Financial Market Regulation and Intermediation Program - Subprogram 2 Output 1: Enhanced Financial Sector Stability. To mitigate the immediate effects of the crisis, the government has enacted a number of measures to strengthen its ability to assure the stability of the financial sector and to reduce systemic risk. The central bank, Bangko Sentral ng Pilipinas (BSP), adopted measures to provide additional liquidity to the banking sector and enhanced its ability to serve as a lender of last resort by doubling the peso rediscounting facility to P60 million, as well as opening a US dollar repurchase facility. BSP also submitted proposed amendments to Congress to strengthen its monetary policy framework, including a mandate to carry out open market operations of BSP bills. In addition, congress doubled the deposit insurance ceiling to P500,000 and granted the Philippine Deposit Insurance Corporation (PDIC) additional powers, including the flexibility to adjust the maximum deposit insurance ceiling in times of systemic stress and to exclude deposits from the deposit insurance coverage scheme in cases of fraud or abuse. PDIC also established a mechanism to build up and maintain an adequate deposit insurance fund (DIF) and has approved a resolution for submission to Congress in support of legislation to establish bridge banking and other resolution methodologies. The Philippines has completed a Financial Sector Assessment Program and, under subprogram 2, the BSP, PDIC, and SEC have begun implementing corrective actions to address financial sector risks as well as regulatory and structural bottlenecks identified in the assessment. The BSP and PDIC have combined their efforts to encourage industry consolidation. The Strengthening Program for Rural Banks was launched with P5 billion in funding to provide incentives for weaker rural banks to merge with stronger rural banks. The PDIC board also approved the investor-investee framework, which is an electronic matching system intended to facilitate mergers, acquisitions, and consolidation among banks. To enhance financial sector stability and reduce systemic risk, the Department of Finance (DOF) has strengthened its capacity for public debt management and has prepared a needs assessment for its newly established Debt and Risk Management Division. The division subsequently prepared a draft public debt management strategy for FY2011 as well as a debt sustainability assessment for fiscal years 2010 and 2011.

Output 2: Strengthened Financial Sector Regulatory Oversight. Under subprogram 2, measures were implemented to improve interagency coordination and sharing of information, and to strengthen regulatory oversight functions in the financial sector. The enforcement powers of the PDIC were strengthened and the SEC enhanced its capacity for market surveillance. Subprogram 2 addresses the long-standing governance weaknesses of the SEC and the Insurance Commission by sequencing reforms over the medium to long term, with the primary objective of lifting the capacity of the two agencies toward a par with the other financial sector regulators (i.e., BSP and PDIC). Subprogram 2 also promotes greater integration and coordination between the different regulators, with the goal of establishing a highly coordinated financial sector regulatory and surveillance framework to enhance the conduct of micro and macro prudential supervision. Memorandums of understanding setting out the working relationship of the regulators in the Financial Stability Forum (FSF) have been signed. Standing committees have been established to address standardization of supervision and risk measurement across regulators, as well as for optimizing the regulatory architecture. BSP has just issued its third Financial Sector Stability Report. Subprogram 2 initially anticipates supporting the internal efforts of the FSF to strengthen early warning systems, and promoting better coordination and communication. Subprogram 2 will strengthen coordination between BSP and the PDIC with regard to the examination of problematic banks to lessen the risk to the DIF. Congress amended the PDIC charter to grant the agency the authority to adopt a new or revised organizational structure and to provide enhanced legal protection for its staff. The PDIC may now conduct special examinations in coordination with BSP when there are threats of bank closures, and may examine deposit accounts in cases of unsafe and unsound practices. Congress further granted the PDIC the authority to rescind splitting of deposits within 120 days before bank closure. This authority is expected to enhance stability and to contain losses to the DIF arising out of high rate deposit promotions that have been used to forestall the timely resolution of problem banks. The extension of examination authority to deposit accounts in specified situations is also expected to curtail the use of high rate deposit promotions to fund fraudulent or other improper activities.

Subprogram 2 places the SEC under the DOF s administrative authority, which should strengthen the SEC s ability to pursue reforms. The DOF, in consultation with the SEC, produced and endorsed an action plan for restructuring the SEC. This plan identified the core responsibilities of the SEC and recommended arrangements to deal with non-core responsibilities. It also identified organizational structures, staffing complements and skill sets, and pay scales. Finally, the plan will identify a funding mechanism to ensure the eventual administrative and fiscal autonomy of the agency. In the interim, the government (Department of Budget and Management [DBM]) raised the SEC s proposed 2011 general budget appropriation to accommodate the priority recommendations of the action plan, as committed to higher resources in the DBM s forward estimates, until an independent, self-funding mechanism can be established. The DOF, in consultation with the Insurance Commission, will produce an action plan for restructuring the Insurance Commission. This plan will contain recommendations regarding restructuring the agency to address the organizational structure as well as staff size, skills, and remuneration. As with the SEC, recommendations will be provided to establish a funding mechanism to ensure ongoing administrative and fiscal autonomy. Completion and implementation of the action plan will be monitored under the P3F.

Output 3: Improved Efficiency and Liquidity in Securities Markets. To develop an efficient and liquid secondary market, the SEC defined the guidelines for the over-the-counter market, which included the requirement for a central trade reporting system. This effectively provides for price discovery of the bilateral transactions that define the over-the-counter market, aligning it with the data capture and reporting standards used in exchange-based markets. Subsequently, the SEC approved listing requirements and trading rules of the designated selfregulatory organization, effectively providing an enabling environment for trading in corporate bonds on the fixed-income exchange. To stimulate secondary trading and accelerate the pace of capital market development, Congress enacted a permanent stamp duty exemption for secondary trading of listed companies. Several enabling laws were passed,  including the Personal Equity Retirement Account Act, 2008, which creates a tax-free personal retirement account, and the Law on Real Estate Investment Trusts, 2009, which is expected to act as a stimulus to capital market development by providing a method to increase investor participation in the real estate market. Together, these acts should stimulate demand for both investment products and professional investment management. Implementing regulations for the Personal Equity Retirement Act are expected to include a requirement for formal training and licensing of investment professionals similar to the Series license in the United States. Finally, the Credit Information System Act