TRUST IS the operative word that keeps the financial system functioning properly. It’s a confidence game and banks have to protect the trust of their depositors, borrowers and stakeholders at all times. The alleged irregularities at the Development Bank of the Philippines involving the illegal “wash sales” of government securities that led to a P710-million loss to the state-owned financial institution are definitely to the contrary.
A report made by the Commission on Audit identified 28 transactions made between Jan. 29 and March 3, 2014, involving 20- and 25-year fixed-rate treasury notes issued by the government and worth P14.3 billion—all with First Metro Investment Corp., the investment banking arm of the Metrobank group. The securities were sold at a loss and bought back by DBP on the same day and at the same price they were sold. This,
according to the COA, gave “an impression of unsound trading practices leading to market manipulation.”
A bank keeps its fixed-income securities in either its “hold-to-maturity” account (where the IOUs are not subjected to periodic repricing to recognize paper gains or losses) or its “available-for-sale” account (for short-term trading and revalued regularly to reflect paper gains or losses to comply with the mark-to-market rule). The Bangko Sentral ng Pilipinas and the Securities and Exchange Commission prohibit banks from transferring securities freely from one account to another to prevent the illegal practice of artificially making their finances look better by either showing bigger gains or hiding losses. Still, some banks go around the restriction through “wash sales,” wherein securities are sold to another financial institution and bought back at a pre-agreed price, usually on the same day, to make auditors believe that these were new purchases rather than mere transfers meant to make the books look better.
“Wash sales” are illegal because they distort the market by artificially increasing the trading volume of securities even when there is no real change in beneficial ownership. They also taint benchmark interest rates because unsuspecting financial institutions will be misled into thinking that the rate or price of the huge transactions was determined by the market and not by just one player.
DBP has replied that there was no attempt to rig the market with its series of bond transactions, although it admitted that some rules might have been violated. As early as March 31, the bank claimed that it had filed administrative charges against its treasurer and two other treasury employees; it added that the DBP board would decide on the sanctions in the next couple of weeks after the governance office has presented its report.
Union members and officials of DBP have filed a graft complaint against 14 DBP executives over the “wash sale” of securities. Congress has also been asked to look into the controversy, given that the questionable transactions could jeopardize the recently approved House bill allowing DBP’s merger with another state-owned institution, Land Bank of the Philippines.
The institutions that should resolve this is the BSP (with help from the privately run Philippine Dealing and Exchange Corp., which oversees the bond trading market) and the SEC. The silence of the regulatory agencies is not helping calm the market, especially when it was found out that whistle-blowers had informed them of the violations as early as February. The Inquirer reported that DBP insiders wrote SEC Chair Teresita Herbosa on
Feb. 20, informing her of the alleged anomalies in the bank, including the hiring and appointment by management of supposedly unqualified personnel to sensitive senior positions. To date, the SEC—despite acknowledging receipt of the complaint—has yet to disclose the actions it has taken, if any. DBP insiders also raised the same complaints to the BSP’s policymaking Monetary Board and
Finance Secretary Cesar Purisima, but they have yet to receive a formal reply.
The BSP, one of the few remaining regulatory agencies with a high public trust rating, should see this case through to its logical conclusion. Letting this wrongdoing pass unresolved and the perpetrators go unpunished will deal a big blow to the people’s trust in the BSP in particular, and the financial system in general. A whitewash of this “wash sale” is the last thing the banking community and the public need now.