Loans and Credit Operations

Rediscounting Rediscounting is a standing credit facility provided by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to their clients. Through the facility, the BSP also makes possible the timely delivery of credit to all productive sectors of the economy. Moreover, rediscounting is one of the monetary tools of the BSP to regulate the level of liquidity in the financial system. The BSPs rediscounting is administered by the Department of Loans and Credit. You may download the FAQ on Rediscounting here. Overdraft Credit Line The BSP also makes available an overdraft credit line (OCL) to banks participating directly in the clearing operations of the Philippine Clearing House Corporation to cover shortfalls in the banks demand deposit accounts with the BSP arising from clearing operations. The BSP will impose a ceiling on the amount of overdraft a bank may incur due to failure to cover clearing losses through interbank borrowings and/or repurchase agreements with BSP. The ceiling is defined as the sum of clean OCL equivalent to 15% of the banks rediscounting line with BSP and the collateralized OCL that will be imposed by the BSP. A bank not meeting the following criteria: 1. CAMELS composite rating of at least 3; 2. CAR of at least 10%; or 3. No chronic reserve deficiencies for the immediately preceding one year, or other measures as may be defined by the BSP for this purpose, should apply for a collateralized OCL in an amount equivalent to at least 5% of its demand deposit liabilities as of end of month, two months prior to the date of application with the DLC; otherwise, its outward clearing items shall be subject to second day value dating. A bank which meets the above criteria may also apply for collateralized OCL in any amount. Emergency Loans The BSP also extends financial assistance to banking institutions in the form of fully secured liquidity (emergency) loans as a temporary remedial measure to help solvent banks overcome their liquidity problems arising from causes beyond their control, pursuant to Section 84 of R.A. No. 7653. The assistance shall be limited to the amount needed by the applicant bank to overcome the emergency or financial predicament but shall not exceed 50% of its deposits and provided that any emergency advance should be collateralized by government securities and unencumbered first-class collateral (primarily real estate).

Electronic Rediscounting System

The Electronic rediscounting system or eRediscounting is an online internet-based rediscounting facility that the BSP makes available to all active and qualified banks nationwide. This facility allows banks to conduct their rediscounting transactions and inquiries with the BSP in an on-line, real time basis at the convenience of their own bank premises. With its simplified and end-to-end processing capability, the system provides immediate availability and fast delivery of credit to banks, especially those in the countryside. More importantly, it will reduce the transaction costs of banks, which will mutually benefit the participating banks and their clients.

Banks with established rediscounting lines may participate in the eRediscounting by complying with the execution of all the required documents, i.e., the Electronic Rediscounting System Participation Agreement, User Account Registration, and User Specimen Signature form.

Credit Surety Fund Program

The Credit Surety Fund Program (CSF) is a credit enhancement scheme developed by the Bangko Sentral ng Pilipinas that aims to increase the credit worthiness of micro, small and medium enterprises (MSME) that are experiencing difficulty in obtaining loans from banks due to lack of acceptable collaterals, credit knowledge and credit track records. How it works:

The CSF is created by pooling the contributions of well-capitalized and well-managed cooperatives, non-government organizations, a local government unit and partner institutions such as Development Bank of the Philippines, Land Bank of the Philippines, Industrial Guarantee and Loan Fund, as well as other interested parties. The MSME-member submits a loan proposal, together with the application for the surety cover, to the cooperative for the initial loan evaluation. The cooperative then endorses the loan proposal to the Oversight Committee for its own evaluation and the latter endorses the same to the lending bank. The lending bank informs the Oversight Committee of the approval of the loan proposal and the latter issues a surety cover as security for the loan. Upon receipt of the surety cover, the bank releases the loan proceeds to the MSME-borrower.

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Monetary Policy The primary objective of BSP's monetary policy is to promote a low and stable inflation conducive to a balanced and sustainable economic growth. The adoption of inflation targeting framework for monetary policy in January 2002 is aimed at achieving this objective. _____________________________________________________________________________

The primary objective of the BSP's monetary policy is to promote price stability conducive to a balanced and sustainable growth of the economy (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January 2002 is aimed at achieving this objective. Inflation targeting is focused mainly on achieving a low and stable inflation, supportive of the economys growth objective. This approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period.

The Inflation Target The governments inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year. The inflation targets have been

set at 4 1 Percentage Point for 2013-2014 and at 3 1 Percentage Point for 2015-2016. Consistent with the inflation targeting framework, the Monetary Board announced in July 2010 the BSPs shift to a fixed inflation target for the medium term of 4 1 percent for 2012-2014. The shift to a fixed medium-term inflation target from a variable annual inflation target was approved by the Development Budget Coordination Committee (DBCC) on 9 July 2010 under DBCC Resolution No. 2010-3.

The BSP has a number of monetary policy instruments at its disposal to promote price stability. To increase or reduce liquidity in the financial system, the BSP uses open market operations, accepts fixed-term deposits, offers standing facilities and requires banking institutions to hold reserves on deposits and deposit substitutes.

1. Open Market Operations Open market operations are a key component of monetary policy implementation. These consist of repurchase and reverse repurchase transactions, outright transactions, and foreign exchange swaps. Repurchase and reverse repurchase transactions are carried out through the repurchase (RP) facility and the reverse repurchase (RRP) facility of the BSP. In a repurchase or repo transaction, the BSP buys government securities from a bank with a commitment to sell it back at a specified future date at a predetermined rate. The BSPs payment to the bank increases the latters reserve balances and has an expansionary effect on liquidity. Conversely, in a reverse repo, the BSP acts as the seller of government securities and the banks payment has a contractionary effect on liquidity. RP and RRP transactions have maturities ranging from overnight as well as two weeks to one month. The interest rates for the overnight RRP and RP facilities signal the monetary policy stance and serve as the BSPs primary monetary policy instruments. Outright transactions refer to the direct purchase/sale by the BSP of its holdings of government securities from/to banking institutions. In an outright transaction, the parties do not commit to reverse the transaction in the future, creating a more permanent effect on money supply. The transactions are conducted using the BSPs holdings of government securities. When the BSP buys securities, it pays for them by directly crediting its counterpartys Demand Deposit Account with the BSP. The transaction thus increases the buyers holdings of central bank reserves and expands the money supply. Conversely, when the BSP sells securities, the buyers payment (made by direct debit against his Demand Deposit Account with the BSP) causes the money supply to contract. Foreign exchange swaps refer to transactions involving the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed on the deal date (the first leg), and a reverse exchange of the same two currencies at a date further in the future (the second leg) at a rate (different from the rate applied to the first leg) agreed on deal date. 2. Acceptance of fixed-term deposits The BSP also accepts deposits from banks. The Special Deposit Accounts (SDA) facility consists of fixedterm deposits by banks and by trust entities of banks and non-bank financial institutions with the BSP. It was introduced in November 1998 to enable the BSP to expand its toolkit in liquidity management. In April 2007, the BSP expanded access to the SDA facility by allowing trust entities to deposit in the SDA facility in order to better manage liquidity in the face of strong foreign exchange inflows. 3. Standing Facilities

The BSP extends discounts, loans and advances to banking institutions in order to influence the volume of credit in the financial system.Rediscounting is a standing credit facility provided by the BSP to help banks meet temporary liquidity needs by refinancing the loans they extend to their clients. The rediscounting facility allows a financial institution to borrow money from the BSP using promissory notes and other loan papers of its borrowers as collateral. There are two types of rediscounting facilities available to qualified banks: the peso rediscounting facility and the Exporters Dollar and Yen Rediscount Facility (EDYRF) which was introduced in 1995. 4. Reserve requirements Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend. Changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management. Reserve requirements apply to peso demand, savings, time deposit and deposit substitutes (including longterm non-negotiable tax-exempt certificates of time deposit or LTNCTDs) of universal banks (UBs) and commercial banks (KBs) and may be kept in the form of cash in vault, deposits with the BSP and government securities. Required reserves consist of two forms: regular or statutory reserves; and liquidity reserves. Deposits maintained by banks with the BSP up to 40 percent of the regular reserve requirement are paid interest at 4 percent per annum, while liquidity reserves are paid the rate on comparable government securities less half a percentage point. The use of liquidity reserves help to reduce bank intermediation costs since they are paid market-based interest rates. In March 2006, the Monetary Board began to require banks to keep liquidity reserves in the form of term deposits in the reserve deposit account (RDA) with the BSP instead of government securities bought directly from the BSP.

Monetary Policy - Glossary and Abbreviations

Base Money (BM) the sum of the reserve money (RM), reserve-eligible government securities, liquidity reserves and reserve deficiency of banks. 1 Consumer Price Index (CPI) represents the average price for a given period of a standard basket of goods and services consumed by a typical Filipino family. This standard basket contains hundreds of consumption items (such as food products, clothing, water and electricity) whose price movements are monitored to determine the overall change in the CPI, or the level of inflation (See also Inflation Rate). Demand-Pull Factors of Inflation pressures on inflation caused by relatively higher demand compared to the available supply of goods and services. Usually, when people, business or the government receive more income, realize capital gains or obtain easier access to credits, the overall demand for goods and services may increase. This would lead to increased prices, assuming the supply of goods and services is not able to adjust quickly enough to meet the higher demand. In addition, supply shocks in the economy that, either increase the costs of raw materials or curtail supply or both could result in second-round effects that, in turn, may lead to higher demand-side price pressures. Higher oil and agricultural commodity prices, for instance, may eventually affect the price- and wage-setting behavior of economic agents, which could then lead to second-round price pressures from the demand side.

Explanation Clauses - the predefined set of acceptable circumstances under which an inflation targeting central bank may fail to achieve its inflation target. Such circumstances recognize the fact that there are limits to the effectiveness of monetary policy and that deviations from the inflation target may sometimes occur because of factors beyond the control of the central bank. Under the inflation targeting framework of the BSP, these circumstances include price pressures arising from: (a) volatility in the prices of agricultural products; (b) natural calamities or events that affect a major part of the economy; (c) volatility in the prices of oil products; (d) significant government policy changes that directly affect prices such as changes in the tax structure, incentives and subsidies. Inflation Rate - the rate of change in the weighted average prices of goods and services typically purchased by consumers. The weights of the goods and services are based on their corresponding share to the Consumer Price Index (CPI) basket, i.e., the standard basket of goods and services purchased by a typical household. In the Philippines, the composition of the CPI basket is determined from the Family Income and Expenditure Survey (FIES) periodically conducted by the National Statistics Office (NSO). Inflation is typically defined as the annual percentage change in the CPI. It indicates how fast or slow the CPI increases or decreases.

Headline Inflation the rate of change in the weighted average prices of all goods and services in the CPI basket. Core Inflation An alternative measure of inflation that eliminates transitory effects on the CPI, core inflation removes certain components of the CPI basket that are subject to volatile price movements, such as food and energy, and other items affected by supply side factors, the price changes from which are not within the control of monetary policy. Official Definition - This refers to the rate of change in the CPI which excludes the following items/ commodity groups: rice, corn, fruits and vegetables, and fuel items (gas, liquefied petroleum gas (LPG), kerosene, gasoline and diesel), which together represent 18.4 percent of the CPI basket. Core inflation data for 2001-2002 are BSP estimates while the data starting January 2003 are the official National Statistics Office (NSO) figures. BSPs Alternative Measures of Core Inflation:

Net of Selected Volatile Items - This measure refers to the rate of change in the CPI which excludes the following items/ commodity groups: educational services, fruits and vegetables, personal services, rentals, recreational services, rice, and corn which together represent 37.6 percent of the CPI basket. Trimmed Mean - represents the average inflation of the (weighted) middle 70 percent in a lowest-to-highest ranking of year-on-year inflation rates for all CPI components. Weighted Median - represents the middle inflation (corresponding to a cumulative CPI weight of 50 percent) in a lowest-to-highest ranking of year-on-year inflation rates.

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Inflation Expectations the perceived rate of change, trends and movements of the prices of goods and services in the economy. Measures of inflation expectations include survey-based consumer and business expectations of inflation and inflation forecasts of private analysts, among others. Inflation Target level of inflation which the BSP aims to achieve over a given period under the inflation targeting framework. The governments inflation target is an annual target, currently expressed in terms of a point target (with a tolerance interval of 1 percentage point) and is set jointly by the BSP and the

government through an inter-agency body, the Development Budget Coordination Committee (DBCC), although the responsibility of, and accountability in, achieving the target rests primarily on the BSP. Inflation Targeting (IT) a framework for monetary policy that focuses mainly on achieving price stability as the ultimate objective of monetary policy. The IT approach entails the announcement of an explicit inflation target that the monetary authority promises to achieve over a policy horizon of two years. Interest Rates the cost of borrowing money or the amount paid for lending money expressed as a percentage of the principal. Interest Rate Differential - the difference or margin between interest rates such as the difference between domestic and foreign interest rates. M1 or Narrow Money consists of currency in circulation (or currency outside depository corporations) and peso demand deposits. M2 or Broad Money consists of M1 plus peso savings and time deposits. M3 or Broad Money Liabilities consists of M2 plus peso deposit substitutes, such as promissory notes and commercial papers (i.e., securities other than shares included in broad money). M4 - consists of M3 plus transferable and other deposits in foreign currency. Monetary Aggregate Targeting an approach to monetary policy whereby the central bank adjusts its monetary policy instruments to control the level of monetary aggregates. This approach is based on the assumption that there is a stable and predictable relationship between money on the one hand, and output and inflation on the other hand. This means that the reaction of inflation to changes in money supply is stable over time and is, therefore, predictable. The approach assumes that the monetary authority is able to determine the level of money supply that is needed given the desired level of inflation that is consistent with the economy's growth objective. In effect, the monetary authority influences inflation indirectly by targeting the money supply. Monetary Policy measures or actions taken by the central bank to influence the general price level and the level of liquidity in the economy. Monetary policy actions of the BSP are aimed at influencing the timing, cost and availability of money and credit, as well as other financial factors, for the main objective of stabilizing the price level.

Expansionary Monetary Policy monetary policy setting that intends to increase the level of liquidity/money supply in the economy and which could also result in a relatively higher inflation path for the economy. Examples are the lowering of policy interest rates and the reduction in reserve requirements. Expansionary monetary policy tends to encourage economic activity as more funds are made available for lending by banks. This, in turn, increases aggregate demand which could eventually fuel inflation pressures in the domestic economy. Contractionary Monetary Policy - monetary policy setting that intends to decrease the level of liquidity/money supply in the economy and which could also result in a relatively lower inflation path for the economy. Examples of this are increases in policy interest rates and reserve requirements. Contractionary monetary policy tends to limit economic activity as less funds are made available for lending by banks. This, in turn, lowers aggregate demand which could eventually temper inflation pressures in the domestic economy.

Liquidity reserves - refers to the option given to banks in complying with the reserve requirement, whereby bonds deposited in the reserve deposit account (RDA) facility are considered as compliance with the reserve requirement. 2 Monetary Policy Instruments the various instruments used by the BSP to achieve the desired level of money supply. These include (a) raising/reducing the BSP's policy interest rates; (b) increasing/decreasing the reserve requirement; (c) encouraging/discouraging deposits in the special deposit account (SDA) facility by banks and trust entities of BSP-supervised financial institutions; (d) increasing/decreasing its rediscount rate on loans extended to banking institutions on a short-term basis against eligible collaterals of banks borrowers; and (e) outright sales/purchases of the BSPs holdings of government securities. The BSPs primary monetary policy instruments are the overnight reverse repurchase (borrowing) rate and the overnight repurchase (lending) rate. Moral Suasion the influence which the central bank exercises to induce or convince banks to conduct operations in a manner that would contribute to the attainment of monetary goals but not necessarily support the profit-maximizing objectives of the banks. Open Market Operations (OMO) the sale or purchase of government securities by the BSP to withdraw liquidity from or inject liquidity into the system. Quasi-money the sum of savings and time deposits Rediscounting a special refinancing facility of central banks wherein a financial institution borrows money from the BSP using promissory notes and other loan papers of its borrowers as collateral Repurchase (RP) Rate - the policy interest rate at which the BSP lends to banks with government securities as collateral Reserve Deposit Account (RDA) The reserve deposit account (RDA) is a deposit facility with the BSP designed to facilitate the adoption of the change in the banks mode of compliance with the liquidity reserve requirement, pursuant to Circular No. 539 which became effective on 25 August 2006. The liquidity reserve requirement consisted of market-yielding government securities purchased directly from the BSP. The RDA, which eventually replaced government securities as a form of compliance with the liquidity reserves, allows banks to keep a portion of their reserves in the form of a three-month term deposit in the RDA maintained with the BSP. The Treasury Department also has the option of offering RDA with 6-and 12-month tenors, with interest rate at one-half percent (1/2%) below the prevailing market rate for comparable government securities. Pre-termination of RDAs is allowed, subject to a reduction in applicable interest rates, as prescribed by the Treasury Department. Reserve Money (RM) the sum of currency in circulation and reserves of banks which include cash in banks vault and reserve balances or deposits with the BSP including banks balances under the reserve deposit account (RDA). Reserve Requirement refers to the proportion of banks deposits and deposit substitute liabilities that banks are required to hold as reserves Regular (statutory) reserves - pertain to the proportion of deposits and deposit substitute liabilities, which must be held as deposits with the BSP in part, with the remaining balance allowed to be kept in banks' vaults as cash or as reserve-eligible government securities

Regular Reserves the proportion of deposits and deposit substitute liabilities, a certain fixed portion of which must be held as deposits with the BSP, with the balance kept in banks vaults as cash or eligible reserves. Reverse Repurchase (RRP) Rate the policy interest rate at which the BSP borrows from banks with government securities as collateral. Special Deposit Accounts Fixed-term deposits by banks and trust entities of BSP-supervised financial institutions with the BSP. These deposits were introduced in November 1998 to expand the BSP's toolkit for liquidity management. In April 2007, the BSP expanded the access to the SDA facility to allow trust entities of financial institutions under BSP supervision to deposit in the facility. Supply Shocks to Inflation pressures on inflation resulting from shortages in supply and increases in the cost of production without a corresponding expansion in output. Examples of these are bad weather, natural calamities and disasters; wage increases not matched by higher productivity of labor; hikes in international oil prices; increases in prices of imported raw materials; and hikes in rental rates. These tend to limit or decrease supply, and, assuming no decline in demand for goods and services, push prices up. (Conversely, an oversupply of commodities tends to induce the opposite effect on prices.) Transmission Mechanism of Monetary Policy process by which monetary policy actions affect economic and financial variables. This mechanism describes the various channels, as well as the length of time, through which monetary policy actions affect the real economy, particularly inflation and output. Treasury Bill Rate the yield on short-term debt instruments issued by the National Government (NG) (the primary market) for the purpose of generating funds. Treasury bills come in maturities of 91, 182 and 364 day

Open Market Operations

Policy Rate Setting The Bangko Sentral ng Pilipinas (BSP) formally adopted inflation targeting as the framework for monetary policy in January 2002. This policy move is aimed at providing the BSP with a more focused and forwardlooking approach in the pursuit of its primary mandate, which is to ensure price stability. Two intrinsic features of the approachtransparency and accountability in monetary policyis expected to enhance the credibility of the BSP in helping create a stable macroeconomic environment in which vital economic reforms to raise the growth potentials of the economy can continue. This approach involves the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. The target inflation rate is set and announced jointly by the BSP and the government through an inter-agency body. Although the responsibility of achieving the target rests primarily with the BSP, this joint announcement reflects active government participation in achieving the goal of price stability and government ownership of the inflation target. In the Philippines, the interest rates applied on the overnight RP/RRP signals the stance of BSPs monetary policy. The BSP created an Advisory Committee which deliberates, discusses and recommends to the Monetary Board the appropriate monetary policy stance that will enable the BSP to achieve the desired inflation target. The Advisory Committee meets every six weeks and in between regular meetings, whenever it is deemed necessary.

Policy Instruments The BSP implements monetary policy using various instruments to influence the level of liquidity in the market and thereby steer inflation towards thetarget level. These instruments can be classified into two types:

Direct instruments enable the BSP to control directly certain items in banks balance sheets which may be in the form of financial prices or quantities. Direct instruments have a strong coercive element as in the case of reserve requirements and directed lending requirements. Indirect instruments work through the market to influence the behavior of financial institutions, usually through the pricing of central bank facilities. Indirect instruments include adjustments in short-term policy interest rates and the conduct of open market operations (OMO).

Mechanics of OMO OMO is a monetary tool which involves the BSP publicly buying or selling government securities from banks and financial institutions in order to expand or contract the supply of money. By controlling the money supply, the BSP is able to exert some influence on the prices of goods and services and achieve its inflation objectives. When the BSP buys securities, it pays for them by directly crediting its counterpartys Demand Deposit Account that is being maintained with the BSP. Effectively, the transaction increases the buyers level of reserves and on an aggregate level, expands the systems money supply. Conversely, when the BSP sells the securities, the buyers payment (via direct debit against the buyers Demand Deposit Account with the BSP) reduces his reserve account causing money supply to contract. In conducting OMO, the BSP uses two instruments: (1) repurchase (repo)/reverse repurchase (reverse repo) agreements and (2) outright purchases and sales of securities.

Repurchase (repo) / reverse repurchase (reverse repo) agreements. The BSP purchases government securities from a bank with a commitment to sell it back at a specified future date at a predetermined rate. In effect, a repo transaction expands the level of money supply as it increases the banks level of reserves. Under a reverse repo, the BSP acts as the seller of government securities, thus, the banks payment reduces its reserve account resulting in a contraction in the systems money supply. For both repos, the BSP can only affect the level of money supply temporarily, given that the parties involved commit to reverse the transaction at an agreed future date. At present, the BSP enters into repo agreements for a minimum of one (1) day (overnight) for both repos and a maximum of 91 days and 364 days for repo and reverse repo agreements, respectively. Outright purchases and sales of securities. An outright contract involves direct purchase/sale of government security by the BSP from/to the market for the purpose of increasing/decreasing money supply on a more permanent basis. In such a transaction, the parties do not commit to reverse the transaction in the future, creating a more permanent effect on the banking systems level of money supply.

The BSP may also use other monetary policy tools such as reserve requirements and rediscounting to expand or contract money supply. The BSP may also grant loans and advances to banking institutions to influence the volume of credit consistent with the objective of price stability. In addition, the BSP can employ moral suasion as a last resort when existing market mechanisms cannot adequately and promptly ensure the attainment of specific monetary objectives.

Advantages of Open Market Operations However, among the tools available to the BSP, OMO offers advantages and continues to be the most practical tool for the following reasons:

First, it works within the BSPs initiative and control. Having the authority to steer market interest rates, the BSP can influence money supply by changing the monetary policy rates. Consequently, OMO gives the BSP greater flexibility in terms of the amount and timing of intervention. Secondly, it is fast to implement and gives quick results. Any change in the policy rates is readily implemented, i.e., on the same day that the Monetary Board makes the resolution. Thus, any effect on the market is evident right after the overnight trading for the day.

Call Loans and the Interbank Call Loan Market Call money are amounts traded in the interbank call loan market that correspond to the excess or deficiency of each bank in terms of reserves. These can be overnight placements. IBCL transactions among banks are done primarily to correct reserve requirements. The reserve position of each bank or quasi-bank is calculated daily on the basis of the amount of the institutions reserves at the close of business for the day and the amount of its liability accounts against which reserves are required to be maintained. The reserve positions of banks are normally known after the check clearing results have been transmitted. As the check clearing results are known only by late afternoon, interbank call loans are currently done from 4:45 PM to 5:30 PM. The interbank market can either be securitized (collateralized) or unsecuritized (clean) lendings/borrowings, as well as repurchase agreements. Repurchase Agreements (RPs) are generally short-term sale of government securities with an agreement to repurchase on the agreed maturity date. Repurchase agreements are extensively used as a means of short-term financing by government securities dealers and by banks. Banks establish credit lines with its counterparties for these transactions. Managing Risks in OMO Transactions A valuation scheme for securities used in repos is adopted by the BSP to help manage the credit risk inherent in OMO transactions. Eligible securities are valued based on their current market yields as well as the applicable cut based on remaining life of securities involved. To avoid exposing the BSP to undue risks arising from purchases of securities, Section 91, Article V of RA 7653 (The New Central Bank Act) sets the type of securities that can be bought or sold by the BSP for its own domestic portfolio, as follows:

Evidences of indebtedness issued directly by the Government of the Philippines or by its political subdivisions; and Evidences of indebtedness issued by government instrumentalities and fully guaranteed by the Government.

Section 92 of the same article also provides the BSP with effective instruments for OMO, that is, it may, subject to such rules and regulations as the Monetary Board may prescribe and in accordance with the principles stated in Section 90, issue, place, buy and sell freely negotiable evidences of indebtedness of the

BSP, provided that such issuance shall be made only in cases of extraordinary movement in price levels. Said evidences of indebtedness may be issued directly against the international reserves of the BSP or against securities, which it has acquired under the provisions of Section 91 or may be issued without relation to specific types of assets of the BSP.

Foreign Exchange Market

The Bangko Sentral ng Pilipinas (BSP) maintains a floating exchange rate system. Exchange rates are determined on the basis of supply and demand in the foreign exchange market. The role of the BSP in the foreign exchange market is principally to ensure orderly conditions in the market. The market-determination of the exchange rate is consistent with the Governments commitment to market-oriented reforms and outward-looking strategies of achieving competitiveness through price stability and efficiency. In the Philippines, peso-dollar trading among Bankers Association of the Philippines (BAP) member-banks and between these banks and the BSP are done through the Philippine Dealing System (PDS). Most of the BAP-member banks which participate in the peso-dollar trading use an electronic platform called the Philippine Dealing and Exchange Corp. (PDEx). The BAP appointed PDEx as the official service provider for the USD/PHP spot trading (which involve the purchase or sale of the US dollar for immediate delivery, i.e., within one day for US dollars), and Reuters, as the exclusive distributor of all PDEx data. Trading through the PDEx allows nearly instantaneous transmission of price information and trade confirmations. 1Meanwhile, banks which do not subscribe to PDEx can continue to deal peso-dollar spot transactions via their Reuters Dealing screens. Commercial banks in the Philippines are allowed to engage in spot, outright forward, and swap transactions in Philippine pesos/US dollar and other third currency transactions. 2 Interbank trading is conducted among member-banks of the BAP, and between these banks and the BSP. Member-banks of the PDS can also deal through brokers. At present, there are two foreign exchange brokers in the Philippines, Tulett Prebon (Philippines), Inc. and ICAP Philippines Inc. For third currency trading, most commercial banks use the Reuters Dealing and the Bloomberg Financial Services. The US dollar and Philippine peso legs of the PDS transactions are settled in a Payment-versus-Payment (PvP) electronic system for the local interbank spot and forward foreign exchange market. 3 The PvP links two real-time gross settlements systems the BSPs Philippine Payments and Settlements System (PhilPaSS) for the peso transactions and the Philippine Domestic Dollar Transfer System (PDDTS) for dollar transactionswith the Philippine Depository and Trust Corporation (PDTC) as designated clearing entity for peso-dollar transactions of commercial banks under the BAP. The PDDTS is a local clearing and electronic communications system operated by the BAP, the Philippine Clearing House Corporation (PCHC), Philippine Securities and Settlements Corp. (PSSC) and Citibank, Manila. The PDDTS provides the banking industry with a facility to move US dollar funds from one Philippine bank to another on the same day without having to go through correspondent banks in the US. The system allows online, real-time gross settlement of domestic interbank US dollar transfer and third party account-to-account US dollar transfers. In addition, it provides a facility for online inquiry and settlement of foreign exchange transactions, where the PDDTS participants enter interbank US dollar and Philippine peso transfer instruction in a single screen. The PDS has both on-line, real time and end-of-day batch netting transfer capabilities with final settlement on the same day. This compares favorably with the most sophisticated domestic funds transfer systems around the world in terms of speed/flexibility of delivery and settlement finality. Trading at the PDS starts at 9:00 AM and ends at 4:00 PM. A lunch break from 12:00 noon up to 2:30 PM is observed. The BSP reference dollar exchange rate (included in the foreign exchange rate bulletin) for the day represents the weighted average of all done deals at the PDS during the preceding day. Currently a summary of the results of the daily transactions done at the PDS is available at the FX summary page of the

website of PDEx (www.PDEx.com.ph), Reuters page PHPES01 and Bloomberg BAPH1. These pages contain the following information: open, high, low, close, weighted average rates and volume.