INSURANCE Commissioner Emmanuel F. Dooc has suspended the implementation of Circular Letter 31-2014, which allowed insurance companies to engage in securities borrowing and lending (SBL) transactions.
Dooc issued an advisory to defer the implementation of the circular pending the resolution of some issues raised in a recent meeting with the government’s financial experts.
“Please be advised that in view of the concerns raised in the last meeting of the Financial Stability Coordinating Council [FSCC] regarding repurchase agreements, including SBLs, the implementation of CL 31-2014 is deferred in the meantime that related issues are not yet resolved,” the advisory said.
The circular allows insurance companies to engage in SBL transactions, but as lenders only and not as borrowers.
Under an SBL transaction, an entity which has substantial ownership of a particular stock can lend this stock to an investor/borrower, who, in turn, sells this stock at a high price. The borrower would then have to buy back the stock at a lower price in the future to turn up a profit on his investment.
Under the suspended circular, insurance companies acting as lenders should demand collateral for the stocks or government securities that they will lend, and such collaterals can only be in cash, irrevocable and negotiable letters of credit
issued by a commercial bank, or government securities or equity shares listed in the Philippine Stock Exchange. But the FSCC deemed it prudent to recommend the suspension of the circular pending the resolution of issues regarding repurchase agreements entered into by insurance companies, such as SBL transactions.
Regulators have pursued the participation of the country’s insurance companies in securities borrowing and lending activities to give more depth to a market that basically lacks participants and liquidity that makes such a market vibrant. Even now, the market suffers from a lack of supply of securities for borrowers who need them for strategic hedging reasons.
The FSCC is composed of representatives from the Department of Finance, the Insurance Commission, the Bureau of the Treasury, the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corp. Its primary objective is to establish and enabling environment that fully supports market innovation but at the same time mitigates any build-up of systemic risks, factoring in international standards and the country’s particular needs and situation.