Reply to Ben Diokno’s PDEx article

Please read the reply provided by Roberto Tan, Treasurer of the Philippines in regards to the recent article of former NEDA secretary Ben Diokno on the role of PDEx in the trading of government securities. I posted this article last 13 September 2012.

From BusinessWorld Philippines

September 20, 2012

Government failure or government doing its job

THIS ARTICLE has become necessary to defend the good name of government officials who do their best in their job, with an honest heart and an appetite for challenge. We write to address the attacks on our alleged failure to apply the appropriate legal boundaries in our engagements and educate the public on the legal underpinnings of our mandate and exercise thereof.

The issues presented in the article of Professor Benjamin E. Diokno entitled “Government failure” published in this newspaper on Sept. 13, 2012 are not novel.

It may be stressed at the outset that the Department of Finance (DoF) and the Bureau of the Treasury (BTr) have stood behind the vision of providing a liquid market and a robust market environment for holders of government securities. We have viewed the PDS Group as a market institution that has complied with the necessary regulations issued by the Securities and Exchange Commission and the Bangko Sentral ng Pilipinas to perform the market functions it is licensed to provide to its communities. As government officials, we are extra careful about ensuring the soundness of our engagements, and the legitimacy of our counterparts. We trust that our judgment is considered credible and are ready to legally defend our position as well as address legitimate concerns raised by third parties.

The DoF is possessed with borrowing power that is exercised under Republic Act No. 245, among others. This law forms the foundation of the DoF in the origination of debt instruments. The same law recognizes the power of the DoF to issue regulations to govern the sovereign issue to protect the Republic and investors from fraud or loss. This authority has been invoked many a time, and the DoF has adopted Orders and Circulars to regulate the sovereign issue. However, the DoF is similarly mindful of the mandate of the Securities and Exchange Commission (SEC) under the Securities Regulation Code (SRC) to regulate the secondary market of securities and, hence, is interested in ensuring that its (DoF) own rules are consistent with the SEC’s regulations. The DoF and the BTr have been in the process of upgrading the environment of the government securities issue in both the primary and secondary markets, to keep up with regulatory developments.

The relationship between BTr and PDEx is that of any issuer and the marketplace on which it is listed. However, as issuer of the government issue, the application process and disclosure requirements normally prescribed for private debt issuers under the SRC do not apply to the government considering that it is deemed compliant with these requirements in all respects. The BTr has allowed domestic government securities (Treasury Bonds) to be listed in a SEC-licensed fixed income exchange, like PDEx, to improve transparency and liquidity in the trading of government securities. It may be noted that the listing of government securities in a market has been previously done like in the case of the government’s Small Denominated Treasury Bonds that was listed at the Philippine Stock Exchange. It is believed, then as is now, that the listing of government securities in a SEC-licensed market will benefit not only the issuer (government) but especially the investors, present and future, due to the relative transparency of the prices and trading volume of the securities.

It may be likewise pointed out that the listing of government securities in a market falls outside the purview of the Procurement Law (RA 9184), for the listing of the government securities issue is not something “acquired” or “procured” where the government parts away public money. It is merely the issuer’s assent to have its issue traded in that market.

The government (DoF and BTr) is not advocating or supporting market monopoly. It has been government policy that the government issue should be made available to all and for that matter, all segments of the market (investors, market operators, intermediaries, and the like) may be allowed to participate. Indeed, the BTr has remained “open” to any and all market operators like fixed income exchanges to link or interface their systems to the BTr to support the activities of their members. But doing so, the government (BTr) is still guided by established principles that ensure that all government securities investors enjoy the same protections and facilities, no matter the venue where they conduct their activities.

As an issuer, the government cannot “regulate” the government securities secondary market. We would be conflicted in that regard. As government, regulating the secondary market would also mean that the market prices would be government-driven. These conditions do not make for a healthy market environment. Nor do they reflect policy directions of this administration. The SEC said it very clearly during the Senate subcommittee hearing last year.

Relative to the sub-registry facility for government securities, it bears pointing out that the same was intended to support the tax tracking on the trading of government securities in an organized market under a unified tax environment, i.e. holders of government securities may, regardless of tax status (taxable or tax-exempt) freely trade across tax categories. The issuance of Multi-Currency Retail Treasury Bonds in 2010 and its trading and settlement in the domestic market necessitated the implementation of tax tracking so that holders of government securities will be appropriately taxed based on their holding period with the end in view of improving liquidity and transparency of the issue. It should be stressed that private sector provider of the tax tracking system to RoSS does not have access to investment information of holders of government securities; thus, there is no occasion for the government’s violation of the secrecy or confidentiality rule on investment in government securities. This position has been sustained by Department of Justice in its Opinion dated Oct. 18, 2011. The government’s engagement of a third party trading platform provider has made available to investors access to pricing, volume and other trading information in the secondary market thereby enabling them to make educated decisions and protecting them against risks associated with inefficient/opaque information. Contrary to the alleged negative effects claimed by Professor Diokno, we see positive outcomes of a more organized exchange of and better trading information on government securities in the form of more efficient pricing and orderly settlement of trades. In recent years, the government has been able to issue longer-dated retail treasury bonds, feeling and seeing the appetite of our investors for long term instruments. We are expanding the absorptive capacity of the market and responding with a commitment to our debt-holders to move our perspective from being a borrower to them, to being an issuer — interested in ensuring the attractiveness of the investment by looking to liquidity, transparency and a robust secondary market as a hallmark of the sovereign issue and our guarantee to our government securities holders.

We expect that Professor Diokno, as a former government official understands the challenges of serving the country with a desire to leave behind a courageous legacy. It is therefore quite unfair to loosely accuse other civil servants of collusion or corruption. Rest assured that in the performance of our duly sworn duty, we at the DoF and BTr have tasked ourselves to uphold the highest standards of governance, ethics and integrity in pursuit of our noble mission.

Thank you very much.

Roberto B. Tan

Treasurer of the Philippines

Article location : http://www.bworldonline.com/content.php?section=Opinion&title=Government failure or government doing its job&id=58817

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