Effective January 1, 2014, retail investors (meaning, individuals) will not be allowed to invest in Special Deposit Accounts (SDA) anymore, according to a recent Bangko Sentral ng Pilipinas (BSP) memorandum.
BSP Memo number 2013-021 issued on May 20, 2013 restricted access to SDAs only to trust accounts and Unit Investment Trust Funds (UITFs). “Other fiduciary business including agency accounts and investment management activities (IMA) shall no longer have access to the said facility,” the memo explained.
What are Special Deposit Accounts (SDA)?
Special Deposit Accounts or SDAs are placements with short-term maturities offered by the BSP. It is a monetary tool used by the country’s central bank to siphon off excess liquidity in the market. In the past, retail and institutional investors can approach almost any bank to open and invest in SDAs. Since they are backed by the BSP, SDAs are generally considered safe investment instruments.
Individuals have been attracted to this instrument due to relatively higher returns compared to the interest rates offered by traditional bank products, such as savings accounts or time deposits. A few years ago, SDAs offered gross interest rate as high as 4.00% per annum. That is indeed attractive, considering that interest rates in savings and time deposit accounts then (and until now) are just around 1.0% per annum.
Access to SDA facility restricted
As of May 3, BSP records show that total SDA deposits have reached P1.859 trillion. Despite previous measures to restrict access to the facility, SDA deposits continue to grow and the BSP believes it must implement new schemes to prevent more money to be placed in this asset.
This year alone, the BSP has already cut the SDA rate three times. In an attempt to discourage investors from parking excess funds in SDAs, the BSP slashed the interest rate to a historic low of 2.0% per annum starting April 2013.
In July 2012, the BSP also disallowed foreign funds from investing in SDA. Only Filipino citizens and residents then were allowed to place money in SDA (see Why the BSP restricts foreign funds in SDA investments).
Retail investors no longer allowed to invest in SDA
Now, the BSP is implementing a new policy disallowing retail investors from accessing the SDA facility. Starting next year, individuals can no longer approach banks and open an Investment Management Account (IMA) which allows them to make direct placements to SDAs.
The Trust Department of a bank is also required to wind off 30% of their disallowed SDA placements by the end of July 2013 and that “any remaining balance” after that should be removed by the end of November 2013.
The new BSP memo now only allows trust accounts and Unit Investment Trust Funds (UITF) to access the facility. Unit Investment Trust Funds is a collective investment program that pools money from various investors and the pooled money is invested in securities allowed by the fund’s prospectus (see What are Unit Investment Trust Funds?).
Although individuals cannot directly invest in SDAs anymore, they may still invest but only indirectly, that is, through UITF products offered by banks.
Why SDA access is limited
The BSP move to further restrict access to SDA is meant to free up more cash to the financial system. With relatively low SDA rates, investors will opt to park their money somewhere else, perhaps in bonds, stocks, real estate or other investment assets.
Banks will also have more funds available for consumer and business loans, generating more economic activity.
Inflation, though, may increase due to availability of funds in the system but the BSP said it will continue monitoring the country’s inflation rate and will maintain it at manageable levels.
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