UITF_BSP.pdf

8/10/2019 UITF_BSP.pdf

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Deputy Governor Nestor A. Espenilla, Jr.

Bangko Sentral ng Pilipinas

UNIT INVESTMENT TRUST FUND

(UITF)


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Outline

Legal Basis for Creation of UITF

Definition

Rationale for Shift to UITFSalient Features

Investor Protection Measures

May 2006 UITF Experience

Further Enhancements


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Legal Basis for the Creationof UITF

Section 83.6 of the General Banking Law

A trust entity, in addition to the general powersincident to corporations, shall have the power to

Establish and manage common trustfunds, subject to such rules and regulationsas may be prescribed by the MonetaryBoard.


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Common Trust Fund

Different Kinds of common trust funds:

Common Trust Fund (CTF) forphase out by 30 Sept. 2006

UITF


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Rationale for Shift to UITF

Align the operation of pooled fundsunder management by trust entities

with international best practices

Ensure differentiation from bankdeposits and other direct liabilities ofthe financial institution


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Rationale for Shift to UITF

Sound operations of pooled funds willenhance the credibility with retailinvestors and enable them to evolve asmajor institutional players that cansupport the deepening of domesticcapital market.

A client has free choice on what suits hisfinancial objectives, particularly as torisks and returns and his perceived

expertise of the fund manager.


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Governing Regulation

Cir. No. 447 dated 03 September 2004

Regulations governing the creation,administration and investment/s of

UITFs


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Open-ended pooled trust funds denominatedin pesos or any acceptable currency, which

are operated and administered by a trustentity and made available by participation

Participation or redemption is allowed asoften as stated in its plan rules

Specie of common trust funds

UITF - Definition


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UITF Documentation

Plan Rules / Declaration of Trust - Writtentrust agreement

- approved by the Board of Directors- submitted to the BSP for prior approval

- approved copy of Plan available at the

principal office of Trustee for inspection byany person having an interest in the fund orby his authorized representative.


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Minimum elements:

Title (product/brand name)

Investment objectives and policies

Investment powers of trustee

Unitized NAVPUvaluation methodology

Terms and conditions governing theadmission or redemption of units ofparticipation

UITF Documentation


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Minimum elements:

External audit requirement

Basis to terminate Plan Liability clause of trustee

Fees/commission and other charges

deductible from fund Other matters to define clearly the rights of

participants

UITF Documentation


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A copy of the plan rules shall beavailable at the principal office of the

trustee during regular office hours forinspection by any person having aninterest in the fund or his authorized

representative. Upon request of the client, a copy of

the plan rules shall be furnished to the

interested person.

UITF Documentation


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Salient Features of UITFs

I. Pooled UIT funds can only beinvested in liquid investments andtradable financial instruments.


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UITFs Allowable Investments

Bank deposits (for liquidity purposes)

Financial instruments

Government securities

Tradable securities issued by the

government of a foreign country, anypolitical subdivision of a foreigncountry or any supranational entity

Exchange-listed securities


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UITFs Allowable Investments

Marketable instruments that are traded in anorganized exchange

Loans traded in an organized market Other tradable investment outlets/

categories as the BSP may allow

Subject to exposure limit to a single person/entity (equivalent to 15% of market value of

the UIT Fund)


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Tradable Financial Instrument

Loans traded in an organized market

Two-way prices are quoted readily and

regularly available from an exchange,dealer, broker, industry group, pricing

service or regulatory agency

Prices represent actual and regularlyoccurring market transactions on anarms length basis.


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II. UITFs may use financial derivatives tohedge market exposure.


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Financial derivatives instruments

Solely for the purpose of hedging riskexposures of the existing investments of theFund

In accordance with existing BSP hedgingguidelines, Trust Entitys risk managementand hedging policies

Disclosed in the Plan and quarterly list ofinvestment outlets


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III. Full transparency on the pricing ofinvestments (valued at market daily)


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Mark to Market (MTM)

The market price determines the valuation ofthe securities underlying the UITF.Unlike the CTF, valuation is not on an accrualbasis.If the investment deteriorates, the trustee shallprovision to reflect fair value in accordance

with generally accepted accounting principles(GAAP) or BSP regulations

If security has no fair market value, then itshall be assumed to be of no value.


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IV. Beneficial interest of each

participation unit is determined undera unitized net asset value per unit(NAVPU).


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NAVPU

Total Net Assets divided by total outstandingunits

Total Net Assets : summation of the marketvalue of each investment less fees, taxes,and other qualified expenses

Made available to existing and prospectiveparticipants


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NAVPU

Daily computation of NAVPU

Weekly publication

Name of the UITFGeneral classification (e.g., money market

placement, bond, balanced, equity)

UITFs NAVPUReturn on Investments of the UIT fund

- Actual (not annualized) on a year-to-date (YTD)

- Actual year-on-year (YOY)


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V. Fees and expenses that may becharged from the UITF are clearlydefined.


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UITF Expenses

Trust Fees

- inclusive of the routine administrative

expenseso Salaries and wages; office supplies

o Credit investigation/collateral appraisal

o BSP supervision fees/internal audit feeso Security/messengerial/janitorial services


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UITF Expenses

Special expenses

Requirements

o Preserve/enhance the value of Fund

o Payable to third party

o

Covered by a separate contracto Disclosed to participants


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VI. Trust entitys staff charged with the

marketing of the UITF shall be trained toproperly market the instrument.


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All personnel involved in the sale ofUITFs shall undergo standardized

training program for the purpose ofdeveloping/ improving their ability to -

Objectively make a judgment on client

suitability

Clearly explain to investors the inherentrisks in investing in UITFs

Marketing Personnel


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Marketing Personnel

Conduct of training

In accordance with TOAP minimum

training program guidelinesUndertaken by respective trust entities

Training program regularly validated byTOAP


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VII. Dealings with counterparties

undertaken in a transparent manner.


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Dealings with Counterparties

Counterparties are qualified by the TrustCommittee

Counterparties are subject to appropriatelimits in accordance with sound riskmanagement principles.

Trustee always transparent

Maintains an audit trail for all transactions


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VIII. Dealings with related interest follow

the principle of best execution.


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Dealings with Related Interests

Trustee observes principle of bestexecution

- If purchase/sale of securities effected withrelated counterparties, trust entity shallconsider at least two (2) competitive quotes

from other sources.


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VIII. An independent third party custodian

accredited by BSP shall be

appointed for UITF investments.


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Custody of Securities

BSP accredited third partycustodian

Take custody/safekeep investmentsin securities

Perform independent marking-to-market


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IX. UITF may be denominated in any

acceptable foreign currency and are

not subject to the 30% FCDU

liquidity cover


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X. Exemptions from regulations on

reserves, single borrowers limit andDOSRI ceilings applicable to trust

funds in general


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Administration of UITF

Trustee -

Exclusive management and control of eachUITF under its administration

Sole right at any time to sell, convert,

reinvest, exchange, transfer or change ordispose of the assets comprising the fund


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Administration of UITF

Has no other relationship with such fundother than its capacity as trustee of the

UITF

Backroom operations with adequatesystem to support the daily marking-to-

market of UITFs financial instruments


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Investor Protection Features

Minimum Disclosure Requirements

Client Suitability Test


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Minimum DisclosureRequirements

Evidences of participation

Participating Trust Agreement

Confirmation of Participationo NAVPU of fund on day of purchase;

o Number of units purchased/redeemed

o Absolute peso or foreign currency value


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Documentations given to Client Must contain a statement

The contract is a trust agreement not a deposit account.

Not insured by PDIC

No Guaranteed Returns

Losses or income are for the account of thetrustor/investor.

The Trustee is not liable for losses except upon grossnegligence, fraud or bad faith.

Such statements should be strategically placed nearthe space for the investors signature.


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Printed marketing materials Name of fund

Name of Trustee of UITF A trust product, not a deposit account

No guaranteed rate of return

No indicative rates of return Availability of Plan Rules

Customer and Product Suitability Standards


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Printed marketing materials

May present relevant historicalperformance purely for reference andwith clear indication that past results

do not guarantee similar future results


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Quarterly Disclosure Statement Investment Objective Investment Policy

Participations: Requirements and Restrictions List of prospective and outstanding investment

outlets Admission and Redemption

o Frequency, Date, Time and OtherRequirementso Pricing/Currencyo Fees/Other Terms Conditions


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Client Suitability

Investment Objective

Risk Profiling (e.g risk appetite)

Knowledge and Exposure to FinancialInstruments

Previous Investment Experience


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Investment Options

A CONSUMER has a basic right tochoose where he can place his hardearned savings.

Banks need to compete for this business

against other banks and non-bankfinancial institutions by offering depositand non-deposit products that meet

customer needs.


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Investment Options

?


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UITF Growth (in Php billion)

1.5

22.1

2.1

3.4

30.5

1.8

14.7

44.2

1.9

26.5

91.6

2.1

34.3

224.5

2.4

42.5

278.5

2.8

31.8

171.3

3.0

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

31 Mar 05 30 Jun 05 30 Sep 05 31 Dec 05 31 Mar 06 30-Apr-06 31-May-06

Equity Funds

Balanced Funds

Bond Funds

Money Market

261.6

120.5

60.9

25.735.8

324.3

206.8

0.1

0.1

0.1

0.3

0.4

0.5

0.7


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UITF Rapid Growth

Reasons:

UITFs answered the requirements of investors forhigh-yielding investment products that are readilyavailable and convenient to buy.

Philippines interest rates for the past year were on adowntrend (until April 24, 2006). This positively

affected the UITF NAVPUs, which increase wheninterest rates decrease. In addition to interestaccruals on the investments, yields were improvedwith mark-to-market gains. Investors were happy

about their returns.


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UITF Rapid Growth

Reasons

Trust Industry banded together on a UITFeducational campaign, guided by BSP Circular447.

Individual trust institutions had their share inmarketing the products through their branch

network, advertisements, newspaper supplementsand investor briefings.


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Philippine interest rates

Supreme Court decision, 3November 2005, upholding RVAT

Missed tax collection target

Govt floats the idea of lifting RVAT on oil


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Philippine Yield Curve

!!""# $% $&" #$!% #$' #$#( #$() #$&* ($*) ($% )$)

*!""# $() #$!# #$'' #$(% #$)# #$&( ($*' ($" ($&% &$%#

*&!""# #$!% #$#' ($** ($(! ($&' )$%' )$ &$*& &$'& *"$&)

!%!""# ($)* )$'% &$") &$#% &$&& *"$( *"$(& **$!" **$() *%$"%

#!""# $"" $(% ($& &$"" &$%" &$(! &$( &$&' *"$# *!$"

% # *+, !+, %+, '+, +, (+, *"+, !"+,

As of 23 May

As of 05 June

As of 02 2May


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What happened during theUITF May 2006 Experience?

The UITF experience also coincided at a time of growing riskaversion among global investors, which manifested in the fall ofAsian currencies, the emerging markets, metal and the stockmarkets.

As interest rates moved up, NAVPUs of the UITFs, particularly

that of the Bond Funds, moved down as mark-to-market losseswere reflected. While investors in these funds have experiencedvolatility in the past, the degree of volatility had been of smalleramounts and shorter duration (i.e. Hyatt 10, February 2006Declaration of State of Emergency)

Jittery investors withdrew from the UITFs and fund managerswere forced to sell their bond assets to fund such withdrawals. Itbecame a spiral: the more the investors withdrew, the more thefund managers sold the UITF assets, the more the interest rateincreased, the more NAVPUs fell and this became a viciouscycle.


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Proposed Enhancements

Ensure proper marketing of UITFs Enhanced risk disclosure More effective client suitability testing More rigorous standards for training marketing personnel

Promote better investor education through variousprograms

Accelerate development of domestic capital market Promote market depth and liquidity Encourage product diversification and new investment

instruments


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Proposed Enhancements

Adoption of Global Investment PerformanceStandards

Obtain worldwide acceptance of standards for calculatingand presenting fund performance

Ensure accurate and consistent data

Certification of UITF marketing personnel Course will include understanding of the underlying

investments and workings of the financial market


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