26/11/2014 14:50:41 Free Membership Login

what are SDA special deposit accounts

BSP Special Deposit Account (SDA) and Reverse Repurchase Agreement (RRP)

Short-term liability products of the BSP with tenors range from 3 days to 2 months. These are relatively risk-free investment in terms of credit risk since it is issued by the BSP which is a government agency. These are evidenced by a Participation Agreement.   Interest on both SDA and RRP is subject to a 20.0% final w/tax.  The rate offers a premium of 1.0-1.5 percentage points over the BSP overnight borrowing rate.  Rates remain unchanged at 6% as of November 20, 2008.

Trust departments may pre-terminate their SDA placements, either fully or partially. If the holding period of the SDA placement when it is rate pre-terminated is less than 50% of the original tenor of the said placement, the applicable interest rate for the pre-terminated amount will be the rate dealt on value date less two percent (2%) p.a. If the holding period is 50% or more of the original tenor, the applicable interest rate for the pre-terminated amount will be the rate dealt on value date less one percent (1%) p.a. The pre-termination rate shall apply only to the amount pre-terminated.

Last year, the BSP opened its SDA facility to trust entities but later closed three of its six SDA windows as liquidity growth slowed down. 

This was about during end of April 2007, the BSP changed the rules governing its special deposit account, or SDA, allowing trust departments of banks and non-bank government-owned or -controlled corporations access to this facility.

SDA offers interest rates higher than yields on government securities of the same tenors.  Current SDA rate for 2 weeks in BDO is 6.13% p.a. (gross) and about almost 5% net of fees and taxes.

With measures such as the SDA, the BSP aims to bring down the growth in domestic liquidity to below 20 percent. 

The BSP made more moves to boost liquidity in the system, like the recent two percentage point reduction in banks' reserve requirement, to encourage more lending activity amid the global financial crisis.

PHILIPPINE banks want to see the last of measures monetary authorities have drawn up to thaw frozen credit markets, with a plan to plug the Bangko Sentral ng Pilipinas’ (BSP) liquidity-draining special deposit facility now in the cards.  Banks argued that the funds released by the reduction in the reserve requirement would only go back into the SDA facility. Thus, they urged the BSP to close its remaining SDA windows.  You see, SDAs are in direct competition with Bank Time Deposits.  It also competes with government bonds.

But The Bangko Sentral ng Pilipinas (BSP) said Friday it has no plans of scrapping or changing the terms of its special deposit accounts (SDA) at the moment.  BSP governor Amando Tetangco Jr. said the central bank already reviewed the SDA facility and decided it was still effective. 

According to BSP deputy governor Diwa Guinigundo, however, the central bank has not actually detected funds being shifted back to the SDA facility.  "We don’t see it coming back to the BSP yet, but then it is very difficult to track down," noted Guinigundo.

The central bank said it intends to keep the SDA in its "monetary policy tool kit."

On June 2007, P200 billion worth were placed into government SDAs.

By March 2008,  a new high P546.35 billion was achieved in these deposits. However, total SDA declined to P451 billion in June 2008 from P512.9 billion in May 2008 this year.

According to Hong Kong-based economist Frederic Neumann, head of HSBC's Asian Economics Team, the BSP would have kept its special deposit accounts (SDA) open in order to immobilize liquidity to reduce risks to inflation as it cuts down its policy rates.

The effect, according to Neumann, was to make cheaper money available to borrowers in emerging markets, particularly in Asia where growth has been steadily picking up momentum. 

According to Neumann, however, the volume of funds that would suddenly find their way to Asian markets would prevent the BSP from risking the possibility of rampant liquidity growth.

"The BSP will have to keep its SDAs because it needs to continue trapping all that money," Neumann said. "That's just too much money."

When the economy actually starts picking up on a sustained basis, Neumann said that the BSP would then release these funds that have been parked with the central bank and allow it back into the system in order to maintain the momentum.

More importantly, however, Neumann said it was easier for the BSP to control the price of money by adjusting interest rates rather than using SDAs to effect a de facto monetary easing or tightening.

"It's hard to use the SDA to get, say, the equivalent of a 25-point cut," he said.

On Thursday, the BSP kept its benchmark interest rates unchanged at 6%, indicating that rising core inflation could rule out any rate cut for the remainder of the year.

SDA was introduced in November 1998 to enable the BSP to expand its toolkit in liquidity management. 

According to banker Jay, that the BSP generally taking a hit by paying these interest rates to depositors is worth it to control the economy by mopping up excess inflation.  

Comments

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