BSP relaxes tainting rule

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has eased its “tainting rule” to encourage banks and financial institutions to participate in the liability management initiatives of the government.

BSP Governor Amando Tetangco Jr. has issued Circular 738 Series of 2011 providing the guidelines on treatment of securities offered and accepted in tender offers pursuant to liability management transactions of the government.

The circular stated that the central bank approved the exemption of government securities booked in the held to maturity category that are offered and accepted in tender offers pursuant to liability management transactions of the government from the “tainting” rule under Philippine Accounting Standards (PAS) 39 for prudential reporting purposes.

The “tainting” rule under PAS 39 requires the reclassification of the entire held to maturity portfolio to the available-for-sale category and prohibits a bank or a financial institution from using the held to maturity category during the reporting year and for the succeeding two full financial years, whenever it sells or reclassifies more than an insignificant amount of held to maturity investments before maturity, other than for reasons permissible under PAS 39.

The bank regulator put in place the “tainting rule” to discourage banks or financial institutions from manipulating their earnings or capital by shifting from cost-based accounting or accounting for held to maturity to fair value accounting or accounting for held for trading and available for sale securities and vice versa to take advantage of price movements.

“The grant of the recent regulatory relief by the BSP is expected to promote the participation of banks or financial institutions in liability management initiatives of the national government,” the BSP stressed.

The recent exemption granted by the BSP expands the scope of the central bank’s earlier regulatory relief to encompass all types of liability management transactions of the national government in addition to debt exchange offerings.

In order to be granted exemption from the tainting rule, banks or financial institutions are required to maintain appropriate documentation on their liability management transactions with the NG.

This will ensure that only those eligible bondholders who participate in the national government’s initiative shall be able to benefit from the regulatory relief,” the BSP clarified.

In recognition of the significance of the government’s liability management programs to the promotion of domestic capital markets and fiscal management, the BSP earlier granted banks’ or financial institutions’ exemption from the “tainting rule” for prudential reporting purposes, in respect of securities that are offered and accepted in debt exchange offerings of the national government.