UNIT INVESTMENT TRUST FUND (UITF) - bsp.gov.ph · UNIT INVESTMENT TRUST FUND (UITF) 2 Outline ......

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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 DefinitionRationale for Shift to UITFSalient FeaturesInvestor Protection Measures May 2006 UITF ExperienceFurther Enhancements

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Legal Basis for the Creation of UITF

Section 83.6 of the General Banking Law

“A trust entity, in addition to the general powers incident to corporations, shall have the power to

… Establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board.”

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Common Trust Fund

Different Kinds of common trust funds:

– Common Trust Fund (“CTF”) – for phase out by 30 Sept. 2006

– UITF

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Rationale for Shift to UITF

Align the operation of pooled funds under management by trust entities with international best practices

Ensure differentiation from bank deposits and other direct liabilities of the financial institution

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Rationale for Shift to UITF

Sound operations of pooled funds will enhance the credibility with retail investors and enable them to evolve as major institutional players that can support the deepening of domestic capital market.A client has free choice on what suits his financial objectives, particularly as to risks 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 denominated in pesos or any acceptable currency, which are operated and administered by a trust entity and made available by participation

� Participation or redemption is allowed as often as stated in its plan rules

� Specie of common trust funds

UITF - Definition

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UITF Documentation

Plan Rules / Declaration of Trust - Written trust 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 by any person having an interest in the fund or by his authorized representative.

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� Minimum elements:� Title (product/brand name) � Investment objectives and policies � Investment powers of trustee � Unitized NAVPU valuation methodology� Terms and conditions governing the

admission or redemption of units of participation

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 be available at the principal office of the trustee during regular office hours for inspection by any person having an interest 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 be invested in liquid investments and tradable 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, any political subdivision of a foreign country or any supranational entity

� Exchange-listed securities

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UITFs’ Allowable Investments

� Marketable instruments that are traded in an organized 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 regularly occurring market transactions on an arm’s length basis.

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II. UITFs may use financial derivatives to hedge market exposure.

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Financial derivatives instruments

� Solely for the purpose of hedging risk exposures of the existing investments of the Fund

� In accordance with existing BSP hedging guidelines, Trust Entity’s risk management and hedging policies

� Disclosed in the Plan and quarterly list of investment outlets

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

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Mark to Market (“MTM”)

The market price determines the valuation of the securities underlying the UITF.Unlike the CTF, valuation is not on an accrual basis.If the investment deteriorates, the trustee shall provision to reflect fair value in accordance with generally accepted accounting principles (“GAAP”) or BSP regulationsIf security has no fair market value, then it shall be assumed to be of no value.

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IV. Beneficial interest of each participation unit is determined under a unitized net asset value per unit (“NAVPU”).

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NAVPU

� Total Net Assets divided by total outstanding units

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

� Made available to existing and prospective participants

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NAVPU

� Daily computation of NAVPU� Weekly publication

� Name of the UITF� General classification (e.g., money market

placement, bond, balanced, equity)� UITF’s NAVPU� Return 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 be charged from the UITF are clearly defined.

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UITF Expenses

� Trust Fees - inclusive of the routine administrative expenseso Salaries and wages; office supplies o Credit investigation/collateral appraisalo BSP supervision fees/internal audit feeso Security/messengerial/janitorial services

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UITF Expenses

� Special expensesRequirementso Preserve/enhance the value of Fundo Payable to third partyo Covered by a separate contracto Disclosed to participants

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VI. Trust entity’s staff charged with the marketing of the UITF shall be trained to properly market the instrument.

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– All personnel involved in the sale of UITFs shall undergo standardized training program for the purpose of developing/ improving their ability to -�Objectively make a judgment on client

suitability�Clearly explain to investors the inherent

risks in investing in UITFs

Marketing Personnel

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Marketing Personnel

� Conduct of training � In accordance with TOAP minimum

training program guidelines �Undertaken by respective trust entities

� Training program regularly validated by TOAP

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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 Trust Committee

� Counterparties are subject to appropriate limits in accordance with sound risk management 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 best execution - If purchase/sale of securities effected with related counterparties, trust entity shall consider 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 party custodian

�Take custody/safekeep investments in 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 borrower’s limit and DOSRI ceilings applicable to trust funds in general

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Administration of UITF

Trustee -

� Exclusive management and control of each UITF under its administration

� Sole right at any time to sell, convert, reinvest, exchange, transfer or change or dispose of the assets comprising the fund

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Administration of UITF

� Has no other relationship with such fund other than its capacity as trustee of the UITF

� Backroom operations with adequate system to support the daily marking-to-market of UITF’s financial instruments

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Investor Protection Features

� Minimum Disclosure Requirements

� Client Suitability Test

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Minimum Disclosure Requirements

� Evidences of participation

� Participating Trust Agreement

� Confirmation of Participationo NAVPU of fund on day of purchase;o Number of units purchased/redeemedo 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 the

trustor/investor. � The Trustee is not liable for losses except upon gross

negligence, fraud or bad faith.

• Such statements should be strategically placed near the space for the investor’s 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 historical performance purely for reference and with clear indication that past results do not guarantee similar future results

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� Weekly Publication of the NAPVU� Must contain:

� Name of the Fund� General Classification� Moving Return on UITF Investments on a year

to date and year-on-year basis

� At least one newspaper of national circulation

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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 Other Requirements

o Pricing/Currencyo Fees/Other Terms Conditions

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Client Suitability

� Investment Objective � Risk Profiling (e.g risk appetite)� Knowledge and Exposure to Financial

Instruments� Previous Investment Experience

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Investment Options

� A CONSUMER has a basic right to choose where he can place his hard earned savings.

� Banks need to compete for this business against other banks and non-bank financial institutions by offering deposit and non-deposit products that meet customer needs.

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Investment Options

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UITF Growth (in Php billion)

1.522.1

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 FundsBalanced FundsBond FundsMoney Market

Amou

nts

(in P

hp B

illio

ns)

261.6

120.5

60.9

25.735.8

324.3

206.8

0.10.1

0.1

0.3

0.4

0.5

0.7

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UITF Rapid Growth

Reasons:� UITFs answered the requirements of investors for

high-yielding investment products that are readily available and convenient to buy.

� Philippines interest rates for the past year were on a downtrend (until April 24, 2006). This positively affected the UITF NAVPUs, which increase when interest rates decrease. In addition to interest accruals on the investments, yields were improved with mark-to-market gains. Investors were happy about their returns.

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UITF Rapid Growth

Reasons� Trust Industry banded together on a UITF

educational campaign, guided by BSP Circular 447.

� Individual trust institutions had their share in marketing the products through their branch network, advertisements, newspaper supplements and investor briefings.

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Philippine interest rates

Supreme Court decision, 3 November 2005, upholding RVAT

Missed tax collection target

Gov’t floats the idea of lifting RVAT on oil

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Philippine Yield Curve

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

As of 23 May

As of 05 June

As of 02 2May

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What happened during the UITF May 2006 Experience?� The UITF experience also coincided at a time of growing risk

aversion among global investors, which manifested in the fall ofAsian currencies, the emerging markets, metal and the stock markets.

� As interest rates moved up, NAVPUs of the UITFs, particularly that of the Bond Funds, moved down as mark-to-market losses were reflected. While investors in these funds have experiencedvolatility in the past, the degree of volatility had been of smaller amounts and shorter duration (i.e. Hyatt 10, February 2006 Declaration of State of Emergency)

� Jittery investors withdrew from the UITFs and fund managers were forced to sell their bond assets to fund such withdrawals. It became a spiral: the more the investors withdrew, the more the fund managers sold the UITF assets, the more the interest rate increased, the more NAVPUs fell and this became a vicious cycle.

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Is there a future for the UITFs?

� UITFs are sound investment and present real value to investors in terms of returns and convenience.

� UITFs are meant to be held for long periods of time.

� They are a powerful way to mobilize funds for capital market development.

� They can be the answer to increasing the saving rate of the country.

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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 various programs

� 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 Performance Standards – Obtain worldwide acceptance of standards for calculating

and 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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