12.1 Single Exposure Limit (15%) and Government Exemption

Why concentration limits sit in Module 3

Module 3 — Regulations and Operations (~20% of the TOAP UCP exam) tests whether you can run and sell UITFs inside BSP guardrails. Product knowledge without limits is incomplete: a fixed-income fund that loads 40% of NAV into one corporate issuer is no longer a diversified collective investment scheme—it is a concentrated credit bet dressed as a “bond UITF.”

The single exposure limit (also called the single-entity or single-issuer concentration limit) is one of the most testable numbers on the exam. Memorize it cleanly:

General rule: maximum 15% of the UITF’s Net Asset Value (NAV) in the securities of any single corporate issuer.

Core exemption: debt securities issued or fully guaranteed by the Philippine National Government are exempt from this concentration limit.

That pair—15% corporate / National Government exempt—appears in exam-meta, question-bank items, and branch-level portfolio governance. It is not optional trivia.

The 2026 exchange-traded equity exception (BSP Circular 1234)

The 15% cap is the general rule, but since 2026 it is no longer the only number to know. Under BSP Circular No. 1234, series of 2026 (signed May 20, 2026 by Governor Eli M. Remolona, Jr., and effective 15 calendar days after publication), a UITF that is invested partially or substantially in exchange-traded equity securities may take up to 20% exposure to a single entity or issuer. The additional 5% above the 15% base must be solely in the form of exchange-traded equity securities of that same entity/issuer—you cannot mix corporate-bond exposure into the extra sleeve. Equity index-tracking UITFs may exceed even the 20% cap, up to the actual benchmark weighting of the index component issuer when that weighting is higher than 20%. Critically, the combined exposure of the UITF to any entity and its related parties remains capped at 15% of the fund’s market value; the uplift relaxes the single-issuer test for exchange-traded equities, not the related-party aggregation test. Trust entities must notify the appropriate BSP supervising department by the next banking day when a limit is breached; breaches arising from mark-to-market movements or extraordinary circumstances (e.g., abnormal redemptions) must be corrected within 30 days.

For exam purposes, keep three numbers clean: 15% = default single-entity cap, 20% = exchange-traded equity uplift, and benchmark weighting = index-tracker override. Never assume the 20% uplift applies to plain corporate-bond exposure or to non-exchange-traded private placements.

What “15% of NAV” means operationally

If Fund NAV is PHP 1,000,000,000, the general single-issuer corporate cap is PHP 150,000,000 of that issuer’s securities at the measurement used for compliance (fair-value basis consistent with fund accounting). Going to PHP 180,000,000 in one conglomerate’s bonds would be a breach of concentration discipline, even if those bonds still “look safe” to a salesperson.

Worked PHP example — corporate bond UITF

A peso bond UITF has:

• Fund NAV: PHP 800,000,000
• 15% single-exposure cap: 0.15 × 800,000,000 = PHP 120,000,000

Portfolio holdings in Issuer X (listed corporate bonds only):

• 2028 notes: PHP 70,000,000 fair value
• 2030 notes: PHP 45,000,000 fair value
• Total Issuer X: PHP 115,000,000 → 14.375% of NAV → within the 15% limit

If the fund buys another PHP 20,000,000 of Issuer X paper at fair value without reducing other X exposure:

• New total: PHP 135,000,000 → 16.875% of NAV → over the 15% limit

The exam cares that you can do this arithmetic and that you know NAV is the base, not the original subscription amounts of a few large clients.

Why NAV—not historical cost—matters for the test

Suppose Issuer Y bonds were bought at cost of PHP 90,000,000 but mark-to-market fair value is now PHP 110,000,000, and fund NAV is PHP 700,000,000. Concentration risk and limit testing use current economic exposure, not “we bought only 90 million so we’re fine forever.” Rising fair values can push a position through the 15% ceiling without a new purchase; portfolio managers must rebalance or stop adding. Falling values can create room under the cap. Compliance is dynamic with market value and NAV.

Philippine National Government exemption

The exemption is deliberate industrial and prudential policy: Republic of the Philippines (National Government) debt is treated as the local risk-free or near risk-free core for many fixed-income and money-market books.

What is typically exempt (UCP teaching baseline)

• Treasury Bills (T-bills)
• Treasury Bonds / Fixed-Rate Treasury Notes and other National Government peso debt instruments
• Debt fully guaranteed by the Philippine National Government (where the guarantee is a true sovereign full guarantee, not a corporate parent comfort letter)

A peso money-market or bond UITF may therefore hold a large fraction of NAV in National Government securities without violating the 15% single corporate issuer rule. That does not mean the fund is a deposit, PDIC-insured, or free of interest-rate risk. Government bond prices still move when yields move; NAVPU still marks to market.

Worked PHP example — government heavy book is allowed

Fund NAV: PHP 500,000,000

The 60% + 24% government sleeve is not “illegal concentration” under the corporate single-exposure rule. A CUSP who tells a client “we can only buy 15% government bonds because of the 15% limit” is wrong on the exemption.

What does not get the government exemption

Exam traps cluster here:

1. Corporate bonds of a large Philippine conglomerate — subject to 15%, even if the company is “blue chip” or bank-affiliated.
2. Local government or LGU paper — do not assume National Government exemption applies automatically; the tested exemption is framed around Philippine National Government issuance/full guarantee. Do not invent an LGU free pass on the exam.
3. Foreign sovereigns — not the Philippine National Government exemption.
4. Bank’s own equity or corporate debt of the trustee’s commercial affiliates — still corporate (and often conflict-sensitive; see Section 12.2). Affiliation is not an exemption.
5. Corporate parent guarantees — see next subsection.

Corporate guarantees: combine, do not exempt

Question-bank style fact: if a UITF holds corporate bonds of Subsidiary S guaranteed by Parent P, the exposure is not magically government-risk-free, and a corporate guarantee does not raise the limit to 50% or cancel the 15% test.

Correct approach (UCP baseline): aggregate exposure to the issuer and the guarantor and check the combined figure against the 15% single exposure limit. Only a National Government full guarantee pathway creates the sovereign-style exemption taught in exam-meta.

Worked PHP example — aggregation

Fund NAV: PHP 1,000,000,000 → 15% = PHP 150,000,000

• Bonds of Subco S (guaranteed by Parent P): PHP 90,000,000
• Direct bonds of Parent P: PHP 80,000,000
• Combined P/S exposure: PHP 170,000,000 = 17% of NAV → over limit, even though each line alone might look “under 15%” if wrongly tested in isolation without aggregation where rules require combination.

Teach the principle: related concentration risk is measured so the fund cannot hide the same economic group under multiple nameplates.

Diversification purpose—client language that stays true

Why the rule exists:

• Credit event protection: one issuer default or severe downgrade should not destroy the whole fund.
• Fairness across participants: open-ended funds take subscriptions daily; over-concentration is a risk all unit holders share pro rata.
• Product integrity: “bond fund” and “money market fund” labels imply portfolio construction, not a single-name credit desk.

Accurate client explanation:

“BSP rules generally limit how much of a UITF can sit in any one company’s securities—about 15% of the fund’s net asset value—so the portfolio stays diversified. National Government debt is treated differently under that concentration rule. Diversification reduces single-name risk; it does not guarantee your NAVPU or make the product a PDIC deposit.”

Inaccurate language:

• “15% limit means you can only lose 15%.”
• “Government bonds are exempt so principal is guaranteed.”
• “Our bank’s affiliate paper doesn’t count toward 15%.”
• “If NAVPU falls, PDIC covers concentration losses.”

Interaction with fund classification (preview, not a rewrite of Module 2)

Compliance, monitoring, and sales role

Trust investment and risk/compliance units own portfolio limit monitoring. Marketing personnel still need literacy because:

1. Clients ask “why so much government paper?” — answer with exemption + rate risk, not silence.
2. Clients ask “why not 100% in my favorite stock?” — answer with limits + objective of the Plan Rules.
3. Sales must not promise that the trustee will override the 15% rule for a relationship account.
4. Mystery-shop and ethics scenarios punish staff who treat concentration rules as optional.

If a portfolio appears over the limit, the correct institutional response is investment compliance escalation and rebalancing, not “adjust NAVPU manually” or “hide the position in another account name.”

Exam traps for this section

1. 10% or 5% as the general single-entity cap — wrong; 15% of NAV is the standard general figure. (Do not confuse this with the real 20% exchange-traded equity uplift under Circular 1234—20% is a genuine exception, not the default cap.)
2. Saying corporate bonds are exempt — false.
3. Saying foreign equities or bank deposits are the main exemption — false; the core exemption taught is Philippine National Government debt issued/fully guaranteed.
4. Treating corporate parent guarantees as National Government exemptions — false; combine exposures.
5. Measuring 15% against bank capital or client count — wrong base; use fund NAV.
6. Equating government exemption with zero market risk or PDIC insurance — false.

Memory line

Single corporate issuer ≤ 15% of UITF NAV generally; exchange-traded-equity UITFs may reach 20% under Circular 1234 (2026), index-trackers up to benchmark weighting, but entity + related parties combined still ≤ 15%; Philippine National Government debt issued or fully guaranteed is exempt; corporate guarantees do not create that exemption—aggregate related risk; diversification ≠ principal guarantee.