Consumers Domain
By Ian Seruelo

Third Party Custodian

“Genius ain't anything more than elegant common sense.”
—by Josh Billings

Have you heard or read about this issue on third party custodian? Third party what? Well, actually the issue is sort of technical and only those in the field of finance, investments and securities are quite familiar with it.

Maybe one way or the other you have come across this latest controversy that cost the former National Treasurer her job. The hullabaloo sprang from the opposition of former National Treasurer Norma Lasala to two circulars issued by the Bangko Sentral ng Pilipinas (BSP) which created this creature called the third party custodian.

These are BSP Circular No. 392 , which was issued on July 2, 2003 and Circular No. 428 issued on April 15, 2004 . Such circulars gave birth to Third Party Custodians, which are actually private entities tasked to take custody of sold government securities.

The issuance, servicing, redeeming and administration of government securities for the account of the National Government is actually a function of the Bureau of Treasury (BTr) which was originally a function of the BSP but was transferred to the BTr by virtue of a law (Republic Act 7653).

In pursuance of this function, the BTr installed one major component in its system. It installed an electronic system that is called Registry of Scripless Securities or RoSS that computerized all transactions thereby ensuring efficiency and minimized risks and fraud.

Now this is the very system that will be handed down to a private entity who has admitted that they will earn at least half a billion pesos a year for its custodian services! That's a lot of money out of thin air!

Why I am featuring this topic in today's issue is because this is a case of clear rent-seeking and a classic example of trapo governance that is more of a rule than an exception in this country. This issue affects us taxpayers since these circulars will enrich some big boys club and it will be at our expense.

Now I would like to give space to the write up of former Treasurer Lasala why she asserts that this third party custodianship as provided for in the BSP Circulars is grossly disadvantageous to the government and the Filipinos as a whole.

The enumeration below is from Lasala's blogspot site in the internet. For more information and detailed documents, I am encouraging all readers to visit this site in the net: www.lowerphildebt.blogspot.com.

1. The implementation is inefficient and retrogressive because:
a. It merely adds another layer in a transaction that is already simple and working. The bank which used to be able to transact directly with the BTr will now be required to course its transaction through a third party custodian;
b. Reports and debt data which used to be available to the government in the nick of time will now be difficult to prepare, if not impossible. Information which was once whole will become fragmented so that to be able to get a total picture of the country's debt, BTr will now need to request for the records known and available only to the custodians;
c. A reconciliation of records between the BTr and the custodians will now become necessary.
d. It will not maximize the capabilities of the RoSS and will even limit the same.

2. The implementation will be costly to the government because:
a. Added costs to the investors will inevitably be passed on to the government who is the issuer of the government securities in the form on higher borrowing costs and/or interest costs. By their own admission in a local daily, PDTC (Philippine Depository and Trust Corp.) disclosed that it stands to gain half a billion pesos per annum . This is a conservative estimate considering the number of times ownership of a security can be traded in a year. The investors would naturally take the added costs into consideration when they submit their bids for the government securities thus increasing the government's cost of borrowings and adding to the people's debt burden.
b. The re-configuration of the RoSS will entail costs that have not been provided for in the BTr's budget.

3. Implementation will be risky to the government because:
a. With the connection of the PDEX trading platform to the RoSS it will expose the RoSS to the risk of a security breach. Since the PDEX trading platform will connect directly to the RoSS portals, the RoSS system and all the information it maintains INCLUDING CONFIDENTIAL INFORMATION can be accessed by PDTC. Moreover, virus and other elements that can adversely affect data stored in the RoSS can be passed on from the PDEX system;
b. Since debt information will be parceled out to several custodians, the likelihood of unreconciled figures will not be remote. Any difference in figure will impair the INTEGRITY of the country's debt data and and endanger the government debt management processes;
c. Adjudication risks will arise when the issue of which record among the six custodians and that of the BTr shall be deemed controlling in the event of discrepancy.
d. Third party non-bank custodian, PDTC is capitalized at merely P500MM, and yet it will be entrusted with the handling of government securities amounting to Php 2 trillion.
e. The government stands to lose the transparency of its records and will be unable to promptly determine who it actually owes money to. Any delay or errors in the gathering of statistics on debts can adversely affect its debt management capability.
f. It can discourage investors from investing in government securities thereby impairing the government's ability to fund its requirements.
g. If the award to private entities will be proven disadvantageous to government, it renders the BTR liable and vulnerable to all types of suits/litigations.

4. Implementation is unnecessary.
a. Services like providing benchmarks, mark to market valuations , price discovery and transparency and others are already being rendered by the BTr RoSS at no cost to the investor and the government. In fact an investor is able to determine rates and prices anywhere he is through the short messaging system (SMS/text messaging system). These enhancements are among those approved under the Medium-Term Investment Program (MTPIP)of government.
b. Services to be offered by the third party custodians are already being offered by the GSEDs and the Trust Departments of banks. There are existing BSP circulars regulating these custodial functions.
c. It will be uneconomic for small investors to enlist the services of a custodian as the Php 900 transaction fee more than erodes the meager returns on small investors' holdings on top of the other fees that the Third Party Custodians will charge. The small investors do not incur any cost right now under the BTr –RoSS .These small investors will be left with RoSS. Definitely the holders of Retail Treasury bonds (RTBs) as the alternative systems under circulars 392 and 428 will not be able to accommodate them negating the claim that the proposed system was meant to safeguard the small investors.
d. OTC trades will still continue and inputting other data manually negating the claim that the alternative systems effect seamless and straight-through-processing.

5. Moral issues involved:
a. WITHOUT ANY VALUE ADDED TO THE PHILIPPINE GOVERNMENT SECURITIES MARKET, government funds will be used to configure the RoSS, and operate and maintain the same, BUT it will be the PRIVATE third party custodians, more particularly PDTC WHICH WILL BENEFIT from it;
b. The connectivity/implementation of the aforesaid circulars will, in effect, mean an unauthorized awarding of a beneficial use and ownership of a GOVERNMENT ASSET to a PRIVATE ENTITY WITHOUT JUST COMPENSATION TO THE GOVERNMENT. If the government were to decide to privatize the RoSS, it should have been duly bidded out which would, no doubt, fetch the government a substantial amount thereby adding to its resources without the need to raise additional taxes.
c. The implementation of the aforesaid circulars is being relentlessly pursued with ABSOLUTELY LACK OF DISCLOSURE to the proper authorities and to the public as to the detrimental consequences of such a move to government. By the issuance by the Bangko Sentral of mere bank circulars, existing laws are nullified and/or changed to suit the needs of PDTC and another government agency, the BTr is divested of its core function.
d. An “agency” is created whereby the third party custodian can bind the government to contracts and obligations WITHOUT the said custodian being made liable to the government.
e. Confidentiality of bank and GOVERNMENT records and transactions will be breached.

Because Lasala stood up for what is right and did what she was mandated to do, that is to protect the interest of the government, she was elbowed out of her position. Indeed Lasala is right, this third party thing is nothing but a program crafted by opportunistic capitalists who will reap huge profits at the expense of a financially bleeding government and the public.

(For comments and suggestions please email ianseruelo@yahoo.com or send text message to 0919-3486337.)