HANGING BY A THREAD (PART1 ) - (OR HOW PFEC MANAGE TO REMAIN AFLOAT)

I am publishing herewith excerpts from the Supreme Court’s decision [G.R. No. 154131, July 20, 2006] citing the letter from the Central Bank which became the basis for the dismissal of the case filed by the SEC against Performance Foreign Exchange Corporation, to wit:

“Meanwhile, on August 13, 2001, Amado M. Tetangco, Jr., then Officer-in-Charge, Office of the Governor, BSP, in answer to SEC Chairman Lilia Bautista’s letter-request of February 8, 2001, stated that respondent’s business activity “does not fall under the category of futures trading” and “can not be classified as financial derivatives transactions,” thus:

Dear Ms. Bautista,

This refers to your letter dated February 8, 2001 requesting for a definitive statement that the foreign currency leverage trading engage in by private corporations, particularly, Performance Foreign Exchange Corporation (PFEC), is a financial derivatives transaction and that it can only be undertaken by banks or non-bank financial intermediaries performing quasi-banking functions and/or its subsidiaries/affiliates.

As indicated in your description of the transactions and the documents submitted, the foreign currency leverage trading, subject of your query, is essentially similar in mechanics to currency future trading, particularly with respect to the margin requirements, standard contract size, and daily market-to-market of open position. However, it does not fall under the category of futures trading because it is not exchange-traded. Further, we can not classify it as being financial derivatives transactions as we consider the transaction as plain currency margin trading, which by its mechanics, involve the set-up of margin and non-delivery of the currencies involved.

In view of the foregoing facts, the activities of the aforesaid corporation are not covered by BSP guidelines on derivative licensing.

We hope we have satisfactorily clarified your concerns.

Very truly yours,

(Sgd.)
AMANDO M. TETANGCO, JR.“

THE SEC WAS TRYING TO PIN DOWN PFEC ON THE BASIS OF OUTDATED DEFINITIONS OF SECURITIES AND REGULATORY GUIDELINES AS SET IN THE Republic Act 8799 OTHERWISE KNOWN AS THE SECURITIES REGULATION CODE OF THE PHILIPPINES ENACTED ON JULY 19, 2000.

WHY OUTDATED? BECAUSE REPUBLIC ACT 8799 FAILED TO ENCOMPASS THE FAST BECOMING POPULAR SPOT CURRENCY TRADING WHICH WAS BEING CONDUCTED ELECTRONICALLY OFF-EXCHANGE AND NON-BANK BASED, CREATING A LEGAL LOOPHOLE WHICH PFEC IS NOW EXPLOITING TO THE HILT.

IT IS FUNNY, THOUGH, TO NOTE THAT WHILE REPUBLIC ACT 8799 PRACTICALLY GAVE THE SEC A BLANKET AUTHORITY TO REGULATE PRE-NEED PLANS (SEE THE PROVISION BELOW) , IT FAILED TO ADDRESS AND DEFINE THE SEC’S OVERSIGHT FUNCTIONS OVER SPOT CURRENCY TRADING WHICH BY THEN WAS FAST DEVELOPING INTO A PARALLEL MARKET TO INTERBANK FOREIGN CURRENCY MARKET. TOTALLY DIFFERENT IN ESSENCE WITH COMMODITY FUTURES TRADING AND DEFINITELY NOT A FINANCIAL DERIVATIVE BY DEFINITION.

(CHAPTER IV
REGULATION OF PRE-NEED PLANS

Section 16. Pre-Need Plans. – No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and recording keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans.)