Philippine Derivatives Market Summary

Angelo Acosta

083868

February 3, 2015

PHILIPPINES AND THE DERIVATIVES MARKET

History of the Philippine Derivatives Market

Philippine universal and commercial banks had already been engaged in derivatives since the early 1980s. These transactions were foreign currency forwards and foreign currency swaps. The Manila International Futures Exchange (MIFE) was created in 1985 and served as the Philippine’s main commodity and derivatives market. Sugar and Soybean futures contracts are the ones initially offered by MIFE. They then expanded to coffee and copra. All products are produced domestically. Philippine treasury bills are the first financial futures contract to be traded in 1990. During the years, futures trading volumes drastically increased

PDEx ensures price discovery, transparency and investor protection. Pdex was granted a self-regulatory (SRO) status on 2008 by the Securities and Exchange Commission in the Inter-Dealer market and coverage of all its participants in all markets within the PDEx Trading Systems.

In 2008, Banko Sentral ng Pilipinas (BSP) changed its dealer approval process to a number of generally authorized derivatives markets activities. This is applicable to all commercial and universal banks. This was done to promote the derivatives market and encourage domestic businesses to manage their risks involved using derivatives as a risk management tool.

Also in 2008, Philippine Dealing System Holdings Corporation (PDSHC) and Philippine Stock Exchange (PSE) entered into an agreement to develop and create a local derivatives

How the Derivatives Market Operate

Derivatives, other than those that are issued by banks and others that are exempted from registration under the code, are required to be registered with the SEC before they could be issued or sold to end-users. For example, stock warrants and employee stock options must be registered with the SEC before they could be issued.

Aside from freestanding derivatives, many companies use derivatives embedded in other financial instruments to mitigate the risks of its host contracts. For example, equity conversion and/or prepayment options are usually inserted in debt/bond contracts to give the holder an option to control the risks associated with the debt/bond contract.

All derivatives transactions made by banks are done over the counter given the absence of a local exchange. Forwards are transacted using telephone, brokers, or treasury systems. Foreign exchange forward transactions are covered by Masters Agreement while Interest Rate Swaps are covered by agreements on a per transaction basis. Settlement is usually communicated through phone calls or via emails. Payments are done through managers’ checks, checking/savings or nostro accounts or banks’ demand deposit accounts (DDA) with