________(AUTHORIZED SIGNATORY)2Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-47 - Page 3

APP. Q-47a08.12.31SPECIAL DEPOSIT ACCOUNT PLACEMENTS OF TRUST DEPARTMENTS/ENTITIES AS AGENT FOR TAX-EXEMPT INSTITUTIONS AND ACCOUNTS(Appendix to Subsection 4409Q.2)Section 1. Placement of tax-exemptaccounts in the SDA facility should complywith existing minimum placement andincremental requirements for the SDAfacility.Sec. 2. On transaction date, the trustdepartment/entity must inform the BSP theexact amount of the tax-exempt placementin the SDA and submit the followingsupporting documents:a. Copy of the relevant ruling from theBIR, duly certified by the latter, affirmingthe exemption from taxes of the incomeearned by concerned TEls or accounts fromtheir investments;b. Copy of the board resolutionduly certified by the corporatesecretary authorizing the placement(directly for managed funds orindirectly through designated trusteebank/FI in the case of managed trustfunds) in the SDA facility;c. Copy of the covering trustagreement; andd. Certification from the trustdepartment that such placements, for as longas these are outstanding, are owned by thespecified TEls and are accordingly exemptfrom said twenty percent (20%) finalwithholding tax (FWT). Shown in Annex 1.Advance copies may be sent throughfacsimile (facsimile number 523-3348) orelectronic mail of BSP-Treasury Back Officepersonnel (jsiguenza@bsp. gov. ph).Absent the supporting documents byend of the business day, the tax-exemptplacement will be cancelled.Sec. 3. For outstanding tax-exempt SDAplacements as of 01 November 2007,trust departments must submit thedocuments specified in Item "2" hereofon or before 04 December 2007 to availof the exemption from withholding tax.( M-2007-038 dated 29 November 2007)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-47a - Page 1

APP. Q-47a08.12.31Ms. Ma. Ramona GDT SantiagoManaging DirectorTreasury DepartmentBangko Sentral ng PilipinasA. Mabini corner P. Ocampo Sts.Manila 1004(Trust Entity/Department’s Letterhead)Annex 1Date:______________________Dear Ms. Santiago:This refers to the placement/s amounting to (Peso Amount) placed in the BSP’s SDA facility at(SDA rate) % per annum for value (Value date) to mature on (Maturity date).This is to certify that the above placement/s is/are transacted on behalf of the following Tax-Exempt Institutions (TEI) or tax-exempt funds and interest income thereon are exempt from the twentypercent (20%) final withholding tax based on the corresponding BIR rulings:Tax Exempt Institutions Basis Amount(BIR Ruling No. and date)1.2.3.(rows may be increased depending on number of placements)TOTALThis is to further certify that above placements will be owned by the specified TEIs/tax-exemptfunds for as long as these placements are outstanding.In the event that the BSP is assessed for deficiency final withholding tax on the above placementsby the Bureau of Internal Revenue (BIR), (NBFI name) shall be liable for and pay such deficiency taxesand surcharges, and/or indemnify/reimburse the BSP for such deficiency taxes and surcharges that thelatter may eventually pay to the BIR as a result thereof. Further, (NBFI name) hereby authorizes the BSPto automatically debit its regular demand deposit account with the BSP for payment or reimbursement ofany such deficiency taxes and surcharges.Sincerely yours,HEAD OF TRUST DEPARTMENTSUBSCRIBED AND SWORN to before me this ____ day of____________________ 2007 at______________________, affiant exhibiting to me his Community Tax Certificate/Passport No.____________, issued at _________________, on _____________________.Doc. No.Page No.Book No.Series of_________;_________;_________;200___Notary PublicQ RegulationsAppendix Q-47a - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4811.12.31BASIC STANDARDS IN THE ADMINISTRATION OF TRUST, OTHER FIDUCIARYAND INVESTMENT MANAGEMENT ACCOUNTS(Appendix to Subsec. 4401Q)I. IntroductionTrust and other fiduciary business andinvestment management activities haveevolved with the changes in the financialmarket and advancement in technology.These innovations have allowed trustentities to expand the scope of trustproducts and services offered to customers,thus increasing their exposure to variousrisks. As trust entities grow more diverse,necessarily policies and procedures as wellas risk management practices must keeppace. The basic standards would providecommon processes for an efficientoperation and administration of trust, otherfiduciary and investment managementactivities across the trust industry.II. Statement of policyIt is the policy of the BSP to provideadequate level of protection to investorswho, under a fiduciary arrangement,engage the services or avail of products oftrust entities which are required to observeprudence in the exercise of their fiduciaryresponsibility. Along this line, the BSPprescribes basic standards for the efficientadministration and operation of trust andother fiduciary business and investmentmanagement activities.III. StandardsThe basic standards in the administrationof trust, other fiduciary and investmentmanagement accounts are meant to addressthe significant areas of operations and provideminimum set of requirements andprocedures:A. Account acceptance and reviewprocesses1. Pre-acceptance account reviewThis review must document that thetrust entity (TE) can effectively administerthe account. It shall be covered by a writtenpolicy which shall contain, among otherthings, the types of trust, other fiduciary andinvestment management accounts that aredesirable and consistent with the TE’s riskstrategies and the specific conditions foraccepting new accounts, and approved bythe Trust Committee, or the Trust Officer,or subordinate officer of the trustdepartment, authorized by the board ofdirectors or its functional oversightequivalent, in the case of foreign banks andinstitutions.The review process entails thethorough and complete review of theclient’s/account’s characteristics andinvestment profile, including the assets/properties to be contributed/delivered.Non-financial/non-traditional assets (i.e.,real estate and the like) which are morelikely to be iliquid shall be carefullyreviewed prior to acceptance to ensure thatthe TE only accepts accounts which holdassets it may be able to properly manage.Prior to the acceptance of a fiduciaryaccount, the TE shall review the underlyinginstrument (trust agreement or contract)for potential conflicts of interest. If suchconflict exists, the TE shall takeappropriate action to address suchcondition before the account is accepted.In cases where the TE is chosen as asuccessor trustee or investment manager,the TE shall perform a review andevaluation of all assets to be delivered tothe TE to determine how these would servethe client's objectives, whether the TE canproperly handle such assets and to assessany possible issue/problem which mayarise with respect to such assets beforeacceptance of such assets and/orassumption of the trust, fiduciary orinvestment management relationship.Manual of Regulations for Non-Bank Financial Institutions App. Q-48 - Page 1

APP. Q-4811.12.312. Establishment and post-acceptancereviewAcceptance policies for new accountsshall, at a minimum, include the followingprocesses and/or requirements:(1) Account opening process. Thisprocess defines the TE’s policies andprocedures for client/account identification,consistent with the TE’s KYC policy forcompliance with anti-money launderingregulations; identification of the needs ofthe client; the objective(s) of theengagement; the vehicle to be used; andthe account’s investment parameters. Thetrust officer or other authorized personnelof the trust department shall conduct theaccount opening process for trust, fiduciaryand investment management accounts. Inthe case of UIT Funds, only authorizedbranch managers/officers as well as UITmarketing personnel, who have allsuccessfully undergone the requiredcertification/accreditation/licensing process,may perform said process for UIT Fundclients. The account opening process shallat least involve the following:(a.) As a general rule, client profilingshall be performed for all UIT Fund andregular trust, other fiduciary and investmentmanagement accounts via a dulyacknowledged Client Suitability Assessment(CSA), which aims to provide the TE withinformation leading to the prudent designof investment packages, suited to a particularclient or investment account. The CSA,however, shall not be required for thefollowing trust and other fiduciary accounts:1. court trust;2. legislated and quasi-judicial trust;3. trust under indenture;4. facility/loan agency;5. transfer agency;6. depository and reorganization;7. escrow;8. custodianship;9. safekeeping; and10. institutional trust – pre-need plans.The profiling process, to be documentedthrough a CSA Form signed by theconcerned parties, shall be undertaken ona per client basis, which shall emphasizethe level of risk tolerance of the client.• CSAThe TE shall obtain adequate informationfrom the client to determine theappropriateness of the fiduciary product/service to be provided and ensure thesuitability of the investment product/portfolio/strategy to be recommended toeach client. It shall provide prospectiveclients with client suitability questionnaire andrequire them to accomplish the same priorto the acceptance of the account andexecution of a transaction.For this purpose, the TE shall make anassessment of the client’s level of financialsophistication and consider factors relevantto the creation and management of, orparticipation in, an investment portfolio,such as but not limited to, the specific needsand unique circumstances of the client and/or beneficiary/(ies), basic characteristics ofthe clients’ investment and experience,financial constraints, risk tolerance, taxconsiderations and regulatory requirements.The same CSA process shall be appliedby the TE for directional accounts.• Minimum information required forCSA:i. Personal/Institutional data. Minimumpersonal/institutional information that areunique to a natural or juridical client, whichshall also cover demographics and KYCinformation; the identity of beneficiaries,where applicable, and approximate portionof total assets administered/managed.ii. Investment objective. A clearstatement or definition of the client’sinvestment goals/purposes to be achievedthrough a particular trust, fiduciary orinvestment product or service. The clientmay opt to open several accounts, each one(1) with specific investment objectivesseparate and distinct from the otherApp. Q-48 - Page 2Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4811.12.31accounts.iii. Investment experience. A list ofvarious types of investment the prospectiveclient is familiar with, acquired from actual/personal investment experience, or ofsimilar investment circumstances.iv. Knowledge and financial situation.For complex transactions where the levelof risk involved is greater, the TE must takeinto account the knowledge, experienceand financial situation of the client orpotential client to assess the level ofinvestment sophistication. This mayinclude the careful assessment whether thespecific type of financial instrument/service/portfolio/strategy is in line with the client’sdisclosed financial capacity.Such assessment is necessary as thereare significant risks involved on financialinvestments (e.g., derivatives), the type oftransaction (e.g. sale of options), thecharacteristics of the order (e.g., size or pricespecifications) or the frequency of the trading.v. Investment time frame andliquidity requirement. The TE is able toorganize the portfolio in a manner that willprovide for anticipated liquidityrequirement through redemption ofprincipal contribution or earnings.vi. Risk tolerance. Allow the TE toclassify clients in accordance with its ownpre-set internal risk classification.Based on the results of the CSA,classification of clients by the TE may include,but need not be limited to the following:i. Conservative. Client wants aninvestment strategy where the primarygoal is to prevent the loss of principal atall times, and where the client prefersinvestment grade and highly liquid assets,government securities, Republic of thePhilippines' bonds (ROPs), deposits withlocal banks/branches of foreign banksoperating in the Philippines, and depositswith FIs in any foreign country: Provided,That said FI has at least an investment gradecredit rating from a reputable internationalcredit rating agency. For purposes of investingin a UIT Fund, a client wants an investmentstrategy where the primary objective is toprevent the loss of principal at all times andwhere the fund is invested in deposits withlocal banks/branches of foreign banksoperating in the Philippines and with FI inany foreign country: Provided, That said FIhas at least an investment grade credit ratingfrom a reputable international credit ratingagency.ii. Moderate. Client wants a portfoliowhich may provide potential returns oninvestment that are higher than the regulartraditional deposit products and client isaware that a higher return is accompaniedby a higher level of risk. Client is willingto expose the funds to a certain level ofrisks in consideration for higher returns.iii. Aggressive. Client wants a portfoliowhich may provide appreciation of capitalover time and client is willing to accept higherrisks involving volatility of returns and evenpossible loss of investment in return forpotential higher long-term results.• Investment policy statementThe TE shall have in place a methodby which suitability of investment isdetermined based on the results of the CSAand formulated via an Investment PolicyStatement (IPS). It shall communicate toprospective clients the results of theassessment, recommend the investmentproduct/portfolio/strategy, and explain thereasons why, on the basis of the giveninformation, its recommendation is to thebest interest of the client as of a definedtimeframe. The TE shall make arecommendation only after havingreasonably determined that the proposedinvestment is suitable to the client’s and/orbeneficiary’s financial situation, investmentexperience, and investment objectives.The IPS is a clear reference frame forinvestment decisions and must be based onthe investment objectives and risk toleranceof the client. It must include, at a minimum,Manual of Regulations for Non-Bank Financial Institutions App. Q-48 - Page 3

APP. Q-4811.12.31a description of the following:i. Investment objective;ii. Investment strategy-indicating howassets will be allocated indicating theagreed portfolio mix;iii. Investment performance review –indicating proposed market benchmarks, ifany and the desired frequency of theperformance review/reporting;iv. Investment limits – identifies anylimitation which the client may have for theportfolio such as investment restrictions (e.g.,prohibited investments) and client’s consentfor taking losses.For UIT Fund, the IPS is equivalent tothe investment objective of the fundspecifically stated in the Declaration of Trust.• Option of client to re- classificationGenerally, the TE shall recommend theinvestment product/portfolio/strategysuitable to the client based on the resultsof the CSA. The TE may, however, providea process for allowing clients to invest ininvestment products/ portfolio/strategy witha higher risk than those corresponding tothe CSA profile results. A client whoexercises the option to be re-classifiedoutside the CSA process thereby waivessome of the protection afforded by theseguidelines. Such re-classification may beallowed subject to the observance of thefollowing:i. The client shall state in writing tothe TE that -• He does not agree with or acceptthe recommendation of the TE on theinvestment product/portfolio/strategyappropriate to the client’s profile based onthe results of the CSA;• He would like to avail of theinvestment product/portfolio/strategy otherthan that which is consistent with the resultsof the CSA;• He requests/intends to be reclassified,either generally or in respect toa particular investment/service/ transaction/product; and• He fully understands and is willingto take the risks incidental to the investmentproduct/portfolio/strategy to be availed of.ii. The TE shall issue a clear writtenwarning to the client of the protections hemay lose and conversely, of the risks thathe is exposed to.iii. The TE shall have taken allreasonable steps to ensure that the clientmeets all relevant requirements as providedfor in the TE’s written policies.• Frequency of CSA and IPSi. The CSA shall be performed andthe IPS shall be formulated and executedprior to the opening of the account;ii. The TE shall update the CSA andthe IPS at least every three (3) years exceptin the following instances;• Whenever updates arenecessitated by the client, upon notice/advise to the TE, on account of a change inpersonal/financial circumstances orpreferences, the TE shall adjust/modify itsinvestment strategy/portfolio andrecommendation, subject to the conformityof the client;• Whenever managed trust, otherfiduciary, and investment managementaccounts express intention to invest incomplex investment products such asfinancial derivatives, the TE shall ensurethat the CSA and the IPS are updated atleast annually. Otherwise, the TE shall notmake new/additional investments incomplex investment products.iii. The TE shall ensure that periodicwritten notices given to clients remindingthem of such updates are received/acknowledged by clients or theirauthorized representatives;iv. Updated CSA and IPS shall beacknowledged by the client;v. The frequency of review shall beincluded as a provision in the writtenagreement; andvi. The latest CSA and IPS willcontinue to be applied for any subsequentprincipal contributions to the account, untilthese are amended or updated by the client.App. Q-48 - Page 4Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4811.12.31(b.) Identification of degree of discretiongranted by client to the TE. This processinvolves the determination of the extent ofdiscretion granted to the TE to manage theclient’s portfolio.(1) Discretionary. The TE has authorityor discretion to invest the funds/propertyof the client in accordance with theparameters set forth by the client. Suchauthority of the TE which obtained acomposite Trust Rating of “4” in the latestBSP examination will not be subject to theinvestment limitations provided underSubsecs. X409.2 and X409.3 for trust andother fiduciary accounts and Subsecs. X411.4and X411.5 for investment managementaccounts, respectively; and(2) Non-discretionary. Investmentactivity of the TE is directed by the clientor limited only to specific securities orproperties and expressly stipulated in theagreement or upon written instruction ofthe client.(3) Documentation. The trust, fiduciaryor investment management relationshipshall be formally established through awritten legal document such as the trust orinvestment management agreement. Theengagement documents shall clearlyspecify the extent of fiduciary assignments/responsibilities of the TE and articulate thenature and limits of each party’s status astrustor/principal or trustee/agent. Policiesand procedures shall provide that trust orinvestment management agreements aresigned by the trust officer or , subordinateofficer of the trust department, or in thecase of UIT Funds, branch managers/officers duly authorized by the board ofdirectors.The documentation process must alsoconsider the following:(a.) The Agreement must conform to therequirements provided under Subsec.X409.1 for trust and other fiduciary accountsand Subsec. X411.1 for investmentmanagement accounts. In addition, theAgreement shall contain the followingprovisions:(i.) A description of the services to beprovided;(ii.) All charges relating to the servicesor instruments envisaged and how thecharges are calculated;(iii.)The obligations of the client withrespect to the transactions envisaged, inparticular his financial commitmentstowards the TE; and(iv.)For engagements involvingmanagement of assets or properties, thedegree of discretion granted to the trusteeor agent must be clearly defined and statedin the agreement;(b.) The Agreement shall be in plainlanguage understandable by the client and/or personnel of the TE responsible forexplaining the contents of the agreementto the client.(c.) For complex investment productssuch as financial derivatives instruments orthose that use synthetic investmentvehicles, the TE shall disclose to the clientand require client’s prior written conformityto the following:(i.) Key features of investment servicesand financial instruments envisaged,according to the nature of such instrumentsand services;(ii.) The type(s) of instruments andtransactions envisaged;(iii.)The obligations of the TE with respectto the transactions envisaged, in particular,its reporting and notice obligations to theclients; and(iv.) An appropriate disclosure bringing tothe client’s attention the risks involved inthe transactions envisaged.(d.) In order to give a fair and adequatedescription of the investment service orfinancial instrument, the TE shall provide aclearly stated and easily understood RiskDisclosure Statement to its clients, whichforms part of or attached to the trust, fiduciaryor investment management agreement. TheManual of Regulations for Non-Bank Financial Institutions App. Q-48 - Page 5

APP. Q-4811.12.31Risk Disclosure Statement shall contain,among other things, the following provisions:(i.) Cautionary statement on the generalrisks of investing or associated with financialintruments, i.e., if the market is not good,an investor may not be able to get back hisprincipal or original investment. Suchstatement must be given due prominence,and not to be concealed or masked in anyway by the wording, design or format of theinformation provided;(ii.) If the investment outlet is exposedto any major or specific risks, a descriptionand explanation of such risks shall be clearlystated; and(iii.)Advisory statement that for complexinvestment products, said instruments canbe subject to sudden and sharp falls in valuesuch that the client may lose its/his entireinvestment, and, whenever applicable, beobligated to provide extra funding in case it/he is required to pay more later.Additional risk disclosures may beprovided as appropriate.The TE must ensure that the trust,fiduciary and investment managementagreements and documents have beenreviewed and found to be legally in order.B. Account administrationIt is the fundamental duty of a fiduciaryto administer an account solely in theinterest of clients. The duty of loyalty is aparamount importance and underlies theentire administration of trust, other fiduciaryand investment management accounts. Asuccessful administration will meet theneeds of both clients and beneficiaries in asafe and productive manner.Account administration basicallyinvolves three (3) processes, namely;(1) periodic review of existing accounts,(2) credit process and (3) investmentprocess.(1) Periodic review of existing accountsThe board of directors and TrustCommittee shall formulate and implementa policy to ensure that a comprehensivereview of trust, fiduciary and investmentmanagement accounts (including collectiveinvestment schemes such as UIT Funds) shallbe conducted. The periodic review ofmanaged accounts shall be aligned with theprovisions on the review and updating ofthe CSA and IPS. The board of directors maydelegate the conduct of account review tothe Trust Officer or Trust DepartmentCommittee created for that purpose. Thepolicy shall likewise indicate the scope ofthe account review depending upon thenature and types of trust, fiduciary andinvestment management accounts managed.A comprehensive accounts review,which shall entail an administrative as wellas investments review, shall be performedon a periodic basis to ascertain that theaccount is being managed in accordancewith the instrument creating the trust andother fiduciary relationship. Theadministrative review of an account istaken to determine whether the portfolio/assets are appropriate, individually andcollectively, for the account, while aninvestment review is used to analyze theinvestment performance of an account andreaffirm or modify the pertinent investmentpolicy statement, including asset allocationguidelines. Whether the administrativeand investment review are performedseparately or simultaneously, thereviewing authority shall be able todetermine if certain portfolio/assets are nolonger appropriate for the account, (i.e., notconsistent with the requirements of theclient) and to take proper action throughprudent investment practices to change thestructure or composition of the assets.The periodic review process alsoinvolves disclosure of information on theinvestment portfolio and the relevantinvesting activities. Regardless of the degreeof discretion granted by the client to the TE,the former assumes full risk on the investmentand related activities, and counterparties.Relevant changes in the TE’s organization orApp. Q-48 - Page 6Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4811.12.31investment policies that may affect the client’sdecision to continue the services of the TE shallbe disclosed to the client.In the case of non-discretionary publicinterest accounts such as employee benefit/retirement or pension funds, due diligencereview of the investment portfolio by theTE shall include providing investors withappropriate information needed to make aninformed investment decision and avoidpossible conflict of interest and self-dealingsituations.The TE should be able to show (inaddition to the specific written directivefrom the client) what it has done in theexercise of due diligence and prudence onits part to protect the interest of the clientand/or beneficiaries, especially foraccounts of public interest like retirement/pension fund accounts.The TE shall keep its clients informedof the investment and related activities byrendering periodic reports and financialstatements prescribed under Subsec.X425.1 and as necessary. The types ofreports and statements and the frequencyof their submission must be clearlyspecified in the TE’s written policies andprocedures.The TE shall also establish a system thatenables a trust account representative orofficer to periodically contact clientsand/or beneficiaries to determine whethertheir financial objectives and circumstanceshave changed.(2) Credit processEach trust entity shall define its creditprocess in relation to the discharge of theTE’s investment function. The processensures credit worthiness of investmentundertakings including dealings andrelationship with counterparties. It alsoserves to institutionalize the independenceof the credit process of the TE. The creditprocess must at least cover the following:a. Credit policies. Trust entities mustclearly define its credit policies andprocesses, including the use of internal andexternal credit rating and approval processrelative to the delivery of its instrumentfunction. The TE can share credit informationwith the bank proper subject to properdelineation and documentation. The creditprocess shall show the following at theminimum:i. Clear credit process flow, frominitiation of the lending activitiesenvisioned by the TE up to the executionof actual investment;ii. Credit criteria and rating used;iii. Manner by which the TE handlesthe information, including confidential andmaterial data, which is shared between andamong the departments, subsidiaries oraffiliates of the TE; andiv. Clear delineation of duties andresponsibilities of each of the departments,subsidiaries and affiliates of the TE, wheresuch groups or entities share the creditprocess.b. Counterparty accreditation process.The TE must clearly define the policies andthe processes it will undertake to accreditcounterparties, including the bank proper,and its subsidiaries and affiliates, for theirinvestment trading functions. It may use oravail itself of the accreditation process of itsbank proper provided there is properdelineation of functions. The counterpartyaccreditation process shall show thefollowing at the minimum:i. Clear accreditation process flowfrom the initiation of credit activities up tothe actual usage of lines;ii. Credit criteria and rating used;iii. Manner by which the TE handlesthe information, including confidential andmaterial data, which are shared betweenand among the departments, subsidiariesor affiliates of the TE;iv. Usage, duties and responsibilitiesof each of the department, subsidiaries andaffiliates of the TE, where there is sharing ofcredit lines between and among theseManual of Regulations for Non-Bank Financial Institutions App. Q-48 - Page 7

APP. Q-4811.12.31concerned groups/entities; andv. Clear delineation of duties andresponsibilities of each of the departments,subsidiaries and affiliates of the TE, wheresuch groups or entities share theaccreditation credit process.(3) Investment processThis process defines the investmentpolicies and procedures, includingdecision-making processes, undertaken bythe TE in the execution of its fund/assetmanagement function. The primaryobjective of such process is to create astructure that will assure TEs observeprudence in investment activities at all levels,preservation of capital, diversification, areasonable level of risk as well asundivided loyalty to each client andadherence to established structure for theTE’s investment undertakings. Theinvestment process covers a broad rangeof activities; thus, the investment policiesshall clearly outline the parameters that, ata minimum, include the following:a. Overall investment philosophy,standards and practices. A general statementof principles that guides the portfoliomanager in the management of investmentsoutlined in the board-approved policy, alongwith a discussion on the practices andstandards to be implemented to achieve thedesired result.b. Investment Policies and Processes.Defines the policies and the processesundertaken to create the portfolio to ensurethe proper understanding of the client’spreferences.i. Profiling of client. Aims tounderstand the level of maturity of theclient relevant to the creation of anappropriate portfolio.ii. Portfolio construction for custommadeportfolios. Includes the process ofresearching and selecting recommendedportfolio and setting objectives or strategiesfor diversification by types and classes ofsecurities into general and specializedportfolios.• Asset allocation. Outlines theprocess and criteria for selecting andevaluating different asset classes identifiedto be appropriate for the client’s profile andinvestment objective. It includes theallocation of desired tenors in conjunctionwith the client or portfolio profile basedon the CSA or IPS. The asset allocationmay be based on percentage to totalfunds managed by the TE or stated inabsolute amount whichever is preferredby the client.• Security selection. Policies andprocedures on the selection of investmentoutlets, including investment advisory, mustbe in place. This involves the selection ofissuers for each of the identified assetclasses. The process provides for thereview of investment performance usingrisk parameters and comparison toappropriate benchmarks. It shall alsoidentify the documentation required for allinvestment decisions.If the TE uses approved lists ofinvestments, there shall be an outline ofthe criteria for the selection and monitoringof such investments, as well as a descriptionof the overall process for addition to anddeletion from the lists.• Benchmark selection/creation.Selects or crafts the benchmarks to reflectthe desired return of the portfolio and tomeasure the performance of the portfoliomanager. The TE shall be required tomeasure performance based on benchmarksto gauge or measure the performance of theaccount. The TE must have clear definitionof its benchmarking policy.• Limits. Identifies any limitations onportfolio management which the client mayimpose on the TE. These limitations haveto be specific as to the nature of the portfolio,such as but not limited to, core holdings,investment in competitor companies, andcompanies engaged in vices.• Risk disclosure statement. A clearand appropriately worded statement/s todisclose different risks to clients of theApp. Q-48 - Page 8Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4811.12.31various investment undertakings of theinvestment manager done in behalf of theclient.iii. Internal policies on trade allocation.Defines the institution’s policies in ensuringtimely, fair and equitable allocation ofinvestments across investing portfolios.iv. Diversification of discretionaryinvestments. The TE shall have a policyon the general diversification requirementsfor asset administration, as well as theprocess implemented to monitor andcontrol deviations from policy guidelines.v. A TE shall have access to timelyand competent economic analyses andforecasts for the capital markets and otherproducts in which its clients will beinvesting. TEs engaged in more complextransactions may consider providing aneconomic and securities research unit thatcontinually monitors global trends andcapital markets. This unit providesnecessary forecasts of capital marketexpectations, currency relationships,interest rate movements, commodityprices, and expected returns of assetclasses and individual investmentinstruments, which help the TE establishappropriate investment policies andstrategies, select appropriate investments,and manage risks effectively.vi. The TE shall have a process thatwill confirm trust personnel withinvestment functions know and follow theBOD-approved investment policies andprocesses.c. Selection and use of brokers/dealers. The quality of execution is animportant determinant in broker selection.In selecting brokers/dealers, a TE mustconsider the following minimum standardsand criteria:i. Execution capability and ability tohandle specialized transactions;ii. Commission rates and othercompensation;iii. Financial strength, includingoperating results and adequacy of capitaland liquidity;iv. Past record of good and timelydelivery and payment on trades;v. Value of services provided,including research; andvi. Available information about thebroker from other broker customers,regulators, and self-regulated organizationsauthorized by the SEC.The TE with large portfolio may opt toevaluate broker performance using aformalized point scoring system. A list ofapproved brokers shall be made availableby the TE, reviewed periodically andupdated at least annually.d. Best practices. The TE shalldocument best practices policies andprocesses to institutionalize propersafeguards for the protection of its clientsand itself. At a minimum, the policies mustinclude the following standards:i. Best execution. The TE shall usereasonable diligence to ensure thatinvestment trades are executed in atimely manner and on the best availableterms that are favorable to the clientunder prevailing market conditions ascan be reasonably obtained elsewherewith an acceptable counterparty. Forrelated counterparties, no purchase/salemust be made for discretionary accountswithout considering at least two (2)competitive quotes from other sources. Thepolicy on best execution must documentprocesses to warrant such execution isreadily and operationally verifiable.ii. Chinese wall. A clear policy onChinese Wall aims to protect the institutionfrom conflict of interest arising fromvarying functions carried by the TE inrelation to credit (debt), shareholder, andinvestment position taking. The policyshall state the duties and responsibilitiesof the TE and each department includingthat of the bank proper and subsidiariesand affiliates should transactions involvethe concerned departments and entities.iii. Personnel investment policies.Manual of Regulations for Non-Bank Financial Institutions App. Q-48 - Page 9

APP. Q-4811.12.31These policies aim to ensure honest and fairdischarge of investment trading functions ofall qualified personnel. Qualified personnelare those that may have access to informationon clients and investment position-taking ofclients, investment manager or portfolios.The use of such information may be abusedand detrimental to the clients. The policyshall state the duties and responsibilities ofeach qualified personnel in relation totrading and portfolio management activitiesincluding allowed and not allowedtransactions as well as sanctions in case ofviolations.iv. Confidentiality and materiality ofInformation. The TE must keep informationabout past, current and prospective clientsconfidential, unless disclosure is authorizedin writing by the client or required by lawand the information involve illegalactivities perpetrated by the client. It mustensure safekeeping of confidential andmaterial information and prevent the abuseof such information to the detriment of theinstitution or its clients.v. Fair dealing. The TE shalldocument dealing practices to ensurefair, honest and professional practices inaccordance with the best interest of theclient and counterparties at all times andfor the integrity of the market. It mustensure that any representations or othercommunications made and informationprovided to the client are accurate andnot misleading. The TE must also takecare not to discriminate against any clientbut treat all clients in a fair and impartialmanner.vi. Diligence and reasonable basis. Inconducting its investment services, the TEshall act with skill, and care and diligence,and in the best interests of its clients andthe integrity of the market. The duty ofdue diligence is intertwined with the dutyto maintain independence and objectivityin providing investment recommendationsor taking investment actions. Whenproviding advice to a client, the TE shall actdiligently and make certain that its adviceand recommendations to clients are basedon thorough analysis and take into accountavailable alternatives.• The TE shall take all reasonablesteps to execute promptly client orders inaccordance with the instruction of clients.• The TE, when acting for or withclients, shall always execute client orderson the best available terms.• The TE shall ensure thattransactions executed on behalf of clientsare promptly and fairly allocated to theaccounts of the clients on whose behalf thetransactions were executed.Where a client opts not to accept therecommendation of the TE and chooses topurchase another investment productwhich is not recommended, the TE mayproceed with the client’s request/instruction, provided it shall document thedecision of the client and highlight to him/her that it is his/her responsibility to ensurethe suitability of the product selected.vii. In-House or related partytransactions handling. The TE shall definethe policies in handling related-interesttransaction to ensure that the best interestof clients prevails at all times and alldealings are above board. It must conformto the requirements of Subsecs. X409.3 andX411.5.viii.Valuation. The TE shall document theinstitution’s valuation process to show thesources of prices, either market or historicalvalue, and the formula used to derive theNAV of investment portfolios. Valuationshall be understood, compliant with writtenpolicies and operating procedures, andused consistently within the TE. The TEmust ensure that the valuation processesof service providers, custodians, and othersubcontractors are compatible with thoseof the TE and in compliance with relevantstatutory or regulatory valuation standards.Risk officers shall document theApp. Q-48 - Page 10Manual of Regulations for Non-Bank Financial Institutions

APP. Q-4811.12.31accuracy and reliability of all valuationprocesses and data sources and ensure thatvaluations are completed as required byinternal policies and procedures andregulatory reporting standards.e. Conflicts of interests. These mayarise when the TE exercises any discretionwhere mutually opposing interests areinvolved. The most serious conflict ofinterest is self-dealing, which could includetransactions such as an investment inrelated interests of the TE or purchase ofsecurities from or through an affiliate.Such transactions must be fully disclosedand authorized in writing by clients.Because of the complexity and sensitivityof the issue, a TE must develop policies andprocedures to identify and deal with conflictsof interest situations.3. Account terminationAccounts may be terminated for avariety of reasons, including the occurrenceof a specified event or upon written noticeof either the client or the TE. The trust orinvestment management agreement shallprovide for the terms and manner ofliquidation, return and delivery of assets/portfolio to the client. Generally, the TE'sresponsibilities include distribution to theclient, the successor trustee and/orbeneficiaries of the remaining assets heldunder trusteeship/agency arrangement,preparation and filing of required reports.The TE must ensure the risk controlprocesses are observed when terminatingaccounts just as when accepting them.The TE must have a general policy withrespect to the termination of trust accounts,which policy shall take into considerationthe general processes to be observed in thereturn or delivery of different types of assets,the possible modes of distribution, fees tobe paid, taxes to be imposed, thedocumentation required to effect the transferof assets, the provision of terminal reports,and whenever applicable, the timing ofdistribution, needs and circumstances ofthe beneficiaries. Should the TE anticipatepossible issues or problems withrespect to the termination of theaccount, such as the liquidation of certainassets or the partition or division of assets,these issues shall be disclosed to the clientfor proper disposition. The policy on thetermination of trust, fiduciary andinvestment management accounts shalllikewise include the approval process tobe observed for the termination of theseaccounts as well as the reportingrequirements for accounts terminated andclosed.(Circular No. 618 dated 20 August 2008, as amended byCircular No. 721 dated 13 May 2011)Manual of Regulations for Non-Bank Financial Institutions App. Q-48 - Page 11

Manual of Regulations for Non-Bank Financial InstitutionsTime of receiptof Public HolidayAnnouncement bythe BSP1. On anordinarybusiness dayprior to thedate ofeffectivity2. On aSaturday orSunday to takeeffect thefollowingMonday or ona non-workingholiday to takeeffect the nextbusiness dayGUIDELINES FOR DAYS DECLARED AS PUBLIC SECTOR HOLIDAYS[Appendix to 4256Q and 4601Q.6 (2008 - 4246Q.2 and 4601Q.6)]Bangko Sentral ng PilipinasTreasury DepartmentOvernight RP/RRP Term RP& RRP/GS/SDA/RDATrading Settlement Trading SettlementPDS PhilPASS Cash DeptWithdrawalReservePositionBureau of the TreasuryClosed Closed Closed Closed Closed Closed Closed Non- Closed ClosedReservePCHCAuction Sec. Mkt. Manila RegionalNo clearing; nosettlement.PCHC will issuean advisory to itsmembers that itwill continueaccepting andprocessing checksTo be decided incoordination withHead Officea. Under goodw e a t h e rconditionNochangeintradinghoursNochangeinsettlementtimeNochange intradinghoursNochange insettlementtimeOpen Open Open Reserve Open Open NormalTo be decided incoordination withHead OfficeAppendix Q-49 - Page 1b . U n d e runfavorableconditions suchas badweather, (e.g.Typhoon signalno. 3), naturalcalamities orc i v i ldisturbancesClosed Closed Closed Closed Closed Closed Closed Non-ReserveClosedClosedNo clearing; nosettlement.PCHC will issuean advisory to itsmembers that itwill continueaccepting andprocessing checksTo be decided incoordination withHead OfficeAPP. Q-4908.12.31

Appendix Q-49 - Page 2Manual of Regulations for Non-Bank Financial InstitutionsTime of receiptof Public HolidayAnnouncement bythe BSP3. Before 9:00a.m. on the dateof effectivity4. After9:00 a.m. onthe date ofeffectivity5. In case ofsuspension ofwork isextended toDay 2a. Before9:00am ofDay 2Day 1Day 2Day 2Bangko Sentral ng PilipinasTreasury DepartmentOvernight RP/RRP Term RP& RRP/GS/SDA/RDATrading Settlement Trading SettlementSuspendedto beresumedthefollowingday at9:01a.m.to9:45 a.m.Resumedfrom 9:01a.m. to9:45 am(for valueDay 1)then,4:45p.m.to5:30p.m.for samedaytransactionclosed;Day 1transactionswill bemoved toDay 3(for valueDay 1)9:01 a.m.to10:00a.m.4:45p.m.to5:45p.m.Nochange intradinghoursNochange intradinghoursNochange insettlementtimeNochangeinsettlementtimePDS PhilPASS Cash DeptWithdrawalReservePositionClosed Closed Closed Closed Closed Closed Closed Non-ReserveBureau of TreasuryPCHCAuction Sec. Mkt. Manila RegionalOpen Open Open Reserve Open Open Normal To be decided incoordination withHead OfficeOpen Open Open Reserve Open Open NormalClosed Closed Closed Closed Closed Closed Non-ReserveClosedClosedNo clearing; no To be decided insettlement. PCHC coordination withwill issue an advisory Head Officeto its members thatit will continueaccepting andprocessing checksClosed Closed No clearing; nosettlement PCHCwill issue anadvisory to itsmembers that itwill continueaccepting andprocessing checksTo be decided incoordination withHead OfficeTo be decided incoordination withHead OfficeAPP. Q-4908.12.31

Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-49 - Page 3Time of receiptof Public HolidayAnnouncement bythe BSPb. After9:00 a.m.of Day 2Day 3Bangko Sentral ng PilipinasTreasury DepartmentOvernight RP/RRP Term RP& RRP/GS/SDA/RDATrading Settlement Trading SettlementResumedfrom9:01 a.m.to9:45 am(for valueDay 1)then,4:45p.m.to5:30p.m.for samedaytransactionDay 2 Resumedfrom9:01 a.m.to9: 45 a.m.(for valueDay 1)then,Day 2transactionssuspendedto beresumedthefollowingday from9:01a.m.to9:45 a.m.9:01 a.m.to 10:00am4:45p.m.to5:45p.m.9:01 a.m.to10:00a.m.4:45p.m.to5:45p.m.Nochange intradinghoursNochange intradinghoursNochange insettlementtimeNochangeinsettlementtimePDS PhilPASS Cash DeptWithdrawalReservePositionBureau of TreasuryPCHCAuction Sec. Mkt. Manila RegionalOpen Open Open Reserve Open Open Normal To be decided incoordinationwith HeadOfficeOpen Open Open Reserve Open Open NormalTo be decided incoordination withHead OfficeAPP. Q-4908.12.31

Appendix Q-49 - Page 4Time of receiptof Public HolidayAnnouncement bythe BSPBangko Sentral ng PilipinasTreasury DepartmentOvernight RP/RRP Term RP& RRP/GS/SDA/RDATrading Settlement Trading SettlementDay 3 Resumedfrom9:01 a.m.to 9:45am (forvalueDay 2)then,4:45p.m.to5:30p.m.for samedaytransaction9:01 a.m.to 10:00a.m.4:45p.m.to5:45p.m.Nochange intradinghoursNochange insettlementtimePDS PhilPASS Cash DeptWithdrawalReservePositionBureau of TreasuryPCHCAuction Sec. Mkt. Manila RegionalOpen Open Open Reserve Open Open Normal To be decided incoordination withHead OfficeAPP. Q-4908.12.31Manual of Regulations for Non-Bank Financial Institutions6. In case thesuspension ofwork does notapply to allgovernmentoffices (ManilaDay, QuezonCity Day, etc.)4:45 p.m.to 5:30p.m. forsame daytransaction(M-2008-025 dated 13 August 2008)4:45 p.m.to 5:45p.m.Nochange intradinghoursNochange insettlementtimeOpen Open Open Reserve Open Open Normal To be decided incoordination withHead Office

APP. Q-5009.12.31GUIDELINES ON THE SUBMISSION OF APPLICATION FORMERGER AND CONSOLIDATION(Appendix to Subsec. 4108Q.1)The following guidelines andprocedures shall be observed by non-bankfinancial institutions with quasi-bankingfunctions (NBQBs) in their application formerger/consolidation:1. The merging/consolidating entitiesshall comply with the safety and soundnesstest requirements as follows:a. Compliance, especially by theacquiring NBQB, with major banking lawsand regulations; andb. Submission to the BSP of asatisfactory action plan, if applicable, toaddress serious supervisory concerns.2. Submission of the followingdocumentary requirements simultaneouslyto the BSP and the PDIC for merger/consolidation application involving onlyNBQBs;a. Articles of Merger or Consolidationduly signed by the President or Vice-President and certified by the secretaryor assistant secretary of each of theconstituent institutions setting forth thefollowing as required in Section 78 of theCorporation Code:• The Plan of Merger orConsolidation;• The number of shares outstanding;and• The number of shares voting for andagainst the Plan, respectively.b. Plan of Merger or Consolidationsetting forth the following:• The names of the constituentinstitutions;• The terms of the merger orconsolidation and the mode of carrying thesame into effect;• A statement of the changes, if any,in the Articles of Incorporation of thesurviving institution in the case of merger;and in the case• Of consolidation, all the statementsrequired to be set forth in the Articles ofIncorporation;• Such other provisions with respectto the proposed merger or consolidation asare deemed necessary or desirable.c. Resolution of the Board of Directorsof the respective institutions approving thePlan of Merger or Consolidation. Theresolution shall be certified under oath bythe respective corporate secretaries of theconstituent institutions;d. Resolution of the meeting of thestockholders in which at least two-thirds(2/3) of the outstanding capital stock ofeach corporation have approved the planof merger or consolidation. The resolutionshall be certified under oath by therespective corporate secretaries of theconstituent institutions;e. Financial Statements:• Latest financial statements and three(3) - year audited financial statements of themerging institutions• Three (3) - year financial projectionswith valid assumptions of the merged orconsolidated institutions’ balance sheet andincome statement.f. List of merger incentives the bankwill avail of;g. List of stockholdings of each of theconstituent institutions before and after themerger;h. List of directors and officers of eachof the merging/consolidating institutions;i. List of proposed officers anddirectors of the merged or consolidatedinstitution and the summary of theirqualifications;Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-50 - Page 1

APP. Q-5009.12.31j. Organizational chart of themerged or consolidated institutionincluding the number of offices andlocations thereof;k. Inter-company transactions relativeto the submitted Financial Statements;l. Computation of Capital AdequacyRatio on the submitted financialStatements;m. Viable Operational Plan with thefollowing components:• Marketing Strategies• Proposed Loan PortfolioDiversification• Deposit Generation• Proposed Improvements inAccounting System• Operational Control• Computerization Plan• Communication Systemn. The appraiser’s report of reappraisalof NBQB premises, if any, done by anindependent and licensed appraiser;o. Proposed increase of capital stockof surviving NBQB;p. Proposed amendments in theArticles of Incorporation of surviving NBQB;q. Director’s Certificate (survivingNBQB) on the proposed amendment of theArticles of Incorporation increasing theauthorized capital stock; andr. Any other reasonable requirementdeemed material in the proper evaluationof the merger or consolidation as maysubsequently be requested by the BSP and/or PDIC.3. For merger/consolidation involvinga NBQB, the BSP shall wait for PDICconsent before elevating the proposedmerger/consolidation to the Monetary Boardfor approval; and4. The authority given to merge/consolidate the constituent entities shall bevalid within six (6) months reckoned afterBSP approval.(M-2009-028 dated 12 August 2009)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-50 - Page 2

APP. Q-5111.12.31GUIDELINES ON THE COLLECTION OF THEANNUAL SUPERVISORY FEES FOR THE YEAR 2011[Appendix to Subsec. 4901Q.1 (2008 - 4652Q)]The following guidelines shall govern thecollection by the BSP and the payment by QBof the 2011 Annual Supervisory Fees (ASF).1. Notification of amount due for 2011ASF and mode of payment. The BSPSupervisory Data Center (SDC) shall send abilling notice in June 2011 to the QB for itsASF payment indicating, among others, thecomputation of the ASF due, including the 2%creditable withholding tax (CWT) thereon, ifapplicable, the period covered by the ASF andthe specific date when the ASF will be debitedfrom the QB’s demand deposit account (DDA)with the BSP.The BSP will not accept checks as modeof ASF payment. QBs, upon receipt of theASF billing notice from the BSP, shouldmaintain adequate balance in their DDA tocover the ASF and other daily obligationsand, when necessary, make correspondingdeposits to fully cover said obligations. Incase of deficiency, the provisions on DDAdeficiency in Subsec. X4901Q.1, asamended, shall apply.2. Exceptions noted on billing notice of2011 ASF. Upon receipt of the BSP Noticeof ASF billing, a QB is encouraged to checkthe accuracy of the billing and to submitany of the noted exceptions therein not laterthan ten (10) days before the specified dateof collection/debit to DDA as indicated inthe billing notice. The said exceptions,together with supporting documents, shallbe submitted to:The DirectorSupervisory Data Center (SDC)Bangko Sentral Ng Pilipinas16th Floor, Multi-Storey BuildingBSP Complex, A. Mabini StreetMalate, Manila 1004Any exceptions received after the cut-off dateor any exception not duly substantiated withdocuments before the cut-off date will beevaluated and considered in the computationof the ASF for the immediate succeeding year.3. Withholding tax on 2011supervisory fees. The following shall applyto QBs covered by Sections M and N of BIRRevenue Regulations (R.R.) No. 2-98, asamended by R.R. No. 17-2003:a. Within tern (10) days from26 May 2011, the QB shall submit to theBSP (at the address indicated in Item “2”hereof) a certified true copy of the BIR noticeclassifying it as among the institutionscovered under Section M of R.R. No. 2-98,as amended by R.R. No. 17-2003. Such BIRnotice received by the BSP after cut-off often (10) days will be considered in teh ASFcomputation of the next year. The submissionof such BIR notice will no longer benecessary if previously transmitted andreceived by the BSP in compliance withSection 3.1 of the BSP Memorandum No.2009-0046 dated dated 17 November 2009and M-2010-013 dated 31 May 2010.b. The ASF, net of the 2% CWT, shallbe debited from the DDA on the specifieddate referred to in the notice of ASF billingunder Item “1”.c. The following timelines shall beobserved on the submission of annualwithholding tax documents to BSP at theaddress indicated in Item "2" hereof:Tax DocumentsDue Date1. Original copy of BIR Form On or beforeNo. 2307 - Certificate of 31 DecemberCreditable Tax Withheld at 2011SourceManual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-51 - Page 1

APP. Q-5111.12.31Tax DocumentsDue Date2. Original Duplicate Copy of On or beforeBIR Form No. 1601E - 31 DecemberMonthly Remittance Return 2011of Creditable Income TaxesWithheld (Expanded), dulyreceived by BIR, If manuallyfiled, or duly supported withBIR confirmation notice/advice, if elctronically filed3. Certified true copy of BIR On or beforeofficial receipt/payment 31 Decemberconfirmation receipt 2011d. Considering that the withholdingtax documents enumerated in Item “c” willbe used to avail the tax credits for filing theannual income tax return of the BSP, thefailure to submit all of the enumerateddocuments within the stated deadline willcompel the BSP to immediately debit anamount equivalent to the 2% CWT from theDDA of QBs concerned, with no obligationon the part of the BSP to reimburse saidamount in case of late submission. In caseof DDA deficiency, the provisions inSubsec. 4901Q.1, as amended, shall apply.The above guidelines on withholdingtax shall be strictly enforced pendingresolution of the tax treatment on the ASFbeing assessed by the BSP.(M-2009-004 dated 12 February 2009, as amended byM-2011-029 dated 26 May, 2011, M-2010-013 dated 31 May2010 and M-2009-046 dated 17 November 2009)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-51 - Page 2

APP. Q-5209.12.31GUIDELINES ON BANKS’ INTERNAL CAPITALADEQUACY ASSESSMENT PROCESS(Appendix to Sec. 4119Q)A. Introduction1. This document sets out the broadguidelines that UBs and KBs (hereinafterreferred to as ‘banks’) should follow inthe design and use of their Internal CapitalAdequacy Assessment Process (ICAAP).A bank’s ICAAP supplements the BSP’sRisk-Based Capital Adequacy Framework(the Framework) as contained in existingregulations and, thus, must be appliedon a group-wide basis, i.e., it shouldcover all of a bank’s subsidiaries andaffiliates.2. Although the Framework prescribesthe guidelines for determining banks’minimum regulatory capital requirementsin relation to their exposure to credit risk,market risk and operational risk, a bank’sBoard of Directors and senior managementare still ultimately responsible in ensuringthat the bank maintains an appropriate leveland quality of capital commensurate not justwith the risks covered by the Framework,but also with all other material risks towhich it is exposed. Hence, a bank musthave in place an ICAAP that takes intoaccount all of these risks.B. Guiding principles1. Banks must have a process forassessing their capital adequacy relative totheir risk profile (an ICAAP).2. The ICAAP is the responsibility ofbanks. Banks are responsible for settinginternal capital targets that are consistentwith their risk profile, operatingenvironment, and strategic/business plans.The ICAAP should be tailored to a bank’scircumstances and needs, and it should usethe inputs and definitions that a banknormally uses for internal purposes.3. Banks’ ICAAP (i.e., the methodologies,assumptions and procedures) and otherpolicies supporting it (e.g., capital policy,risk management policy, etc.) should beformally documented, and they should bereviewed and approved by the board. Theresults of the ICAAP should also be regularlyreported to the board.In addition, the board and seniormanagement are responsible for integratingcapital planning and capital managementinto banks’ overall management culture andapproach. They should ensure that formalcapital planning and management policiesand procedures are communicated andimplemented group-wide and supported bysufficient authority and resources.Banks’ ICAAP document should besubmitted to the appropriate Central Pointof Contact Department (CPCD) of the BSPevery 31 January of each year. A suggestedformat of the ICAAP submission to the BSPis provided in Annex A of Appendix Q-52.4. The ICAAP should form an integralpart of banks’ risk management processesso as to enable the board and seniormanagement to assess, on an on-going basis,the risks that are inherent in their activitiesand material to their bank. This could rangefrom using the ICAAP in more generalbusiness decisions (e.g. expansion plans) andbudgets, to the more specific decisions suchas allocating capital to business units, or tohaving it play a role in the individual creditdecision process.5. The ICAAP should be reviewed bythe board and senior management at leastannually, or as often as is deemed necessaryManual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 1

APP. Q-5209.12.31to ensure that risks are covered adequatelyand that capital coverage reflects the actualrisk profile of their bank. Moreover, anychanges in a bank’s strategic focus,business plan, operating environment orother factors that materially affectassumptions or methodologies used in theICAAP should initiate appropriateadjustments to the ICAAP. New risks thatoccur in the business of a bank should beidentified and incorporated into theICAAP. The ICAAP and its review processshould be subject to independent internalor external review. Results thereof shouldbe communicated to the board and seniormanagement.6. Banks should set capital targetswhich are consistent with their riskprofile, operating environment, andbusiness plans. Banks, however, may takeother considerations into account indeciding how much capital to hold, suchas external rating goals, market reputationand strategic goals. If these otherconsiderations are included in the process,banks must be able to show to the BSPhow they influenced their decisionsconcerning the amount of capital to hold.7. The ICAAP should capture the riskscovered under the Framework – creditrisk, market risk, and operational risk. Ifapplicable, banks should disclose majordifferences between the treatments ofthese risks in the calculation of minimumregulatory capital requirement under theFramework and under the ICAAP. Inaddition, the ICAAP should also considerother material risks that banks are exposedto, albeit that there is no standarddefinition of materiality. Banks are freeto use their own definition, albeit that theyshould be able to explain this in detail tothe BSP, including the methods used, andthe coverage of all material risks. Theseother material risks may include any of thefollowing:a. Risks not fully captured under theFramework, for example, creditconcentration risk, risk posed by nonperformingassets, risk posed bycontingent exposures, etc.;b. Risks not covered under theFramework. As a starting point, banksmay choose to use the other risksidentified under Circular No. 510 dated03 February 2006. Some of these risksare less likely to lend themselves toquantitative approaches, in which casesbanks are expected to employ morequalitative methods of assessment andmitigation. Banks should clearly establishfor which risks a quantitative measure iswarranted, and for which risks aqualitative measure is the correct riskassessment and mitigation tool; andc. Risk factors external to banks.These include risks which may arise fromthe regulatory, economic or businessenvironment.8. Banks should have a documentedprocess for assessing risks. This processmay operate either at the level of theindividual banks within the bankinggroup, or at the banking group level.Banks are likely to find that some risksare easier to measure than others,depending on the availability ofinformation. This implies that their ICAAPcould be a mixture of detailed calculationsand estimates. It is also important thatbanks not rely on quantitative methodsalone to assess their capital adequacy, butinclude an element of qualitativeassessment and management judgment ofinputs and outputs. Non-quantifiable risksshould be included if they are material,even if they can only be estimated. Thisrequirement might be eased if banks candemonstrate that they have an appropriatepolicy for mitigating/managing these risks.9. The ICAAP should take intoaccount banks’ strategic plans and how theyQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-52 - Page 2

APP. Q-5209.12.31relate to macro-economic factors. Banksshould develop an internal strategy formaintaining capital levels which canincorporate factors such as loan growthexpectations, future sources and uses offunds and dividend policy, and anyprocyclical variation of minimum regulatorycapital requirements.Banks should also have an explicit,board-approved capital plan which statestheir objectives and the time horizon forachieving those objectives, and in broadterms the capital planning process and theresponsibilities for that process. The planshould also lay out how banks will complywith capital requirements in the future, anyrelevant limits related to capital, and ageneral contingency plan for dealing withdivergences and unexpected events (forexample, raising additional capital,restricting business, or using risk mitigationtechniques).In addition, banks should conductappropriate scenario/stress tests which takeinto account, for example, the risks specificto the particular stage of the business cycle.Banks should analyze the impact that newlegislation/regulation, actions of competitorsor other factors may have on theirperformance, in order to determine whatchanges in the environment they couldsustain.10. The results and findings of theICAAP should feed into banks’ evaluationof their strategy and risk appetite. For lesssophisticated banks in particular, forwhich genuine strategic capital planningis likely to be more difficult, the results ofthe process should mainly influence thebank’s management of its risk profile (forexample, via changes to its lendingbehavior or through the use of riskmitigants). The ICAAP should produce areasonable overall capital number andassessment. Banks should be able toexplain to the BSP’s satisfaction thesimilarities and differences between itsICAAP and its minimum regulatory capitalrequirements under the Framework.C. ICAAP Methodologies1. While banks may use simple ormodel-based ICAAP methodologiesdepending on what they think isappropriate for them (please see Annex Bof Appendix Q-52 for description of thedifferent broad classification ofmethodologies), at the minimum, the BSPexpects banks to adopt an ICAAP basedon the minimum regulatory capitalrequirement under the Framework and,where applicable, assess extra capitalproportionate to the other risks that arenot covered under said Framework. Thisrequires an assessment first of whether therisks covered under the Framework - creditrisk, market risk and operational risk - arefully captured, and second, how muchcapital to allocate against other risks andexternal factors.2. Regardless of which methodologya bank decides to adopt, it shouldcompare its actual and future projectedcapital with the actual and future internalcapital need arising from the assessment.The actual calculation and allocation ofcapital always needs to be supplementedby sufficiently robust qualitativeprocedures, measures and provisions toidentify, manage, control and monitor allrisks.3. The ICAAP will always consist oftwo parts. One part covers all stepsnecessary for assessing the risks. Theother part covers all steps necessary toassess the actual capital (risk-takingcapacity). As these two parts will alwaysmeet at the end of the ICAAP and have tobe in balance, there is no procedure whichsays which part has to be assessed first.4. After choosing its ICAAPmethodology, a bank could take itsthinking through the following steps indeveloping the ICAAP:Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 3

APP. Q-5209.12.31a. Risk identificationA bank could prepare a list of all materialrisks to which it is exposed; for that purpose itmay find it useful to identify and consider itslargest past losses and whether those lossesare likely to recur. The identification of allmaterial risk to which a bank is exposedshould be conducted in a forward lookingmanner.b. Capital assessmentFor all the risks identified through theprocess above, a bank could then considerhow it would act, and the amount of capitalthat would be absorbed, in the event that oneor more of the risks identified was tomaterialize.c. Forward capital planningA bank could then consider how its capitalneed as calculated above might change in linewith its business plans over its strategic timehorizon, and how it might respond to thesechanges. In doing so, a bank may want to performa sensitivity analysis to understand how sensitiveits capital is to changes in internal and externalfactors such as business risks, and changes ineconomic/business cycles.d. ICAAP outcomeFinally, a bank should document theranges of capital required as identified aboveand form an overall view on the amount ofinternal capital which it should hold.(Circular No. 639 dated 15 January 2009)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-52 - Page 4

APP. Q-5209.12.31Annex AINTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS(Suggested Format)The BSP expects that there will be a fairdegree of variation in the length and formatof submissions since banks’ business andrisk profiles differ. As such the ICAAPdocument should be proportional to thesize, nature and complexity of a bank’sbusiness.This format has been provided as astarting point. Banks are not required toadopt this format. However, adopting thisformat may be convenient for banks as itcovers the minimum issues which typicallywould be the subject of review by the BSPand may therefore make the review processmore efficient for both the bank and the BSP.Equally, use of this template is not asubstitute for being aware of the relevantrules.What is an ICAAP document?An ICAAP document is a bank’sexplanation to the BSP of its internal capitaladequacy assessment process. While thismay be based on existing internaldocumentation from numerous sources, theBSP will clearly find it helpful to have asummary prepared to communicate the keyresults and issues to it at a senior level.Since the BSP will be basing many of itsviews on the information contained in theICAAP document, the bank’s board ofdirectors and senior management shouldhave formally approved its contents. Assuch, the BSP would expect the ICAAPdocument to be in a format that can beeasily understood at a high level and tocontain all the relevant information that isnecessary for the bank and BSP to make aninformed judgment and decision as to theappropriate capital level and riskmanagement approach.Where appropriate, technicalinformation on risk measurement and capitalmethodologies, and all other works carriedout to validate the approach (e.g. boardpapers and minutes, internal or externalreviews) could be contained in appendices.1. EXECUTIVE SUMMARYThe purpose of the Executive Summaryis to present an overview of the ICAAPmethodology and results. This overviewwould typically include:i. The purpose of the report and whichgroup entities are covered by the ICAAP;ii. The main findings of the ICAAPanalysis:• How much and what compositionof internal capital the bank considers itshould hold as compared with the capitaladequacy requirement under the existing BSPRisk-Based Capital Adequacy Framework(the Framework), and• The adequacy of the bank’s riskmanagement processes given the risksassumed;iii. A summary of the financial positionof the business, including the strategicposition of the bank, its balance sheetstrength, and future profitability;iv. Brief descriptions of the capital anddividend plan; how the bank intends tomanage capital going forward and for whatpurposes;v. Commentary on the most materialrisks, why the level of risk is acceptable or,if it is not, what mitigating actions areplanned;Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 5

APP. Q-5209.12.31vi. Commentary on major issueswhere further analysis and decisions arerequired; andvii. Who has carried out theassessment, how it has been challenged,and who has approved it.2. BACKGROUNDThis section would cover the relevantorganizational structure and business lines,and historical financial data for the bank(e.g., group structure (legal and operational),operating profit, profit before tax, profit aftertax, dividends, equity, capital resources heldand as compared with regulatoryrequirements, total loans, total deposits,total assets, etc., and any conclusions thatcan be drawn from trends in the data whichmay have implications for the bank’s future).3. CAPITAL ADEQUACYThis section could start with adescription of the risk appetite used in theICAAP. It is vital for the BSP to understandwhether the bank is presenting its viewregarding: (1) the amount of capital requiredto meet minimum regulatory needs, or(2) the amount of capital that a bank believesit needs to meet its business objectives(e.g., whether the capital required is basedon a particular desired credit rating, orincludes buffers for strategic purposes, orminimizes the chances of breachingregulatory requirements). A description ofthe methodology used to assess the bank’scapital adequacy should also be included.The section would then include adetailed review of the capital adequacy ofthe bank.The information provided wouldinclude:Timingi. The effective date of the ICAAPcalculations together with consideration ofany events between this date and the dateof submission which would materiallyimpact the ICAAP calculation together withtheir effects; andii. Details of, and rationale for, thetime period over which capital has beenassessed.Risks analyzedi. An identification of the major risksfaced in each of the following categories:• credit risk;• market risk;• interest rate risk in the banking book;• liquidity risk;• operational risk;• compliance risk;• strategic/business risk; and• reputation risk;ii. And for each, an explanation of howthe risk has been assessed and, whereappropriate, the quantitative results of thatassessment;iii. Where relevant, a comparison ofthat assessment with the results of theassessment under the Framework(specifically for credit risk, market risk, andoperational risk);iv. A clear articulation of the bank’s riskappetite by risk category if this varies fromthe assessment; andv. Where relevant, an explanation ofany other methods apart from capital usedto mitigate the risks.The discussion here would make clearwhich additional risks the bank considersmaterial to its operation and, thus, wouldwarrant additional capital on top of thatrequired for credit risk, market risk, andoperational risk under the Framework.Methodology and assumptionsA description of how assessments foreach of the major risks have beenapproached and the main assumptionsmade.At a minimum, the BSP expects banksto base their ICAAP on the results of thecapital adequacy requirement under theQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-52 - Page 6

APP. Q-5209.12.31Framework and additional risks, whereapplicable, should be assessed separately.Capital transferabilityDetails of any restrictions that maycurtail the management’s ability to transfercapital into or out of the business(es)covered, for example, contractual,commercial, regulatory or statutoryrestrictions that apply.4. CURRENT AND PROJECTEDFINANCIAL AND CAPITAL POSITIONSThis section would explain the currentand expected changes to the business profileof the bank, the environment in which itexpects to operate, its projected businessplans (by appropriate lines of business), andprojected financial position for, say threeto five years.The starting balance sheet and date asof which the assessment is carried outwould be set out.The projected financial position mightconsider both the projected capital availableand projected capital resource requirementsto support strategic/business initiatives.These might then provide a baseline againstwhich adverse scenarios (please see CapitalPlanning below) might be compared.Given these business plans, this sectionwould also discuss the bank’s assessmenton whether additional capital is necessaryon top of that assessed to cover their existingrisk exposures, as well as future plannedsources of capital.5. CAPITAL PLANNINGThis section would explain how a bankwould be affected by an economic recessionor downswings in the business or marketrelevant to its activities. The BSP is interestedin how a bank would manage its businessand capital so as to survive a recession/market disruption while meeting minimumregulatory standards. The analysis wouldinclude financial projections forward for,say, three to five years based on businessplans and solvency calculations. Likewise,a bank should disclose here the keyassumptions and other factors that wouldhave significant impact on its financialcondition, in conducting scenario analyses/stress testing.Typical scenarios would include howan economic downturn/market disruptionwould affect:i. the bank’s capital resources andfuture earnings; andii. the bank’s capital adequacyrequirement under the Framework takinginto account future changes in its projectedbalance sheet.It would also be helpful if theseprojections showed separately the effects ofmanagement potential actions to change thebank’s business strategy and theimplementation of contingency plans.In addition, banks are encouraged toinclude an assessment of any other capitalplanning actions that would be necessaryto enable it to continue to meet itsregulatory capital requirements throughouta recession/market disruption such as newcapital injections from related companies ornew share issues.Given the projected capital needsarising from an economic recession orbusiness/market downswings, this sectionwould also discuss the bank’s assessmenton whether additional capital is necessaryon top of that assessed to cover their existingrisk exposures and business plans.6. CHALLENGE AND ADOPTION OFTHE ICAAPThis section would describe the extentof challenge and testing of the ICAAP.Banks should describe the review and signoffprocedures used by senior managementand the board. It might also be helpful if acopy of any relevant report to seniormanagement or the board and their responsewere attached.Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 7

APP. Q-5209.12.31Details of the reliance placed on anyexternal suppliers would also be detailedhere, e.g. for generating economic scenarios.In addition, a copy of any reportobtained from an external reviewer orinternal audit would also be included.7. USE OF THE ICAAP WITHIN THEBANKThis section would describe the extentto which capital management is embeddedwithin the bank including the extent and useof scenario analysis and/or stress testingwithin the bank’s capital managementpolicy, e.g. in business decisions (e.g.expansion plans) and budgets, or inallocating capital to business units, or inindividual credit decision process.Banks should include a statement of theactual operating philosophy on capitalmanagement and how this links to theICAAP. For instance differences in riskappetite used in the ICAAP as compared tothat used for business decisions might bediscussed.Lastly, it would be helpful if details onany anticipated future refinements within thebank’s ICAAP (highlighting those aspectswhich are work-in-progress), as well as anyother information that would help the BSPreview the bank’s ICAAP could be provided.(Circular No. 639 dated 15 January 2009)Q Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-52 - Page 8

APP. Q-5209.12.31Annex BALTERNATIVE INTERNAL CAPITAL ADEQUACYASSESSMENT PROCESS METHODOLOGIESThis appendix outlines ICAAPmethodologies which banks may adoptin lieu of that based on the minimumregulatory capital requirement under theBSP Risk-Based Capital AdequacyFramework (the Framework). However,the choice of methodology should clearlybe commensurate with banks’ ability tocollect the necessary information and tocalculate the necessary inputs in a reliablemanner.Structured approach - In this case,banks will need to set the internal capitalrequirement at a starting point of zerocapital and then build on capital due to allrisks (both those captured under theFramework and those that are not) andexternal factors. This methodology couldbe seen as a simple model for calculatingeconomic capital and is not based on theminimum regulatory capital requirement.A sensitivity analysis could form thestarting point. The sensitivity analysisshould be based on an exceptional butplausible scenario. Risks which are notincluded in the sensitivity analysis shouldalso be considered in terms of thestructured approach.Allocation-of-risk-taking approach – Inthis approach, banks might start with itsactual capital and break it down to all itsmaterial risks. This step in the processrequires quantification or at least anestimation method for various risks. Theamount of capital provided for each riskcategory is determined by the current andenvisaged amount of risk in each category,a risk buffer and their risk appetite. Bankswill decide which type of risk quantification/estimation method is suitable and sufficientfor its particular use. If the allocated capitalseems insufficient, either the risk has to bereduced or capital has to be raised. Theallocated amounts of the capital willtherefore work as a limit system, whichassists and facilitates banks in balancingtheir risk-taking capacity and their risks.Formal economic capital models –These are expected to be used eventually bybanks that use advanced approaches indetermining the minimum regulatory capitalrequirement, or those that have substantialderivatives and structured productstransactions (i.e., those that have expandeddealer and/or user capabilities).(Circular No. 639 dated 15 January 2009)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-52 - Page 9

APP. Q-5309.12.31GUIDELINES ON THE BANGKO SENTRAL’SSUPERVISORY REVIEW PROCESS(Appendix to Sec. 4119Q)A. Introduction1. The BSP’s supervisory reviewprocess (SRP) in the context of thisdocument involves (1) an evaluation ofbanks’ internal capital adequacy assessmentprocesses (ICAAP) and their output, (2) adialogue with banks with regard to theirICAAP, and (3) the prudential measures thatmay be taken to address issues identified.These guidelines should be observed mainlyby the appropriate Central Point of ContactDepartment (CPCD) within the BSP and,where appropriate for on-site validationduring regulation examination, by theexamination personnel. This thereforesupplements the existing guidelines set outin the Manual of Examinations, the CAMELSRating, and the Risk Assessment System(RAS). The CPCD may draft, for its own use,detailed guidelines on the conduct of theassessment of banks’ ICAAP and of the BSPbankdialogue.2. Although these guidelines aredirected mainly at BSP supervision andexamination personnel, banks will have aclear interest in knowing the approach theBSP intends to take in assessing their capitaladequacy.B. Guiding principles in assessingbanks’ ICAAP1. As a first step, the BSP shouldevaluate banks’ compliance with theminimum regulatory capital requirements asprescribed under the Framework. Thiswould involve the verification of banks’calculation of their risk weighted assets(RWA) and capital adequacy ratio (CAR).The minimum regulatory capitalrequirements should always be the startingpoint in the assessment of banks’ capitaladequacy. The validated CAR should thenbe compared with the required capitalresulting from the ICAAP.2. Next, the assessment of banks’ICAAP should include an evaluation of theirassumptions, components, methodologies,coverage and outcome. This review shouldcover both banks’ risk managementprocesses and their assessment of adequatecapital. The BSP should review how banksassess the other risks they are exposed to,especially Elements 2 to 4 listed in Item"C.4" hereof, the controls they have in placeto mitigate these risks, as well as theadequacy and composition of capital heldagainst those risks.3. The BSP should then identify existingor potential problems and key risks facedby banks, the deficiencies in their controland risk management frameworks, and thedegree of reliance that can be placed on theoutputs of their ICAAP. This process willenable the BSP to tailor its approach for eachindividual bank and will provide thefoundation for the BSP’s general approachfor each bank and its actions.4. The BSP’s evaluation of theadequacy of banks’ capital in relation to theirrisk profile would serve as the basis forassigning a rating for the Capital componentof the bank’s CAMELS rating. It would alsoserve as the basis for identifying anyprudential measures or other supervisoryactions required. For example, where thereis an imbalance between business and riskcontrols, the BSP should consider the rangeof remedial supervisory actions that may beneeded to rectify a deficiency in controlsand/or perceived shortfalls in capital, eitheras a long-term requirement(s) or as a shorttermaction(s).5. The results of the SRP will becommunicated to the board and seniorManual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-53 - Page 1

APP. Q-5309.12.31management of banks together with anyaction that is required of them and anysignificant action planned by the BSP. Thismay be done as part of the dialoguebetween the BSP and each bank on theICAAP.6. In evaluating the ICAAP of branchesof foreign banks in the Philippines, the BSPwill refer to the home supervisor’sconsolidated assessment of the ICAAP of thehead office/parent bank. The BSP will alsotake into account the strength andavailability of parental support.C. Guiding principles on BSP-bankdialogue1. A key element of the SRP is thedialogue between the BSP and each bank.The dialogue will inform the BSP about theway each bank’s ICAAP is structured, andthe assumptions and methodologies whichare used to assess its risk exposures.2. The ICAAP document, which banksare required to submit to the BSP everyJanuary of each year (suggested format isin Annex A of Appendix 91), will be thebasis for the BSP-bank (specifically,BSP-CPCD) dialogue. This dialogue mayfeed into the regular examination, and thefindings of the regular examination mayin turn feed into the dialogue. The BSP willdetermine the nature and depth of thedialogue, based on the type andcomplexity of the bank.3. Banks should be able to justify theirprocesses for identifying and measuring theirrisks as well as how much capital, if any,they allocate against them, taking intoaccount other qualitative mitigants of risk.Banks should be able to explain anydifferences between their own assessmentof capital needs and targets under the ICAAPand the minimum regulatory capitalrequirements prescribed under theFramework.4. The dialogue should embrace thefollowing four main elements:a. Element 1: Risks covered underthe Framework (i.e., credit risk, marketrisk, and operational risk);b. Element 2: Risks not fully coveredunder the Framework (for example, creditconcentration risk, risk posed by nonperformingassets, risk posed by contingentexposures, etc.);c. Element 3: Risks not covered underthe Framework (other risks identified underCircular No. 510 dated 3 February 2006);andd. Element 4: External factors, whichinclude risks which may arise from theregulatory, economic or businessenvironment.5. Aside from these four mainelements, the dialogue should also coverthe quality of internal governance of banks,including risk controls, compliance andinternal audit, as well as operational andorganizational structure.6. For the SRP to be effective, the BSPwill need to develop a sufficiently thoroughunderstanding of how the ICAAP isdetermined and the differences between itand the minimum regulatory capitalrequirement under the Framework. Thiswould help in evaluating the ICAAPoutcome. The SRP emphasizes theimportance of analyzing the main elements,and understanding the differences betweenICAAP assumptions and minimumregulatory capital requirement assumptions.7. Once the process has begun, thedialogue will provide the opportunity foriteration between the ICAAP and SRP, witheach informing the other, i.e., banks maymake changes to the ICAAP in the courseof the dialogue, in response to challengeand feedback from the BSP, and vice versa.Following the dialogue, the BSP will reachan assessment.D. Guidelines on prudential measures1. If the BSP considers that a bank’sICAAP does not adequately reflect its overallQ Regulations Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-53 - Page 2

APP. Q-5309.12.31risk profile, or does not result in the bankhaving adequate capital, then considerationshould be given to applying prudentialmeasures.2. The measures available to the BSPinclude:a. Requiring the bank to improve itsinternal control and risk managementframeworks;b. Requiring the bank to reduce the riskinherent in its activities, products andsystems;c. Restricting or limiting the business,operations or network of the bank;d. Limiting or prohibiting thedistribution of net profits and requiring thatpart or all of the net profits be used toincrease the capital accounts of the bank;ande. Requiring the bank to increase itscapital.3. The choice of prudential measuresshould be determined according to theseverity and underlying causes of thesituation and the range of measures andsanctions available to the BSP. Measurescan be used individually or in combination.The requirement to increase capital should,however, be imposed on any bank whichexhibits an imbalance between its businessrisks and its internal control and riskframeworks, if that imbalance cannot beremedied by other prudential measures orsupervisory actions within an appropriatetimeframe.4. The requirement to increase capitalmay also be set where the BSP judges theexisting capital held by a bank to beinherently inadequate for its overall riskprofile. It must be acknowledged that thereis no ‘scientific’ method for determining theamount, and that capital is not a long-runsubstitute for remedying deficiencies insystems and controls. In practice, theprocess relies heavily on subjectivejudgment and peer-group consistency toensure a level playing field and a defense topossible challenge that may be posed bybanks.5. Prudential measures should becommunicated promptly and in sufficientdetail. In communicating its decision onprudential measures, the BSP should:a. Explain in sufficient detail the factorswhich have led to the risk assessmentconclusions;b. Indicate areas of weakness and thetimeframe for remedial action;c. Explain the reasons for anyadditional capital requirement; andd. Indicate what improvements couldbe made to systems and controls to makethem adequate for the risks and activities ofthe bank, and for this improvement to bereflected in the bank’s capital requirements.(Circular No. 639 dated 15 January 2009)Manual of Regulations for Non-Bank Financial Institutions Q RegulationsAppendix Q-53 - Page 3

App. Q-5410.12.31PROCESSING GUIDELINES FOR MICROFINANCE OTHERBANKING OFFICES OR MICROBANKING OFFICES(Appendix to Subsection 4160Q.3)The establishment of other bankingoffices and the notes on microfinance shallbe guided by the following processingguidelines:The processing of applications will beundertaken in a two-stage process.Stage 1: Letter of Intent and PrequalificationStage 2: Business Plan (Strategic andOperational Plan Assessment)Stage 1: The applicant QB shall submita letter of intent duly authorized by theBoard of Directors, signed bythe President or equivalent rank.The letter will be evaluated by theappropriate Supervision and ExaminationSector (SES) Department based on safety andsoundness considerations.Stage 2: The applicant QB will berequired to submit a business plan containingthe strategic and operational details. Amongothers, such plan shall address the followingquestions:1.Why is the QB establishing microbankingoffices and how does it relate to theoverall corporate strategy?2. How many are to be established inthe next 1 (one) year, 3 (three) years, 5 (five)years? Where are these to be established?Why have these areas been identified?3. What are the products and servicesto be offered?4. How is the expansion to be funded?5. How does the QB plan to maintainadequate command and control over theexpanded network?6. The proposed MBOs are to be linkedoperationally to which branches?7. How does the QB propose to complywith the minimum fifty percent (50%)microfinance transaction requirement perMBO? (Microfinance transactions compriseof micro-loans and micro-deposits)8. What is the policy on the minimumcash position of the MBO? This shall includearrangement for replenishment.9. What are the management andorganizational arrangements for the MBO?This shall include proposed staffing patternand functions and qualification of thepersonnel in accordance with therequirements in 4160Q.3.10. What are the ManagementInformation Systems (MIS)and financial accounting arrangements tosupport customer handling and properrecording and reporting of transactions?11. What are the physical securityarrangements? These arrangements shall beincluded in the overall security program ofthe bank.A final decision will be made based onthe quality of Stage 2 submissions. Stage 2submissions will be evaluated whether theproposed operational plan is commensurateand proportionate to the strategy to ascertainsafe and sound MBO operations. A QB mayapply for additional MBOs, after six (6)months from approval of the initial set/batch.All MBOs must be opened within one (1)year from their approval. If not deemedsatisfactory, the application may be denied.Re-application shall only be allowed aftersix (6) months from the date of receipt ofdenial.All applications are to be submittedthrough the Central Application andLicensing Group (CALG) of the SES.(M-2010-040 dated 04 November 2010)Manual of Regulations for Non-Bank Financial InstitutionsPage 1

GUIDELINES ON OUTSOURCING OFSERVICES BY ELECTRONIC MONEY ISSUERS (EMIs) TOELECTRONIC MONEY NETWORK SERVICE PROVIDERS (EMNSP)(Appendix to Subsec. 4780Q.11)App. Q-5510.12.31I. Statement of policy. It is the goalof the BSP to achieve a truly inclusivefinancial system. In line with achievingthis goal, the BSP recognizes the potentialof electronic money (e-money) as aninstrument to facilitate delivery of financialservices affordably to the low-income,unbanked or undeserved segments of thepopulation, particularly in non-urbanizedareas. The BSP likewise recognizes thatefficient and effective delivery of financialservices may necessitate Electronic MoneyIssuers (EMI) to develop business modelsthat utilize outsourcing arrangements,considering the specialized operationaland technological requirements in ane-money business. Outsourcing, howevermay introduce an EMI to certainoperational and reputational risks thatneed to be properly managed. The BSPhereby issues the following guidelines togovern the outsourcing of E-Money relatedservices.II. Definition. An Electronic MoneyNetwork Service Provider (EMNSP) shallrefer to a non-financial institution thatprovides automated systems, networkinfrastructure, including a network ofaccredited agents utilizing the systems, toenable clients of an EMI to perform anyor all of the following:a. Convert cash to e-money andmonetize e-money;b. Transfer funds from one electronicwallet to another;c. Use e-money as a means ofpayment for goods and services; andd. Conduct other similar and/orrelated e-money activities/transactions.III. Application to outsource. An EMIintending to outsource the servicescontemplated under Item “2” shall limit itselfto an EMNSP as an outsource entity, andshall follow the procedures for outsourcinginformation technology systems/processesas provided under Appendix Q-37. Inaddition to the documentary requirementsunder said Subsec., an EMI should alsosubmit a certification signed by its Presidentor any officer of equivalent rank and functioncertifying that a due diligence review hadbeen conducted and that the selectedEMNSP has met the minimum requirementsprovided under Item “V”.IV. Responsibilities of an EMI. Relativeto the outsourcing of services to an EMNSP,it shall be the responsibility of an EMI to:a. Conduct due diligence review on anEMNSP in accordance with Item “V”;b. Ensure that the relationship/arrangement with an EMNSP is supportedby a written contract that should contain, ata minimum, the requirements prescribedunder Appendix Q-37. The contract shouldalso stipulate that:(1) the EMNSP shall allow the BSP tohave access and to examine the e-moneysystem, network infrastructure, operation ofthe network of accredited agents and alloperations related to e-money services beingoutsourced by the EMI for the purpose ofassessing the confidentiality, integrity, andreliability of the e-money system anddetermining compliance with BSP rules andregulations;(2) that the EMNSP shall not furtheroutsource or subcontract the activity beingoutsourced to the EMNSP; and(3) that interconnection by the EMNSPwith other networks shall be limited tonetworks of other EMNSPs and the BSPrecognizedATM consortia.Manual of Regulations for Non-Bank Financial Institutions App. Q-55 - Page 1

App. Q-5510.12.31c. Ensure that the EMNSP employs ahigh degree of professional care inperforming the outsourced activities as ifthese were conducted by the EMI itself.This would include, among others, makinguse of monitoring and control proceduresto ensure compliance at all times withapplicable BSP rules and regulations;d. Ensure that the EMNSP has anaccreditation process in the selection ofagents participating in the retail networkfor the conversion of cash to e-money andits monetization and that the EMNSP hasinstituted mechanism to manage sufficientliquidity in the system/network.e. Ensure that the EMNSP enforces aprogram that requires all cash-in and cashout agents under its network to undergoAML trainings and re-trainings every two(2) years; andf. Comply with all laws and BSP rulesand regulations covering the activitiesoutsourced to the EMNSP, especially oncompliance with anti-money laundering(AML) requirements.V. Due diligence and continuingoperational review. Prior to entering intoan outsourcing arrangement with anEMNSP, an EMI should conductappropriate due diligence review to assessthe capability of an EMNSP in performingthe service to be outsourced. The duediligence should take into considerationboth qualitative and quantitative factorsaffecting the performance of theoutsourced service, such as the financialcondition and results of operation for theprevious year/s, risk managementpractices, technical expertise whichinvolve monitoring the velocity ofe-money transactions and aggregation ofmonthly limits, among others, marketshare, reputation (both the company andits stockholders) and compliance withanti-money laundering requirements andBSP rules and regulations.An EMI should make sure that theEMNSP adheres to international standardson IT governance, information security, andbusiness continuity in the performance ofits outsourced activities. An EMI shouldendeavor to obtain independent reviews andmarket feedback on the EMNSP tosupplement its own findings.Operational review by an EMI of theEMNSP should be undertaken at least onan annual basis as part of riskmanagement. This review should bedocumented as part of an EMI’smonitoring and control process.VI. Delineation of responsibilities.The EMI and EMNSP shall identify,delineate and document theresponsibilities and accountabilities ofeach party as regards the outsourcingarrangement, including planning forcontingencies. Notwithstanding anycontractual agreement between an EMIand an EMNSP on the sharing ofresponsibility, the EMI shall be responsibleto its customers, without prejudice to furtherrecourse, if any, by the EMI to the EMNSP.VII. Confidentiality and security. AnEMI should review and monitor the securitypractices and control processes of theEMNSP on a regular basis, includingcommissioning or obtaining periodic expertreports on adequacy of security to maintainthe confidentiality and integrity of data,and compliance with internationallyrecognizedstandards in respect to theoperations of the EMNSP. Consideringthat the EMNSP may service more thanone EMI, the EMI should ensure thatrecords pertaining to its transactions aresegregated from those of other EMIs.The EMI and EMNSP shall identifycircumstances under which each party hasthe right to change securityrequirements. An EMNSP should berequired to report immediately anysecurity breaches to the EMI.App. Q-55 - Page 2Manual of Regulations for Non-Bank Financial Institutions

App. Q-5510.12.31In addition, the EMI should make surethe EMNSP have documented businesscontinuity plans in place and that said planis periodically reviewed and tested with nosignificant test findings. An EMNSP shallprovide the EMI with timely and adequatenotification on any adverse developmentthat may impact the former’s performanceand delivery of service to the EMI.VIII. EMI-Others intending to be anEMNSP. An EMI-Others that intend to bean EMNSP because of its specializedtechnical expertise shall comply with therequirements for an EMNSP. In addition,an EMI-Others shall undertake riskmitigatingmeasures to ensure that liquidassets, corresponding to the outstandingbalance of e-money issued by the EMI-Others and maintained pursuant to Sec.4780Q and Subsecs. 4780Q.1 to4780Q.7, be insulated from risks arisingfrom its liabilities as EMNSP. Thesemeasures may include ring fencing theliquid assets through an escrow or trustaccount in a financial institutionacceptable to BSP.IX. Sanctions. Violations committed byEMIs pertaining to outsourcing of activitiesto EMNSP shall be subject to monetarypenalties as graduated under AppendixQ-39 and/or other non-monetary sanctionsunder Section 37 of RA No. 7653.X. Transitory provisions. EMIs thatwere granted an authority to outsourcetheir e-money activities to an EMNSP maycontinue to exercise such authorityprovided that they have to conform to thisguidelines within a six (6)-month periodfrom 04 Novemeber 2010.(Circular No. 704 dated 22 December 2010)Manual of Regulations for Non-Bank Financial Institutions App. Q-55 - Page 3

APP. Q-5611.31.12GUIDELINES ON RECEIVERSHIP AND LIQUIDATION PROCEEDINGS OFNON-BANKS WITH QUASI-BANKING FUNCTIONS AND TRUST ENTITIES(Appendix to Section 4428Q)PART IGUIDELINES ON RECEIVERSHIP OFNBQBs/TRUST ENTITIESIntroduction. Receivership is defined as thecondition when the Monetary Boarddesignates a person, known as a “Receiver”,to take over an institution enumeratedunder Item "I" of these guidelines andadminister and hold the assets of theinstitution in trust for its creditors andstockholders.I. Coverage. These Guidelines shall coverinstitutions which shall refer to any of thefollowing:a. Non-banks with quasi-banking license(i.e. Investment houses and Financingcompanies); andb. Trust entities.II. Legal Bases for Placement underReceivershipa. Section 30, R.A. No. 7653.“Whenever, upon report of the head ofthe supervising or examining department,the Monetary Board finds that a x x xquasi-bank:1. is unable to pay its liabilities as theybecome due in the ordinary course ofbusiness: Provided, that this shall notinclude inability to pay caused byextraordinary demands induced byfinancial panic in the banking community;2. has insufficient realizable assets, asdetermined by the Bangko Sentral to meetits liabilities; or3. cannot continue in businesswithout involving probable losses to itsdepositors or creditors; or4. has willfully violated a cease anddesist order under Section 37 that hasbecome final, involving acts or transactionswhich amount to fraud or a dissipation ofthe assets of the institution; x x x"“x x x The receiver shall determine as soonas possible, but not later than ninety (90)days from takeover, whether the institutionmay be rehabilitated or otherwise placed insuch a condition so that it may bepermitted to resume business with safety toits x x x creditors and the general public:Provided, That any determination for theresumption of business of the institutionshall be subject to prior approval of theMonetary Board."“If the receiver determines that theinstitution cannot be rehabilitated orpermitted to resume business in accordancewith the next preceding paragraph, theMonetary Board shall notify in writing theboard of directors of its findings and directthe receiver to proceed with the liquidationof the institution x x x”“The actions of the Monetary Board takenunder this section or under Section 29 ofthis Act shall be final and executory, andmay not be restrained or set aside by thecourt except on petition for certiorari on theground that the action taken was in excessof jurisdiction or with such grave abuse ofdiscretion as to amount to lack or excess ofjurisdiction. The petition for certiorari mayonly be filed by the stockholders of recordrepresenting the majority of the capital stockwithin ten(10) days from receipt by theboard of directors of the institution of theorder directing receivership x x x”“The x x x appointment of a receiver underManual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 1

APP. Q-5611.31.12this Section shall be vested exclusively withthe Monetary Board. xxx”b. Section 53, R.A. No. 8791“In case a x x x quasi-bank notifies theBangko Sentral or publicly announces abank holiday, or in any manner suspendsthe payment of its deposit liabilities for morethan thirty (30) days, the Monetary Boardmay summarily and without need for priorhearing close such banking institution andplace it under receivership xxx."c. Section 56, R.A. No. 8791, 2 nd par.“Whenever a x x x quasi-bank or trust entitypersists in conducting its business in anunsafe or unsound manner, the MonetaryBoard may, without prejudice to theadministrative sanctions provided in Section37 of the new Central Bank Act, take actionunder Section 30 of the same Act x x x"d. Section 91, R.A. No. 8791 inrelation to Section 66 of R.A. No. 8791 andSection 36 of R.A. No. 7653Section 91, R.A. No. 8791“Sanctions and Penalties. — A trustentity or any of its officers and directorsfound to have willfully violated any pertinentprovisions of this Act, shall be subject tothe sanctions and penalties provided underSection 66 of this Act as well as Sections 36and 37 of the New Central Bank Act."Section 66, R.A. No. 8791“Penalty for Violation of this Act. — Unlessotherwise herein provided, the violation ofany of the provisions of this Act shall besubject to Sections 34, 35, 36 and 37 of theNew Central Bank Act. If the offender is adirector or officer of a bank, quasi-bank ortrust entity, the Monetary Board may alsosuspend or remove such director or officer.If the violation is committed by acorporation, such corporation may bedissolved by quo warranto proceedingsinstituted by the Solicitor General."Section 36, R.A. No. 7653“Sec. 36. Proceedings Upon Violation ofThis Act and Other Banking Laws, Rules,Regulations, Orders or Instructions. – xxxxxx xxxWhenever a xxx quasi-bank persists incarrying on its business in an unlawful orunsafe manner, the Board may, withoutprejudice to the penalties provided in thepreceding paragraph of this section and theadministrative sanctions provided in Section37 of this Act, take action under Section 30of this Act."III. Minimum Qualifications of theReceiver. The receiver shall possess at alltimes the following minimum qualifications:a. Must belong to the private sector;b. Must have appropriate knowledge,training and competence in the field ofbanking and finance, receivership,liquidation, rehabilitation/ corporaterecovery, insolvency, or supervision andregulation of financial institutions;c. Must have a minimum of five (5)years work experience in any of thefollowing:(i) rehabilitation/corporate recovery,receivership, liquidation, or insolvencyinvolving a business similar in size andcomplexity as that of the institution underreceivership; or(ii) banking and finance or supervisionand regulation of financial institutions.d. Must pass the “fit and proper” rule ofthe BSP on bank directors/officers;e.Must be of good moral character,sound judgment and tact in dealing withthe transactions of the institution underreceivership;f. Must not have conflict of interest asdefined in these guidelines;g. Must not be included in the BSPWatchlist Disqualification Files “A” and “B”;h. Must be eligible for coverage by afidelity bond;i. Must not have been convicted by, orhave no pending criminal or administrativeAppendix Q-56 - Page 2Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12case before a court or administrative bodyfor any offense involving dishonesty orbreach of trust such as, but not limited to,estafa, embezzlement, extortion, forgery,malversation, swindling, theft, robbery,falsification, bribery, violation of B.P. Blg.22, violation of anti-graft and corruptpractices act and prohibited acts andtransactions under Section 7 of R.A. No.6713 (Code of Conduct and EthicalStandards for Public Officials andEmployees), violation of banking laws, rulesand regulations; andj. Must not have been sentenced bya court to serve a maximum term ofimprisonment of more than six years,which conviction has become final andexecutory.A juridical person may serve as a receiver:Provided, that it must designate asits representative/s natural person/s whopossess/ess all of the above qualifications.Such juridical entity and therepresentative/s are solidarily accountablefor all the liabilities of the receiver.The Receiver shall be appointed by theMB and may be replaced at anytime uponwritten notice by the MB.The BSP may maintain a pool ofqualified receivers who shall be subjectedto the following selection process:(i) The SES shall send invitations citingthe minimum requirements for the position,together with a copy of the terms ofreference (TOR), to specific persons withreputable track record in handlingcorporate recoveries, rehabilitation,receivership, liquidation, banking andfinance or supervision and regulation offinancial institutions.(ii) Interested parties shall submit anapplication for appointment as receiver ofan entity, together with the statement thatthe applicant is agreeable to the TORprescribed by the BSP. The applicant shallalso submit his/her/its proposedcompensation and other fees.(iii) The SES shall evaluate thequalifications submitted by the applicantsand shall prepare a short list of thosequalified. To be included in the short list,candidates must comply strictly with theminimum qualifications.The BSP-accreditation of the receiversmay be renewed every three (3) years. Anyperson pre-qualified to be included in thepool, may be appointed as Receiver of one(1) or more NBQBs/Trust Entities subject tosuch conditions as may be imposed by theMB.The SES, when recommending to the MBthe person who shall be appointed asreceiver, shall consider, among others, thefollowing:(i) Area of expertise of the candidatesvis-à-vis the nature of the business of theentity under receivership;(ii) Amount of assets of the entity underreceivership;(iii) Proposed compensation and otherfees; and(iv) Any information available in thebusiness community and/or inlegal/professional organizations regardingthe candidate.IV. Conflict of Interest. Conflict of interestis a situation wherein a person in a fiduciaryposition has competing professional orpersonal interests that can make it difficultto fulfill his/her duties impartially, whichmay include the following:a. The person is, or was within two(2) years prior to the date the MB placed theinstitution under receivership a director,officer, employee, consultant/adviser,external counsel/auditor, creditor, debtor, orstockholder of the institution underreceivership;b. The person is presently engaged in acompeting line of business as the institutionunder receivership;c. The person is related by consanguinityor affinity within the fourth civil degree toManual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 3

APP. Q-5611.31.12such creditor, debtor, stockholder, director,officer of the institution under receivership;d. The person has a direct or indirectinterest in the institution under receivershipor any of its creditors; ore. Other cases analogous to theforegoing or where there is a clear showingof a conflict of interest, as may bedetermined by the MB.The applicant-receiver shall disclosewhether he/she/it possesses any of theforegoing conflict of interest.V. Powers, Duties and Responsibilities ofthe Receiver. The receiver has thefollowing principal responsibilities:a. Take charge of the institution’s assetsand liabilities as provided in theReceivership Procedures;b. As expeditiously as possible, collectand gather all the assets and administer thesame for the benefit of its creditors andexercise the general powers of a receiverunder the Revised Rules of Court but shallnot, with the exception of administrativeexpenditures, pay or commit any act thatwill involve the transfer or disposition of anyasset of the institution;c. Determine as soon as possible, butnot later than ninety (90) days fromtakeover, whether the institution may berehabilitated or otherwise placed in such acondition so that it may be permitted toresume business with safety to its clients,creditors and the general public; andd. Evaluate and propose rehabilitationplan that may be submitted and make arecommendation to the MB whether theinstitution should be rehabilitated orliquidated.e. Upon approval by the MB of thereceiver’s recommendation for liquidation,the receiver shall proceed with theliquidation without prejudice to theprerogative of the MB to select a liquidator.The receiver, in the performance of his/her/its duties, shall observe due diligenceas required under the circumstances,reasonable skill, sound discretion and goodfaith.VI. Designation of Deputy Receiver/s. Thereceiver may appoint as many deputies asmay be necessary to accomplish theobjectives of receivership. The appointeddeputies should possess the samequalifications required of a receiver.VII. Term of Receivership. Unlessotherwise provided by competent court, thereceiver shall determine within ninety (90)days from takeover, whether the institutionmay be rehabilitated or liquidated. The saiddetermination to rehabilitate or liquidate theinstitution shall be subject to prior approvalof the MB. The receivership may beterminated either upon receipt of the orderof the MB authorizing the institution toresume its operation or order placing itunder liquidation.VIII. Remuneration of the Receiver. TheReceiver and the Deputy Receivers shallreceive remunerations not more than theamount to be fixed by the MB.All expenses attendant to thereceivership, including the above, shall beborne by or chargeable to the institutionconcerned.PART IIGUIDELINES ON LIQUIDATIONPROCEEDINGS OF NBQBS/ TRUSTENTITIES1. Introduction. Liquidation is the processby which all the assets of an NBQB/TrustEntity are converted into liquid assets (cash)in order to pay for all the claims ofcreditors of the NBQBs, and the remainingbalance, if any, is to be distributed to thestockholders of the corporation. Aliquidation proceeding is a proceeding inAppendix Q-56 - Page 4Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12rem so that all other interested personswhether known to the parties or not maybe bound by such proceeding. 12. Legal Bases for Liquidation ProceedingsSection 30 of Republic Act No. 7653,otherwise known as the New Central BankActProceedings in Receivership andLiquidation. —“x x x x x x x x x“If the receiver determines that theinstitution cannot be rehabilitated orpermitted to resume business in accordancewith the next preceding paragraph, theMonetary Board shall notify in writing theboard of directors of its findings and directthe receiver to proceed with the liquidationof the institution. The receiver shall:“i. file ex parte with the proper regionaltrial court, and without requirement of priornotice or any other action, a petition forassistance in the liquidation of theinstitution pursuant to a liquidation planadopted x x x. In case of quasi-banks, theliquidation plan shall be adopted by theMonetary Board. Upon acquiringjurisdiction, the court shall, upon motionby the receiver after due notice, adjudicatedisputed claims against the institution,assist the enforcement of individualliabilities of the stockholders, directors andofficers, and decide on other issues as maybe material to implement the liquidationplan adopted. The receiver shall pay the costof the proceedings from the assets of theinstitution.“ii.convert the assets of the institutionto money, dispose of the same to creditorsand other parties, for the purpose of payingthe debts of such institution in accordancewith the rules on concurrence andpreference of credit under the Civil Code ofthe Philippines and he may, in the name ofthe institution, and with the assistance ofcounsel as he may retain, institute suchactions as may be necessary to collect andrecover accounts and assets of, or defendany action against, the institution. Theassets of an institution under receivershipor liquidation shall be deemed in custodialegis in the hands of the receiver and shall,from the moment the institution was placedunder such receivership or liquidation, beexempt from any order of garnishment, levy,attachment, or execution.”Section 56, R.A. No. 8791xxx xxx xxxWhenever a x x x quasi-bank or trustentity persists in conducting its business inan unsafe or unsound manner, the MonetaryBoard may, without prejudice to theadministrative sanctions provided in Section37 of the new Central Bank Act, take actionunder Section 30 of the same Actxxx xxx xxx”Section 91, R.A. No. 8791 in relationto Section 66 of R.A. No. 8791 and Section36 of R.A. No. 7653Section 91, R.A. No. 8791“Sanctions and Penalties. — A trustentity or any of its officers and directorsfound to have willfully violated any pertinentprovisions of this Act, shall be subject tothe sanctions and penalties provided underSection 66 of this Act as well as Sections 36and 37 of the New Central Bank Act.Section 66, R.A. No. 8791Penalty for Violation of this Act. — Unlessotherwise herein provided, the violation ofany of the provisions of this Act shall besubject to Sections 34, 35, 36 and 37 of theNew Central Bank Act. If the offender is adirector or officer of a bank, quasi-bank ortrust entity, the Monetary Board may alsosuspend or remove such director or officer.If the violation is committed by acorporation, such corporation may be1 Chua v. NLRC, 1990Manual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 5

APP. Q-5611.31.12dissolved by quo warranto proceedingsinstituted by the Solicitor General.Section 36, R.A. No. 7653Proceedings Upon Violation of This Actand Other Banking Laws, Rules,Regulations, Orders or Instructions. – xxxxxx xxxWhenever a xxx quasi-bank persists incarrying on its business in an unlawful orunsafe manner, the Board may, withoutprejudice to the penalties provided in thepreceding paragraph of this section and theadministrative sanctions provided in Section37 of this Act, take action under Section 30of this Act."3. Selection of Liquidator3.1 Minimum Qualifications of theLiquidator.The liquidator shall possess at all timesthe following minimum qualifications:a. Must belong to the private sector;b. Must have appropriate knowledge,training and competence in the field ofbanking and finance, receivership,liquidation, rehabilitation/corporaterecovery, insolvency, or supervision andregulation of financial institutions;c. Must have a minimum of five (5)years work experience in any of thefollowing:i. rehabilitation/corporate recovery,receivership, liquidation, or insolvencyinvolving a business similar in size andcomplexity as that of the institution underliquidation; orii.banking and finance or supervisionand regulation of financial institutions.d. Must pass the “fit and proper” ruleof the BSP on bank directors/officers;e. Must be of good moral character,sound judgment and tact in dealing with thetransactions of the institution underliquidation;f. Must not have conflict of interest asdefined in these guidelines;g. Must not be included in the BSPWatchlist Disqualification Files “A” and “B”;h. Must be eligible for coverage by afidelity bond;i. Must not have been convicted by,or have no pending criminal oradministrative case before a court oradministrative body for any offenseinvolving dishonesty or breach of trust suchas, but not limited to, estafa, embezzlement,extortion, forgery, malversation, swindling,theft, robbery, falsification, bribery, violationof B.P. Blg. 22, violation of anti-graft andcorrupt practices act and prohibited actsand transactions under Section 7 of R.A.No. 6713 (Code of Conduct and EthicalStandards for Public Officials andEmployees), violation of banking laws, rulesand regulations; andj. Must not have been sentenced by acourt to serve a maximum term ofimprisonment of more than six (6) years,which conviction has become final andexecutory.A juridical person may serve as aliquidator; Provided, that it must designateas its representative/s natural person/s whopossess/ess all of the above qualifications.Such juridical entity and the representativesare solidarily accountable for all theliabilities of the liquidator.The BSP may create a pool of prequalifiedliquidators, whose inclusion in thepool is subject to renewal every three (3)years. Any person pre-qualified to beincluded in the pool, may be appointed asLiquidator of one (1) or more NBQBs/TrustEntities subject to such conditions as maybe imposed by the MB.The Liquidator shall be appointed by theMB and may be replaced at anytime uponwritten notice by the MB.3.2 Conflict of Interest.Conflict of interest is a situationwherein a person in a fiduciary position hascompeting professional or personal intereststhat can make it difficult to fulfill his/herduties impartially, which may include thefollowing:Appendix Q-56 - Page 6Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12a. The person is, or was within two (2)years prior to the date the Monetary Boardplaced the NBQB/Trust Entity underliquidation, director, officer, employee,consultant/adviser, external counsel/auditor,creditor, debtor, or stockholder of the saidNBQB, or any of its subsidiaries, affiliatesor related interests;b. The person is presently engaged in acompeting line of business as the NBQB/Trust Entity under liquidation;c. The person is related byconsanguinity or affinity within the fourthcivil degree to such creditor, debtor,stockholder, director, officer, consultant/adviser, or external counsel/auditor of theNBQB/Trust Entity under liquidation;d. The person has a direct or indirectinterest in the NBQB/Trust Entity underliquidation; or any of its creditors; ore. Other cases analogous to theforegoing or where there is a clear showingof conflict of interest, as may be determinedby the Monetary Board.3.3. Selection Processa. The SES shall send invitations,together with a copy of the terms of reference(TOR), to specific persons with reputabletrack record in handling corporaterecoveries, rehabilitation, receivership andliquidation citing the minimumrequirements for the position.b. Interested parties shall submit anapplication for appointment as liquidator ofan entity, together with the statement thatthe applicant is agreeable to the TORprescribed by the BSP. The applicant shallalso submit his/its proposed compensationand other fees.c. The SES shall evaluate thequalifications submitted by the applicantsand shall prepare a short list of thosequalified. To be included in the short list,candidates must comply strictly with theminimum qualifications.SES, when recommending to the MB theperson who shall be appointed asliquidator, shall consider, among others, thefollowing:• Area of expertise of the candidatesvis-à-vis the nature of the business of theNBQB/Trust Entity under liquidation;• Amount of assets of the NBQB underliquidation;• Proposed compensation and otherfees; and• Any information available in thebusiness community and/or inlegal/professional organizations regardingthe candidate.SES shall then recommend to theMonetary Board the person/partnership/firmwho/which shall be appointed as liquidator.4. Terms of Reference of the BSP-Appointed Liquidator4.1 Functions, Responsibilities andAuthorities of the Liquidator.a. Master Liquidation PlanImplement the Master Liquidation Planfor NBQBs/Trust Entities.b. Liquidation ProcessThe BSP-designated liquidator of theNBQB/Trust Entity shall:1. Within sixty (60) days upon receiptof the Monetary Board placing the NBQB/Trust Entity under liquidation, file ex partea Petition for Assistance in the Liquidationof the NBQB/Trust Entity with the properRegional Trial Court pursuant to the MasterLiquidation Plan;2. Represent and act for and in behalfof the closed NBQB/Trust Entity;3. Gather and take charge of all theassets which shall include the NBQB/TrustEntity license, records, documents andaffairs of the NBQB/Trust Entity, andadminister the same for the benefit of itscreditors;4. Collect loans and other claims of theNBQB/Trust Entity, and for this purpose,modify, compromise or restructure the termsand conditions of such loans or claims asManual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 7

APP. Q-5611.31.12may be deemed advantageous to theinterest of the creditors and claimants of theclosed NBQB/Trust Entity;5. Convert the assets to money ordispose of the same to creditors and otherparties for the purpose of paying debts ofthe NBQB/Trust Entity in accordance withthe preference of credits provided under theCivil Code;6. Settle the affairs of the NBQB/TrustEntity within a reasonable time preferablywithin three (3) to five (5) years;7. Provide for his own organizationalsupport and for other resource back-up facilitiesto accomplish the liquidation plan,including hiring of counsel;8. Bring suits to enforce liabilities of thedirectors, officers, employees, agents of theclosed NBQB/Trust Entity and other entitiesrelated or connected to the closed NBQB/Trust Entity or to collect, recover andpreserve all assets, including assets overwhich the NBQB/Trust Entity has equitableinterest;9. Incur, disburse, charge and be paidfrom the funds of the NBQB/Trust Entity,liquidator’s fees, salaries/compensation ofsupport personnel and such other necessaryexpenses incurred in the discharge of theliquidation functions subject to approval bythe Liquidation Court; and10. Perform such other functionsnecessary in the liquidation of the NBQB/Trust Entity.c. Safeguards for Preserving the Assets ofan Entity during the Liquidation Process.The liquidator, in the performance ofhis/her/its duties, shall observe duediligence as required under thecircumstances, reasonable skill, sounddiscretion and good faith. Immediately afterhis takeover, the liquidator shall takeappropriate steps to manage, administer andpreserve the assets of the NBQB/Trust Entityin order to conserve and/or maximize thevalue of the assets, including assets in thepossession or administration of thirdpersons or those previously given ascollaterals by the NBQB/Trust Entity to itscreditors. Accordingly, the liquidator shallundertake the following steps:1. All properties included in theinventory of assets and/or under the custodyof the liquidator that are reasonably deemedto have inherent risk, shall be adequatelyinsured;2. The liquidator shall use alllegal means to control the assets, collect allreceivables, bring suit to collect claims andresist all unlawful claims against the assetsof the entity;3. Investible funds shall be limitedto readily marketable government securities;4. The liquidator shall convert theassets into money with convenient speedas may be practicable and at maximumrecovery obtainable under thecircumstances;5. The liquidator and his staff shallbe prohibited from purchasing propertiesof the NBQB/Trust Entity subject ofliquidation;6. The liquidator shall limitadministrative expenses to what isnecessary and reasonable;7. Third parties hired to performcertain activities shall possess theeducation, experience, training andcompetence necessary for the job;8. The liquidator shall maintainappropriate records which may be madeavailable to parties as provided in Section4.6 below; and9. The liquidator shall be required topost a surety bond in an amount not lessthan 10% of the book value of the totalassets of the institution as of takeover. Saidsurety bond shall be renewable every yearand the amount of which shall be at leastten percent (10%) of the realizable assets ofthe preceding quarter.d. Submission of Status Report.Appendix Q-56 - Page 8Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12The liquidator shall submit a semestralstatus report to the MB, or as often as maybe required by the MB.The liquidator shall also submit a statusreport to the Liquidation Court if so requiredby the Liquidation Court.4.2. Compensation and/or Fees ofLiquidatorThe Liquidator and the DeputyLiquidators shall receive compensations notmore than the amount to be fixed by theMB.All expenses attendant to theliquidation, including the above, shall beborne by or chargeable to the institutionconcerned.4.3. Termination of LiquidationProceedingsThe liquidation proceeding shall bedeemed closed and terminated upon finalityof the order of the Liquidation Courtapproving the termination of the liquidationproceeding and discharging the Liquidatorfrom any and all liabilities arising from orin connection with the Liquidation of theclosed NBQB/Trust Entity.4.3.1. Disposition of RemainingNon-Cash AssetsIn case the NBQB/Trust Entity hasremaining non-cash assets, the Liquidatorshall recommend to the Court the finaldisposition of such assets.4.4. Final Liquidation ReportAt the end of the liquidationproceedings, the Liquidator shall submit afinal report to the Monetary Board and theLiquidation Court. The Liquidator shallrecommend to the Court the issuance of anorder terminating the liquidationproceedings.4.5. Extension or Replacement ofLiquidator.In case the Liquidator fails to terminatethe Liquidation proceedings within his term,the Liquidator shall submit a status reportand may request for extension of his termor replacement, subject to BSP approval.The Liquidator shall manifest to the courtsuch approval for the information ofcreditors and other stakeholders.Upon the termination of the liquidationproceedings, the Liquidator shall pursueaction in accordance with the precedingSubsection.4.6. Records of the LiquidationProceedings.The liquidator shall maintain records ofthe liquidation proceedings which may bemade available to parties duly authorizedby him or the Liquidation Court.After the termination of the liquidationproceedings, the liquidator shall turn overall records to a custodian duly appointedby the Court.5. Term of Liquidator. The Liquidator shallserve for a term of five (5) years unlesssooner terminated, revoked or extended bythe Monetary Board.6. Proceedings in Case of VoluntaryLiquidation6.1. Grounds. An NBQB/Trust Entitymay elect voluntary dissolution under theCorporation Code by any of the followingmethods:a. by two-thirds (2/3) vote of thestockholders and majority vote of the boardof directors, where no creditors areprejudiced;b. judgment of the Securities andExchange Commission after hearing thepetition for voluntary dissolution, wherecreditors are prejudiced; orc. amending the articles ofincorporation to shorten the corporate term,provided all creditors are assured ofpayment of their claims.The liquidation of an NBQB/Trust Entitywhich is voluntarily dissolved may beundertaken by the NBQB/Trust Entity itselfthrough its Board of Directors, or by aTrustee appointed by the NBQB/TrustManual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 9

APP. Q-5611.31.12Entity. If the liquidation cannot be carriedout by the Board of Directors or by aTrustee, a Liquidator may be appointed bythe Monetary Board. However, in both ofthe foregoing cases, the following conditionsshall apply:• No voluntary dissolution shall beundertaken by an NBQB/Trust Entitywithout written notice to the MonetaryBoard;• The notice shall be accompanied by asurrender of license and request forapproval of a liquidation plan which laysdown the procedures to be adopted in theliquidation of the NBQB/Trust Entity;• The liquidation plan shall beimplemented by the Board of Directors/Trustee/Liquidator only upon its approvalby the Monetary Board;• Within five (5) days from receipt of noticeof approval by the Monetary Board of theNBQB/Trust Entity’s Liquidation Plan, theBoard of Directors shall cause the postingin three (3) public places and publicationof the NBQB/Trust Entity’s voluntarydissolution once in a newspaper of generalcirculation; and• The liquidation shall be terminatedwithin a reasonable time, preferably withinfive (5) years or sooner.6.2. Liquidation Process.T h e liquidation plan shall, at aminimum, include the following:a. Inventory/Appraisal of Assets andLiabilities. A schedule/inventory and status/appraisal reports of assets and liabilities ofthe NBQB/Trust Entity.b. Notice to Creditors. Notice of thevoluntary dissolution to be sent by theBoard of Directors/Trustee/Liquidator byregistered mail to all creditors of the NBQB/Trust Entity advising them to file their claimswithin a set deadline. Publication of thesame notice shall be made in a newspaperof general circulation at least once a weekfor two (2) consecutive weeks, within thirty(30) days from approval by the MonetaryBoard of the voluntary dissolution.c. Conversion of Assets into Money.Projected timetable to convert assets andmanner of conversion, e.g., thru publicauction or negotiated sale.d. Project of Distribution of Assets andLiquidating Dividends.e. Final Notice to Claimants/Creditors.Undertaking of the Board of Directors/Trustee/Liquidator to advise, within thirty(30) days from conversion into money ofall or substantially all of the assets of theNBQB/Trust Entity, by registered mail andby publication in a newspaper of generalcirculation at least once a month for three(3) consecutive months, that claimants/creditors have thirty (30) days from lastpublication within which to claim checkpayments.f. Final Liquidation Report. Submissionby the Board of Directors/Trustee/Liquidator, within thirty (30) days from thedeadline given in the final notice toclaimants/creditors, of a final liquidationreport to the Stockholders, copy furnishedthe Securities and Exchange Commissionand the Monetary Board. The final reportshall include, among others, a list of theremaining non-cash assets of and claimsagainst, the NBQB/Trust Entity, if any.Appendix Q-56 - Page 10Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12RECEIVERSHIP PROCEDURES FOR NON-BANKS WITH QUASI-BANKINGFUNCTIONS (NBQBs) AND TRUST ENTITIESA. Pre-Takeover PreparationsIn preparation for actual takeover, thereceiver designated by the Monetary Board(“MB”) shall, as much as practicable, see toit that the following procedures areaccomplished:1. Designation of deputy receiver(s)and the formation of a completereceivership team which preferably includesan auditor and a lawyer. The compositionof the team shall depend on the size, typeof institution and the number of branches;2. Planning, organization, andcoordination of the duties and functions ofall members of the team and completebriefing of the mechanics and the strategyof the takeover in a conference called forthe purpose;3. Drawing-up/formulation ofpolicies, guidelines and strategies to ensurethe effective implementation of MonetaryBoard (“MB”) resolutions, BSP Circulars andother applicable laws in relation to thereceivership of the institution;4. Arrange security measures for thetakeover; and5. Review of the examination papers/files and other documents pertaining to theinstitution to be taken over.B. Actual TakeoverDuring the actual takeover, the followingprocedures shall be observed:1. Serve the letter of authority from theDeputy Governor of the Supervision andExamination Sector on the takeoveraddressed to the President/Board ofDirectors of the institution. The receiver/deputy receiver shall see to it that the officialreceiving the said letter of authority indicateshis designation, date and time of receipt onthe duplicate copies of the letter.In case the management of theinstitution refuses to allow the takeover, thereceiver/deputy receiver shall immediatelyreport the matter to the nearest office of thePhilippine National Police and to the MBfor further instructions;2. As soon as the official of theinstitution receives the letter of authority ontakeover, all operations shall be under thedirection of the receiver or deputy receiver.The receiver shall suspend all operationsexcept collections of loans and receivables;3. Post a notice in the mostconspicuous place in the institution’spremises (usually the main door) informingthe public of the placement of the institutionunder receivership;4. Adopt appropriate securitymeasures, such as hiring of private securityguards, to prevent removal of records andother properties from the premises of theinstitution;5. Notify in writing all of theinstitution’s depository banks of thereceiver’s takeover with instruction not tohonor any withdrawal from the institution’sdeposit accounts without the writtenapproval of the receiver/deputy receiver;6. Request or secure copies of trialbalance, statement of condition andstatement of earnings and expenses as of thelast working day preceding the actualtakeover;7. Open a new deposit account(preferably a current account-savingsaccount combo) with a reputable bankwithin the vicinity, in the name of the closedinstitution, with the Receiver as theauthorized signatory and custodian. TheReceiver may also maintain the existingaccount of the institution provided that theReceiver shall be the authorized signatory.Manual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 11

APP. Q-5611.31.128. Conduct physical inventory and instituteappropriate control and custody of all assets,liabilities, records, books of accounts andaccountable forms of the institution;9. Notify in writing the employees ofthe institution concerning the suspension oftheir employment contracts. Determine thenumber of employees to be retained in thereceivership operation of the institution, andissue a notice of indefinite leave of absencefor those who may not be retained and aconfirmation of employment for those to beretained;10. Deposit all checks and other cashitems that were inventoried and subsequentcollections to the savings account/currentaccount mentioned in Item 7 above; and11. Reconcile the inventoriedproperties/assets with the books/records andaccount for missing items. Demand from theresponsible/ accountable officials theturnover of unaccounted items or writtenexplanation under oath for each of themissing items.The tasks and the procedures listedabove need not be followed in the order theywere listed. The entire receivership team isexpected to exercise sound discretion ingiving priorities to more urgent matters.Moreover, the receiver/deputy receiver mayadopt other measures/ appropriate steps hemay deem necessary under givencircumstances. Finally, he shall endeavor toeffect an orderly and seamless takeover andminimize inconvenience to the institution’smanagement and personnel.Item Nos. (1) to (9) above should be, asmuch as practicable, undertaken on the firstday of takeover.C. Post TakeoverWithin fifteen (15) days after the completionof the takeover, the receiver shall submit tothe MB, through the Deputy Governor ofthe Supervision and Examination Sector, areport containing the following information:1. Brief history of the institution;2. Basis of its placement underreceivership;3. Comparative balances of its accountas reflected in the books as of takeover dateagainst the balances obtained per inventoryand turnover from the institution’smanagement to the receiver;4. Inventories mentioned in Item B. 8above; and5. Such other information that shouldbe brought to the attention of the MB.D. Accounting and ReportorialRequirements AccountingOnce takeover is in place, the receivershipteam shall immediately undertake to:1. Adopt an effective accountingsystem.a) Carry in the receiver’s books a chartof accounts of the institution, withadditional accounts such as ReceivershipCosts and Fees (for recording of the salariesof the receivership team and those of theinstitution’s employees to be retained, andother authorized expenses incurred by thereceiver) and the Receivership Income(which may include rental income, andinterest income);b) Supervise the closing of the books asof takeover date and transfer the balancesof all real accounts from the institution’sbooks to the new set of books opened bythe receiver’s team; andc)Record receiver’s transactionsinvolving receipt and disbursement of cashin accordance with generally acceptedaccounting principles.2.Attend to all requirements of variousagencies of the government, such as filingof tax returns and notices or otherreportorial requirements of theDepartment of Labor and Employment,Securities and Exchange Commission andSocial Security System/GovernmentService Insurance System.Appendix Q-56 - Page 12Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12ReportsThe receiver shall submit a monthlyreport of the receivership to the MBcontaining, among others, the following:a) Statement of Condition;b) Statement of Earnings and Expenses;c) Cash receipts and disbursements;d) Bank Reconciliation Statements;e) Summary of loan collections;f) Summary of Assets Acquired; andg) Status of Legal CasesE. Administration of the Assets of theInstitutionThe receivership team or any memberthereof, to be assigned by the receiverrelative to the administration of theinstitution’s assets, shall perform thefollowing tasks/duties:Cash and Deposits in Banks1. Reconcile the deposit accounts of theinstitution and prepare/book the necessaryadjusting entries.2. Pay the following receivershipexpenses:a) Salaries and other allowances ofofficers and employees, including those ofthe receivership team;b) Security and janitorial services;c) Rental on institution’s premises;d) Telephone, light, water and otherutility expenses; ande) InsuranceOther than the foregoing expenses, nopayment shall be made unless it is necessaryfor the preservation of the institution’s assetsand the operation of the receiver.Loans/Receivables and Trading AccountSecurities1. Evaluate documents of each loanfolder and segregate vital documents fromthe file;2. Prepare inventory of missingdocuments and demand explanations underoath from accountable/responsible officersof the institution;3. Send demand letters, when due, ornotice to borrowers and co-makers ofvarious loan accounts;4. Ensure that the real estate taxes onproperties mortgaged in favor of theinstitution are updated by the borrowers;5. Hire legal counsels to enforcecollection;6. Initiate collection proceedings; and7. Follow-up on execution ofjudgments when warranted.Real and Other Properties Acquired1. Update payment of taxes;2. Collect the fruits and rentals; and3. Perform other acts which arenecessary in preserving the properties andmaking them productive;F. Rehabilitation ProposalIn case a rehabilitation proposal issubmitted, the receiver shall undertake to:1. Evaluate the rehabilitation proposalwhich shall contain, among others, thefollowing:a) a capital restoration plan that shallinclude an initial fresh capital infusion ofan amount (to be determined by theReceiver) that will render the institutionoperational ;b) a business improvement plan thatshall contain set of actions to be takenimmediately to bring about an improvementin the entity’s operating condition ; andc) a corporate governance reforms thatshall contain actions to be immediatelytaken to improve composition of the Boardof Directors and to enhance the quality ofits oversight over the management andoperation of the entity.2. Submit report on the rehabilitationproposal, together with his evaluations andrecommendation(s), to the MB within ninetydays (90) from takeover.Manual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 13

APP. Q-5611.31.12G. Termination of ReceivershipUnless otherwise provided by competentcourt, the receiver shall determine withinninety (90) days from takeover, whetherthe institution may be rehabilitated orliquidated. The said determination torehabilitate or liquidate the institutionshall be subject to prior approval of theMB. The receivership may be terminatedeither upon receipt of the order of the MBauthorizing the institution to resume itsoperation or order placing it underliquidation.Upon termination of the receivership,the receiver shall -1. Submit a report to the MB containingthe following:a) MB resolution placing the institutionunder receivership;b) Summary of total cash realized anddisbursed by the receiver;c) Comparative balance sheetstatements as of takeover date and as oftermination date of the receivership;d) Other information which should bebrought to the attention of the MB;e) Recommendation for the dischargeof the receivership team from thereceivership duties.2. Prepare an inventory of assets,liabilities and records to be turned over tothe new management (if the entity is to berehabilitated) or to the liquidator (if the entityis to be liquidated).Appendix Q-56 - Page 14Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12MASTER LIQUIDATION PLAN FOR NBQBs/TRUST ENTITIES1. Preparation of Schedules of Assets andLiabilities.After the turn-over of the affairs of theinsolvent NBQB/Trust Entity is completed,the Liquidator shall prepare the schedulesof all the assets and liabilities of the entityaccompanied by the following basicinformation:• Statement of condition as of date oforder of liquidation• Exceptions/variances noted in thetakeover• Work program pursuant to the masterliquidation plan2. Inventory of AssetsThe following procedures/guidelinesshall be observed by the Liquidator in preparingthe inventory of assets:2.1. The inventory shall contain allknown assets of the NBQB together withtheir book value and market value basedon the latest available appraisal report.2.2. Supplemental reports shall besubmitted for additional assets discovered,if any, and the Liquidator shall takepossession thereof.2.3. The schedules/reports shall be thebasis for the conversion/disposition of theassets.3. Conversion of Receivables/Loans,Securities, and Other Receivables intoMoneyThe following procedures/guidelinesshall be observed by the Liquidator inconverting the NBQB’s/Trust Entity’s assetsto money:3.1. In case the Liquidator engages theservices of private collection agencies to collectall or particular receivables of the entity,such shall be covered by an agreementin writing.3.2. In case the Liquidator shallundertake the collection of the loanreceivables:3.2.1. At least three (3) demand lettersshall be sent to borrowers whose accountsare not subject to pending cases in courts,furnishing a copy of said letters to respectiveco-makers or guarantors, by registered mailwith return card or by courier;3.2.2. The Liquidator shall cause theappraisal of collaterals to determine theirexistence and valuation, where necessary.3.2.3. Settlement proposals whichrequire at least 20% payment of the totalobligation and the balance (with interest)payable in equal amortizations within aone-year period may be allowed, provided,any deviation from the aforementionedarrangement shall require approval of theLiquidation Court.3.2.4. For borrowers who ignoredemand letters or who fail to settle theiraccounts in accordance with the agreedpayment arrangement, or whose demandletters are returned by the Post Office or bycourier, the following courses of action shallbe taken:3.2.4.a. Secured loans – Immediateforeclosure of the mortgaged property shallbe instituted.3.2.4.b. Unsecured loans – TheLiquidator shall pursue appropriate legalaction.3.2.5. Foreclosure of mortgages may bedone either extra-judicially or judicially. Theamount of bid shall be the current appraisalvalue of the property or the total obligationconsisting of principal, interest, penaltiesand other charges, including attorney’s fees,other foreclosure and collection expensesincurred, whichever is lower. In case thebid price in foreclosure sale is not sufficientto cover the total loan obligation, thenecessary legal remedies shall be institutedagainst the borrower-mortgagor, with theassistance of the counsel engaged by theManual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 15

APP. Q-5611.31.12Liquidator, to recover the deficiency.3.2.6. The Liquidator is authorized todisburse funds for foreclosure expenses,including legal fees, to be charged againstthe NBQB/Trust Entity.3.2.7. Booked receivables found to benon-existent and/or uncollectible shall bewritten-off subject to prior approval of theLiquidation Court.4. Conversion of Personal and Real EstatePropertiesThe conversion into money of thepersonal properties and real estate propertiesand their improvements shall be made asfollows:4.1. These items shall be sold bymeans of public sealed bidding or onnegotiated basis; provided that negotiatedsale shall only be resorted to in the event offailure of public sealed bidding.Negotiated sale shall be governed byAnnex A-1.1. Sample form for negotiatedoffer to purchase is attached as Annex A-1.4.2. Publication of the sale by meansof sealed bidding shall be made by theLiquidator once in a national newspaper ofgeneral circulation in the Philippines.4.3. In case of properties situatedoutside National Capital Region, theinvitation to bid shall also be published oncein a local newspaper of general circulationin the province or city where the propertyis situated at least fifteen (15) days beforethe scheduled sale. If there is no newspaperof general circulation in the locality wherethe property is situated, the invitation to bidshall be posted conspicuously in thecity or municipal hall and in other publicplaces, like public market, at least fifteen(15) days before the scheduled sale.4.4. In the case of personal property, thepublication of sale in a newspaper may bedispensed with if the value of the propertyto be sold is insignificant relative to the costof publication. Instead, notices of sale ofthese properties shall be posted ingovernment offices and other public placesat least fifteen (15) days before the scheduledsale.4.5. In case of sale through sealedbidding, sample invitation to bid is attachedas Annex A-2.4.6. The minimum selling price of realand personal properties of the NBQB shallbe determined taking into consideration theappraised value based on the appraisalreport made not more than two (2) yearsprior to date of disposition.4.7. The Liquidator may reduce theminimum bid/selling price by not more than10%, in case of properties that cannot besold at the stipulated minimum bid/sellingprice.4.8. The Liquidator shall recommend tothe Court the write-off of assets which areascertained to be worthless.4.9. In case of sale thru sealed biddingof personal and/or real properties, theLiquidator may use the sample bid formsand conditions of bid as shown in AnnexesA-3 and A-4, respectively. In the case ofpartnerships/corporations, the bid form shallbe accompanied by an authority/resolutionthat shall indicate the designated personwho shall make a bid and bind thepartnership/corporation.In any case, the higher price obtainableshould govern the sale of the assets of theNBQB/Trust Entity.4.10. Prospective bidders are allowedto examine the documents covering the realestate properties and their improvementsand to inspect the property andimprovements at their site, if desired.4.11. The condition of the bid withrespect to the real estate properties andimprovements shall form part of theconditions for the sale of such assets.4.12. All bids shall be in Philippinecurrency and shall be written in words andin figures. In case of conflict betweenwords and figures, the words shall prevail.4.13. Bid proposals together with theminimum 20% of the bid tender in cash orAppendix Q-56 - Page 16Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5611.31.12manager’s check shall be submitted to theLiquidator in sealed envelopes. SampleInvitation to Bid is shown in Annex A-2.Bidders of real property shall be thosequalified to own real property underexisting laws.4.14. The Deed of Sale shall be madeand executed after the winning bidder paysthe entire bid price of the property.4.15. The winning bidder of the realestate property shall be responsible forinstituting eviction proceedings against anyformer owner or present occupant orpossessor, if any.4.16. Real and personal properties thatcannot be sold shall be subject to suchdisposition as may be determined by theLiquidator and with the approval of theLiquidation Court.5. Processing of Claims Against theInsolvent NBQB/Trust Entity.Processing of claims against the NBQB/Trust Entity shall only start after submissionto the Monetary Board of the inventory ofassets and liabilities.The Liquidator shall observe thefollowing procedures/guidelines in theprocessing of claims:5.1. Posting in the premises of closedNBQB and publication of a “Notice toCreditors” in a newspaper of generalcirculation once a week for two (2)consecutive weeks advising all creditors tofile their claims against the entity. (SeeAnnex A-5 for sample of Notice toCreditors.)5.2. Distribution of claim forms forcreditors to accomplish. (See Sample ClaimForm in Annex A-6)The claimant shall accomplish ClaimForm as shown in Annex A-6. In the caseof partnerships/corporations, the claimform shall be accompanied by an authority/resolution that shall indicate the designatedperson who shall make a claim and bindthe partnership/corporation. Claims receivedshall be stamped “Received”, dated andnumbered consecutively and recorded in theregistry of claims. A copy of the claimreceived shall be given to the claimant.5.3. Verification of claims receivedagainst the records and books of accountsof the NBQB to ascertain authenticity,determine whether claimants haveoutstanding liabilities to the NBQB/TrustEntity and whether settlement of the claimsshall be in full or pro-rata depending onwhether the claim is preferred or ordinary.5.4. Preparation of an adjustment andverification sheet for each claim. (SeeAnnex A-7)5.5. Preparation of a LiquidationCertificate (sample is shown in Annex A-8)embodying the conclusive findings arrivedat on the adjustment/verification sheet. Theorder shall be served on the claimant byregistered mail with return card/personalservice.6. Payment of Claims6.1. The net proceeds of the sale maybe paid to creditors of the NBQB, takinginto consideration the rules on preferenceof credits. A proposal to this effect shall besubmitted to the Liquidation Court, copyfurnished the Monetary Board.6.2. Prepare and submit to the Court forapproval a Project of Distribution, in caseof 6.1, or Final Distribution (Sample inAnnex A-9) as the case may be, which mustshow, among others, the following:• Cash• Assets to be realized• Cost of liquidation/recoveries,including reasonable expenses and fees ofthe Liquidator• List of credits/claims to be paid inaccordance with the provisions onpreference of credits under Articles 2241 to2246 of the Civil CodeA copy of the Project of Distributionsubmitted to the Liquidation Court shall beprovided to the Monetary Board forManual of Regulations for Non-Banks Financial InstitutionsAppendix Q-56 - Page 17

APP. Q-5611.31.12information with the followingrecommendations:1. That an authority be secured from theliquidation court, through engaged counselof the Liquidator, on the disposition of theremaining cash/unclaimed checks;2. That the report be approved and thecourt issue an order terminating liquidationproceedings and discharging the Liquidatorfrom his duties; and3. That in case the NBQB/Trust Entityhas remaining non-cash assets, theLiquidator shall seek the Court’s approvalto turn over said assets to a trusteeappointed by the court for properdisposition in accordance with law.6.3. Individual notices to the claimantsas well as Claim for Payment forms shall besent by way of registered mail. (Samples areshown in Annexes, A-10 and A-11).6.4. Distribute the check payments toclaimants in accordance with the Project ofDistribution approved by the Court.a. Claims shall be paid in check.Claimants shall execute an affidavitproving their right to be paid and anindemnity undertaking (Sample is shownin Annex A-12) to save the Liquidator fromany claim or loss that might be caused byreason of such payment.b. Remaining assets shall bedistributed in accordance with law.6.5. A final report on liquidation shallbe submitted by the Liquidator to theLiquidation Court for approval, showingamong others, the following:a. Summary of the total cash realizedand paid out by the Liquidator to approvedclaimants;b. Statement of remainingcash/unclaimed checks; andThe Liquidator shall also submit a copyof the final report to the Monetary Boardfor information. Likewise, the Liquidatorshall inform the MB of the action taken bythe Court on the final report.Appendix Q-56 - Page 18Manual of Regulations for Non-Banks Financial Institutions

APP. Q-5711.12.31LIST OF DOCUMENTARY REQUIREMENTS CONFIRMATION OF THEELECTION/APPOINTMENT OF THE MEMBERS OF THE BOARD OF DIRECTORS/SENIOR VICE PRESIDENTS (SVP) AND ABOVE OR EQUIVALENT RANKS OFNON-BANKS WITH QUASI-BANKING FUNCTIONS (NBQBs)(Appendix to Subsecs. 4141Q.4, 4180Q.2 and 4406Q.10)1. Letter request signed by a duly authorizedofficer of the QB. When applicable, the lettershould also indicate request for approval of theinterlocking positions 1 of the directors and/orofficers concerned, pursuant to Section 4145Qand related provisions of the MORB, together witha justification for such interlock;2. Secretary’s Certificate on the resolution ofthe (1) stockholders of the QB regarding theelection of the director concerned; or (2) board ofdirectors of the QB approving the appointment ofthe officer concerned.3. Notarized certification of the director/officer concerned that he possesses all thequalifications and none of the disqualifications tobecome a director/officer as enumerated inSections 4141Q, 4142Q and 4143Q and otherpertinent provisions;4. Notarized certification as described underSubsec. 4141Q.9 and Appendix Q-3 that thedirector concerned is fully aware and understandsthe specific duties and responsibilities enumeratedunder Subsec. 4141Q.3.5. Notarized Authorization Form forQuerying the BSP Watchlist File of the director/officer concerned pursuant to Subsec. 4143Q.5;6. If the director concerned is anindependent director, sworn statement underoath of the independent director containingcertification and information required underSec. 4192Q;7. Copies of the certificate of attendanceon corporate governance seminar by the newlyelecteddirectors; 28. In case of directors for re-election,secretary’s certificate on the attendance by thedirector concerned to the board meetings heldfor the last (twelve) 12 months covering the termof service, indicating the percentage underSection 4141Q;9. In the case of officers with rank of SVPand above or equivalent rank, a brief descriptionof his/her duties and responsibilities;10. Alien Employment Permit issued by theDepartment of Labor and Employment forforeigners appointed as officers; and11. To be directly submitted to SDC, a fullyaccomplished bio-data together with aphotograph (2"X2") of the elected/appointeddirectors and officers respectively 3 .CL-2011-045 dated 01 July 20111QBs are responsible in determining interlocking positions of their directors/officer that are subject to the prior approvalof the Monetary Board as required under Section 4145Q.2This does not apply to those directors previously confirmed by the Monetary Board notwithstanding that their confirmationas such were with other QBs.3Subsequent submissions of bio-data and/or schedules or attachments thereto for the purpose of completing a previouslysubmitted but incomplete version shall be considered late reporting subject to applicable penalties in accordance withSection 4192Q.2.Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-57 - Page 1

APP. Q-57a11.12.31LIST OF DOCUMENTARY REQUIREMENTSAPPROVAL OF THE APPOINTMENT OF TRUST AND COMPLIANCE OFFICERS OF BANKS1. Letter request 1 signed by an authorizedofficer of the bank;2. Secretary’s Certificate attesting to theresolution of the board of directors of the bankapproving the appointment of the officerconcerned or in the case of foreign banks, letterof approval on the appointment from the countryhead;3. Notarized certification of the officerconcerned that he possess all the qualificationsand none of the disqualifications to become anofficer as enumerated in Sections X142 and X143;4. Notarized Authorization Form forquerying the BSP Watchlist File of the officerconcerned pursuant to Subsec. X143.5;5. Alien Employment Permit issued by theDepartment of Labor and Employment forforeigners appointed as officers;6. Brief description of the concerned officer’sduties and responsibilities; and7. To be submitted to Supervisory DataCenter, a fully accomplished bio-data togetherwith a photograph (2"X 2") of the elected/appointed directors and officers, respectively 2 .CL-2011-045 dated 01 July 20111In case of Trust Officer and/or compliance officer with rank of senior vice president and above or equivalent rank andwhose appointment as SVP in another capacity has not yet been confirmed by the BSP, the letter should state that it is arequest for approval and confirmation of the concerned officers.2Subsequent submissions of bio-data and/or schedules or attachments thereto for the purpose of completing a previouslysubmitted but incomplete version shall be considered late reporting subject to applicable penalties in accordance withSection 4192Q.2.Manual of Regulations for Non-Bank Financial InstitutionsAppendix Q-57a - Page 1

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