2.1 Money Market and Capital Market Instruments

2.1 Money Market and Capital Market Instruments

Financial markets in the Philippines serve as the institutional mechanism through which funds are channeled from net savers (such as households and surplus corporations) to net borrowers (such as expanding enterprises and the sovereign government). Under the Philippine capital market framework, these markets are segregated into two distinct segments based on maturity horizons, liquidity characteristics, and economic functions: the money market and the capital market.

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Overview of Financial Markets: Money Market vs. Capital Market

The fundamental boundary between the money market and the capital market lies in the original maturity of the traded instruments:

• Money Market: Encompasses short-term debt instruments having an original maturity of one year or less (typically 365 calendar days or fewer). It provides wholesale cash management for institutional treasuries, supports working capital cycles, and serves as the operational venue through which the central bank conducts monetary policy.
• Capital Market: Encompasses medium- and long-term financial claims with maturities exceeding one year, as well as perpetual equity instruments. It facilitates long-term capital formation, corporate infrastructure expansion, and national sovereign development financing.

Structural Comparison

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Philippine Treasury Bills (T-Bills)

Treasury bills (T-bills) are direct, unconditional, short-term debt obligations issued by the Republic of the Philippines through the Bureau of the Treasury (BTr), an agency under the Department of Finance. Because they are backed by the full taxing authority and credit of the sovereign government, T-bills are classified as benchmark risk-free securities regarding credit or default risk within the Philippine financial system.

Auction Tenors and Mechanics

The BTr conducts competitive auctions on a weekly basis (typically on Mondays) through the National Registry of Scrip-less Securities (nRoSS) system. The primary participants eligible to submit competitive and non-competitive bids are licensed financial institutions designated by the Department of Finance as Government Securities Eligible Dealers (GSEDs).

Philippine T-bills are issued in three standardized auction maturities:

1. 91-Day T-Bills: Approximately 3 months (13 weeks).
2. 182-Day T-Bills: Approximately 6 months (26 weeks).
3. 364-Day T-Bills: Approximately 12 months (52 weeks).

Exam Watch: In Philippine sovereign debt issuance conventions, the one-year bill has an exact tenor of 364 days, not 365 days. This standard ensures that both auction settlement and maturity occur on the same day of the week (typically Wednesday), avoiding weekend settlement complications.

Valuation and Yield Conventions

Treasury bills do not pay periodic coupon interest. Instead, they are issued at a discount from nominal par value (face value of Php 100, or trading lots of Php 10,000 and above) and mature at full face value. The investor's return represents the accretion from the discounted purchase price to par.

Two standard formulas are employed in Philippine market quotations:

1. Bank Discount Yield (Annualized): $\text{Discount Rate } (d) = \frac{\text{Face Value} - \text{Purchase Price}}{\text{Face Value}} \times \frac{360}{\text{Days to Maturity}}$
2. Money Market / Bond Equivalent Yield (BEY): $\text{BEY } (y) = \frac{\text{Face Value} - \text{Purchase Price}}{\text{Purchase Price}} \times \frac{365}{\text{Days to Maturity}}$

Taxation

Under Section 24 of the National Internal Revenue Code (NIRC), the discount on Treasury bills is treated as interest income subject to a 20% final withholding tax (FWT) deducted at the time of purchase or at settlement, rendering net cash returns exempt from further income tax filing by individual investors.

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Commercial Paper (CP)

Commercial paper is an unsecured, short-term promissory note issued by prime corporations to finance operational cash requirements, such as accounts payable, inventory accumulation, and seasonal payroll needs. Under the Securities Regulation Code (SRC / RA 8799) and SEC regulatory guidelines, commercial paper is categorized by maturity:

• Short-Term Commercial Paper (STCP): Tenors not exceeding 365 days.
• Long-Term Commercial Paper (LTCP): Maturities extending beyond one year (treated as medium-term corporate notes in the capital market).

SEC Regulatory Standards

Because commercial paper represents unsecured debt, public issuance presents potential credit exposure to investors. Under SEC rules:

1. Registration Requirement: Issuers must file a registration statement with the SEC unless the transaction qualifies for an exemption, such as a sale exclusively to Qualified Buyers under Section 10.1(l) of the SRC.
2. Rating or Rule-Based Exception: A commercial-paper issue generally must be rated by an SEC-accredited credit rating agency. The rating condition does not apply when the proposed issue is not more than 25% of the issuer's net worth or an irrevocable committed bank line covers 100% of the proposed issue.
3. Do Not Combine Alternatives: A full committed credit line is one route to the rating exception; it is not a universal requirement that every rated issuer must also satisfy. Registration, exemptions, underwriting rules, disclosures, and rating conditions must be analyzed separately.

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Certificates of Deposit and Negotiable Instruments

Banks in the Philippines issue deposit certificates to manage funding and liquidity:

• Certificates of Deposit (CDs) are time deposits with stated maturities. A conventional time deposit is not ordinarily transferred in a secondary market and early withdrawal may carry contractual consequences.
• Negotiable Certificates of Deposit (NCDs) are transferable instruments that may be sold before maturity subject to their terms and market liquidity.
• Long-Term Negotiable Certificates of Time Deposit (LTNCDs) are BSP-regulated long-term deposit obligations that may be listed or traded in the organized fixed-income market.

The Capital Markets Efficiency Promotion Act, Republic Act No. 12214, changed the tax exam rule effective 1 July 2025. Interest, yield, or other monetary benefit from covered deposits, deposit substitutes, trust funds, and similar arrangements is generally subject to a uniform 20% final tax regardless of tenure. Instruments issued or transacted before 1 July 2025 remain subject to the prior rules through maturity under the transition treatment. Therefore, the former long-term-deposit exemption must not be applied automatically to a newly issued LTNCD.

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Repurchase Agreements (Repos) and Reverse Repos (RRP)

A Repurchase Agreement (Repo) is a contractual transaction involving the spot sale of eligible securities coupled with a simultaneous agreement by the seller to repurchase those exact securities (or equivalent collateral) from the buyer at an agreed future date and price.

Economic Anatomy

Although legally structured as two separate purchase and sale legs, a repo operates economically as a collateralized borrowing and lending transaction:

• Cash Borrower (Seller of Securities): Executes a Repo. The borrower posts securities as collateral and receives cash.
• Cash Lender (Buyer of Securities): Executes a Reverse Repo. The lender provides cash and holds the securities as protective collateral.
• Repo Rate: The percentage spread between the initial sale price and the higher repurchase price, annualized across the contract tenor: $\text{Repo Interest} = \text{Principal Borrowed} \times \text{Repo Rate} \times \frac{\text{Days}}{360}$

The BSP Overnight RRP Monetary Policy Facility

The Bangko Sentral ng Pilipinas uses the Overnight Reverse Repurchase (RRP) Facility as its primary policy interest rate under the Interest Rate Corridor (IRC) framework:

• In BSP RRP operations, the BSP acts from its own institutional perspective as the cash borrower (absorbing excess structural liquidity from domestic banks).
• Participating banks lend excess cash balances overnight to the BSP and receive government securities as collateral.
• The BSP Overnight RRP rate serves as the foundational benchmark for all short-term interest rates throughout the Philippine financial system.

Documentation, Collateral, and Market Rules

Institutional repos are commonly documented under a master agreement such as the Global Master Repurchase Agreement (GMRA) or the agreement required by the relevant market program. Documentation addresses title transfer, margin maintenance, substitution, default, close-out, and netting. Government-securities repos in the Philippine interdealer market also follow the applicable Bureau of the Treasury, BSP, and PDEx operating, delivery, registry, and custody rules. Do not attribute these repo controls to SEC MC No. 6, Series of 2017: that circular concerns annual reporting on segregation of functions (the Chinese Wall), not repo regulation.

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Banker's Acceptances (BAs)

A Banker's Acceptance is a short-term time draft or bill of exchange drawn by an importer or exporter on a commercial bank pursuant to a commercial Letter of Credit (LC). When the bank formally stamps the draft as "Accepted," the bank assumes an unconditional, primary liability to pay the face amount at maturity.

• Tenor: Typically aligns with trade shipment timelines, ranging from 30 to 180 days.
• Credit Quality: The instrument's credit rating reflects the creditworthiness of the accepting bank rather than the commercial trading company.
• Trading: Exporters frequently discount accepted drafts in the secondary money market to obtain immediate cash rather than waiting for trade settlement.

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Risk Profiles of Money Market Instruments

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Practical Exam Traps

• Tenor Trap: Do not confuse Philippine T-bill maturities. The standard three auction tenors are 91, 182, and 364 days. Questions testing 365-day T-bills in the Philippines are incorrect.
• Repo Perspective Trap: Exam questions often ask whether an institution engaged in a repo or reverse repo. Remember: The firm supplying securities and borrowing cash is doing a Repo; the firm supplying cash and receiving securities is doing a Reverse Repo.
• BSP Perspective Trap: When the BSP raises the "Reverse Repo Rate," it is raising the interest rate it pays to banks to absorb excess reserves. The transaction is a reverse repo from the central bank's viewpoint because it is borrowing cash.