PDST Calculation Guidelines (2-2010)

Guidelines for Calculation of Philippine Dealing System Treasury (PDST) Reference Rates with PDEx as SRO Calculating Agent
This document is a guide for the daily calculation and publication of the following Philippine Dealing System Treasury Reference Rates and corresponding Interpolated Rates: a) PDS Treasury Fixing or PDST-F, b) PDS Treasury Reference Rate AM or PDST-R1, c) PDS Treasury Reference Rate PM or PDST-R2, d) PDS Treasury Interpolated Fixing or PDSI-F, e) PDS Treasury Interpolated Rate AM or PDSI-R1, and f) PDS Treasury Interpolated Rate PM or PDSI-R2 For the purposes of this document the following terms shall be used: Bellwether Security Associated Security Benchmark Securities PDST Fixing Banks the On-the-Run Security designated for the 11:15 Fixing for the Benchmark Tenor the Expanded On-the-Run security falling within range of the defined Benchmark Tenor the collective term for any security falling within the defined Benchmark Tenor those banks qualified as such by the BAP and endorsed to PDEx by inclusion in Annex C of this document as the same may be amended from time to time

Benchmark Tenors, Securities and Data Sources 1. Benchmark Tenors. There are twelve (12) tenor points on the yield curve for which yields will be set daily. These are; 1Mth, 3Mth, 6Mth, 1Yr, 2Yr, 3Yr, 4Yr, 5Yr, 7Yr, 10Yr, 20Yr, and 25Yr. The range of tenors captured for each benchmark tenor is defined in Annex A of this document. 2. Securities - Determination of Bellwether Security and Associated Securities 2.1. Every day an algorithm shall be run to determine one Bellwether Security and a set of Associated Securities for each of the 12 tenors above. 2.2. Yields from done transactions of the set of Benchmark Securities for each Benchmark Tenor shall be the source data for the PDST Reference Rate for that tenor. 2.3. The contributed firm bid yields for the designated bellwether security will be the source data for the PDST-F (MART1) for that tenor point. 2.4. For the tenors of 1-year and below only Treasury Bills qualify as bellwether securities, except as otherwise provided in Annex A in respect of absence of a clear benchmark. 2.5. For the tenors of 2-years and above Fixed Rate Treasury Notes, Retail Treasury Bonds and Special Purpose Treasury Bonds qualify as bellwether securities. 2.6. In the PDEx pages the selected securities are noted by an asterisk (*) in their securities names.

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3. Data Sources. The contribution source/s of the market yield data are 3.1. For the PDS Treasury Reference Rates (PDST-R1 and PDST-R2): All done transactions of PDEx Trading Participants for the Benchmark Securities identified for each benchmark tenor. In the absence of done transactions, firm bid yields of at least PhP 50.0 Million posted by PDST Fixing Banks shall be used. 3.2. For the PDS Treasury Fixing (PDST-F): Firm Bids of at least PhP 50.0 Million quoted by PDST Fixing Banks for the Bellwether Securities. Methodology for the PDS Treasury Reference Rate AM and PM (PDST-R1 and PDST-R2) 4. The set of published PDST-R1 and R2 benchmarks are intended to become the source of reference rates for the repricing of loans, securities, derivative transactions and other interest rate sensitive instruments to be issued. The PDST-R1 and R-2 benchmarks are also intended to become the bases for market valuation of Government Securities and other PhP-denominated fixed income securities. 5. Each day the PDS system shall: 5.1. Track all done transactions for the Benchmark Securities for each Tenor on that trading day. 5.1.1. Convert prices of value today (T+0) transactions into standard value tomorrow (T+1) equivalent prices for inclusion into a value tomorrow Weighted Average Price for each Benchmark Security. (See Annex D for an example of this conversion process.) Derive the Weighted Average Yield for each Benchmark Security from the Weighted Average Price. If Total Volume of deals within the Tenor point is less than the prescribed volume (e.g. PhP 50 Million) in Annex B of this document 5.2.1.1. Array FIRM BID ORDERS for at least PhP 50.00 Million from the set of posted BID Yields for the Benchmark Securities including the Bellwether Security within a Benchmark Tenor. 5.2.1.2. From the FIRM BID ORDERS arrayed, select the LOWEST BID YIELD posted from within the set of posted BID Yields for the Benchmark Securities within a Benchmark Tenor. The LOWEST BID YIELD will represent the PDST-R1 or R2 of that Benchmark Tenor at that calculation time. 5.2.2. If the Total volume is equal to or greater than the prescribed volume: 5.2.2.1. Multiply the Weighted Average Yield for each Benchmark Security in that Tenor by the Face Amount traded for that Benchmark Security 5.2.2.2. Sum the products of the Weighted Average Yields and Face Amounts of the Benchmark Securities 5.2.2.3. Divide the sum of step 5.2.2.2 by the Total Volume for the Benchmark Tenor (i.e. sum of the Face Amounts of the Benchmark Securities) 5.2.2.4. This result shall be the Weighted Average Yield for the Benchmark Tenor and this figure will represent the PDST-R of that Benchmark Tenor at that calculation time.

5.1.2.

5.2. Check the Total Volume of Deals for each Tenor Point at each Calculation Time and: 5.2.1.

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6. Calculation and Publication Schedule. The PDS Treasury Reference Rates AM and PM shall be calculated and published daily at: 6.1. PDST- R1: 6.2. PDST- R2: 11:16 - reflecting weighted average yields of deals done up to 11:15 16:16 - reflecting weighted average yields of deals done up to 16:15

Methodology for the PDS Treasury Fixing (PDST-F) 7. The PDST-F shall be computed daily for each specified benchmark tenor and is intended to support the repricing of earlier-issued debt securities and derivative contracts or other interest-rate sensitive instruments that use contributed bid rates for a reference rate. The PDST-F shall use the original methodology used by the BAP and MART and is effectively a MART1-equivalent reference rate. 7.1. PDST Fixing Banks shall be committed to post firm bids of at least PhP 50 Million Face Amount for each bellwether security identified for each tenor bucket on that Trading Day. 7.2. The firm bids of the PDST Fixing Banks shall be collated by the PDS system which shall then select only the best sixty percent (60%) of the contributed firm bid yields (i.e., the lowest bid yields). 7.3. The system will compute for the simple average yield from the selected best sixty percent (60%) of the bid yields for each benchmark tenor, and the result shall be the PDST-F Yield for that benchmark tenor point. 8. Calculation and Publication Schedule. The PDST-F shall be computed as of 11.15 a.m. and published shortly after 11.16 a.m. daily. Methodology for PDS Interpolated Rates (PDSI-F, PDSI-R1 and PDSI-R2) 9. The processes above shall generate three (3) sets of yield points, which form the bases for interpolating yield curves of Philippine Treasury issues. The PDS Interpolated Rates (yields) are intended to serve as market valuation data for less liquid and non-Benchmark Philippine Treasury securities that have no price or yield data. 9.1. PDEx shall apply a simple linear interpolation method to determine yields in between the known tenor points of the yield curves. The interpolation is implemented down to the number of days remaining for the non-Benchmark Philippine Treasury security, for which the yield is being calculated, using the following process: 9.1.1. 9.1.2. 9.1.3. Determine the remaining Days to Maturity (DTM) of each non-Benchmark Philippine Treasury security. Based on the DTM, determine between which two tenor points the non-Benchmark Philippine Treasury security falls. Get difference of the two PDST-Rs of the known tenors (i.e. Benchmark Tenors) and divide by the number of days between the two known tenors. (This will generate a daily interpolation factor). Get the difference between the DTM of the non-Benchmark Philippine Treasury security and the number of days of the lower known tenor.

9.1.4.

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9.1.5. 9.1.6. Multiply the daily interpolation factor by no. of days between DTM and lower known tenor to get the interpolation factor for the non-Benchmark Philippine Treasury security. Add the interpolation factor to the PDST-R of the lower known tenor and this shall be the PDS (Treasury) Interpolated Rate PDSI-R for that non-Benchmark Philippine Treasury security. Interpolated Yield Curve PDS (T) Interpolated Fixing PDS (T) Interpolated Rate AM PDS (T) Interpolated Rate PM Short Name PDSI-F PDSI-R1 PDSI-R2 Published at 11:20 11:20 16:20

9.2. The following table outlines shows the source data and names of the interpolated rates: Source Yield Points PDST-F (11:16) PDST-R1 (11:16) PDST-R2 (16:16) Contingency Measures 10. PDST Fixing Bank Technical Problem. The following procedure is applicable if a PDST Fixing Bank experiences a system problem or telecommunications problem (for clarity, the latter includes failure of the required dial-up facility for the Trading System). In such a situation, the PDST Fixing Bank should immediately inform PDEx Market Operations by telephone that it will be unable to enter its firm bids for the PDST-F at 11:15 AM and may be delayed in entering its transactions for capture in the PDST-R1 or PDST-R2 calculations. 10.1. PDEx shall proceed with the calculations of the PDST-F using price data entered by the other PDST Fixing Banks and the PDST-R using transactional data of all other PDEx Trading Participants. 10.2. If a situation occurs wherein fifty per cent (50%) of the Trading Participants are unable to dialup into a fully operational PDEx Trading System, then the PDST Fixing Banks shall be duly informed of such fact and the contingency measures in the following section shall be followed by the PDST Fixing Banks. 11. System-wide Trading System Problem. These contingency measures are premised on the occurrence of events wherein all redundancy and backup features of the PDEx Trading Systems have been exhausted. In such a situation, the PDST Fixing Banks would be unable to enter their done transactions or input the bids for the benchmark securities on the PDEx Trading Systems. In this scenario, Trading Participants shall be duly informed and following are the procedures to be followed by PDST Fixing Banks: 11.1. Input the Firm Bids for the bellwether securities that the PDST Fixing Bank would have posted for that day into an Excel spreadsheet. 11.2. Send the Excel spreadsheet as close to the calculation time as possible to the following e-mail account pdex@pds.com.ph and note Bids for Bellwether Securities of [BANK NAME] for [Reference Rate] on the e-mail header. The email and the spreadsheet shall be substantially in the form prescribed by PDEx. Only the data received in time for the calculation of the relevant reference rate shall be processed for generation thereof. 11.3. In the above scenario, PDS Treasury Reference Rates shall be calculated based on the best available Bid/s, and may be published on a delayed basis. 11.4. If the scenario is such that transmission of bid data from fifty percent (50%) of PDST Fixing Banks by e-mail cannot be effected, the previous days PDS Treasury Reference Rates will be applicable and this fact shall be made known in the publication of the PDS Treasury Reference Rates. PDST Calculation Guidelines (Revised November 2010) Page 4 of 9

PDST Calculation Guidelines (2-2010) Annex A Definition of Tenor Ranges within Benchmark Tenors
1. Treasury-Bill Benchmark Securities The PDS System shall count the remaining tenor of Philippine Treasury issues in number of days remaining to maturity. The start date used will be the standard settlement date of value tomorrow (or T+1). As a general rule, the Bellwether Treasury Bills should be the 35-day, 91-day, and 182-day tenors, which shall then be subject to an expansion of +7 days and -7 days count for inclusion of Associated (expanded on-the-run) Securities. The usual one-year benchmark shall be the latest issued 364-day Treasury bill, subject to an expanded range of -14 days for the Associated Securities. Though not qualifying as bellwether security, any outstanding FXTN, Retail Treasury Bond, or Special Purpose Treasury Bond, falling within the defined day-count range qualify as associated securities for the Treasury Bill tenor buckets.

Weekday Monday 1 month 3 months 6 months 1 year Tuesday 1 month 3 months 6 months 1 year Wednesday 1 month 3 months 6 months 1 year Thursday 1 month 3 months 6 months 1 year Friday 1 month 3 months 6 months 1 year

Preferred Bellwether Tenor (days remaining) 37* 93* 184* 359* 36* 92 183 358* 35* 91* 182* 364* 34* 90* 181* 363* 33* 89* 180* 362*

Expanded Tenor Range (days remaining) 30 44 86 -100 177 191 345 359 29 43 85 99 176 190 344 358 28 42 84 98 175 189 350 364 27 41 83 97 174 -188 349- 363 26 40 82 96 173- 187 348 362

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Procedure in case of Absence of Clear Benchmark for Treasury Bills If there are no Philippine Treasury Bill Auctions held or there are no awards in the Philippine Treasury Bill Auctions for the 91-day and 182-day tenors and there will be an absence of a clear benchmark, an expanded range of +14 and -14 days will be used to find and select the Bellwether Security for the 91-day and 182-day tenors. The priority for selecting the Bellwether Security will be placed on the security with a tenor longer than but nearest to the 91-day and 182-day tenors. If this procedure is used, no other Associated Securities shall be tagged by the system If there is no Philippine Treasury Auction held or no awards in the Philippine Treasury Auction for the one-year tenor and therefore cause the absence of a clear benchmark, the latest issued one year TreasuryBill will be assigned as the Bellwether. For the purpose of calculating the PDST-F of the 1-month, 3-month, 6-month or 1-year tenors, only Treasury Bills shall be considered. In case of a decision by the Bureau of the Treasury to cancel the issuance of Treasury Bills, then the Fixed Rate Treasury Notes with remaining tenors falling within the parameters described shall be used. For the purpose of calculating the PDST R1 and R-2 of the 1-month, 3-month, 6-month or 1-year tenors, for either the morning session or the whole day session, all associated securities shall be considered.

2. Treasury Note and Bond Benchmark Securities Benchmark Tenor 2 years 3 years 4 years 5 years 7 years 10 years 20 years 25 years Remaining Tenors for Benchmark Security In Years In Days 1.5 to 2 years 547 731 2.5 to 3 years 913 1096 3.5 to 4 years 1,278 1,461 4.5 to 5 years 1,643 1,827 6.5 to 7 years 2,374 2,557 9.5 to 10 years 3,469 3,653 19.5 to 20 years or latest issued 7,122 7,305 20-year bond 20 years and 1 day up to 25 years 7,306 9,132 and/or the latest 25-yr bond

Retail treasury bonds and Special Purpose Treasury Bonds which have a remaining tenor of more than one year shall be included in the computation of the benchmarks. Procedure in case of Absence of Clear Benchmark for Treasury Bonds If there are no Philippine Treasury Bond Auctions held or there are no awards in the Philippine Treasury Bond Auctions for any of the benchmark tenors, and there will be an absence of a clear benchmark, the latest issued Security for that particular bond tenor will be assigned as the Bellwether.

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Annex B Minimum Trading Volumes for PDS Treasury Reference Rates

Benchmark Tenor 1 Month 3 Months 6 Months 1-Year 2-Years 3-Years 4-Years 5-Years 7-Years 10-Years 20-Years 25-Years Minimum Volume (in PhP Millions) 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00

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Annex C PDST Fixing Banks 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Allied Banking Corp. Asia United Bank Banco de Oro Universal Bank Bank of Commerce Bank of the Philippine Islands Chinatrust (Phils.) Commercial Bank Corp. Citibank, N.A. Deutsche Bank Development Bank of the Philippines. East West Banking Corporation The Hong Kong & Shanghai Banking Corp. ING Bank Land Bank of the Philippines Metropolitan Bank & Trust Company Philippine Bank of Communications Philippine National Bank Philippine Veterans Bank Rizal Commercial Banking Corp. Security Bank Corp. Standard Chartered Bank Union Bank of the Philippines United Coconut Planters Bank

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Annex D Description of Price Conversion from Value Today to Value Tomorrow This section describes the procedure for generating a value tomorrow equivalent price for a benchmark security based on the transacted yield from the value today deal. The conversion is done so that the benchmark securitys transaction data can be included in the calculation of the Weighted Average Price and subsequent determination of the Weighted Average Yield of that specific benchmark security. 1. 2. Select the Yield to Maturity (YTM) of the value today transaction of a benchmark security Apply bond price formula to calculate a new transaction price using the transactions YTM and adjusted settlement date (T+1). This shall be the value tomorrow equivalent or T+1 price. Include the calculated T+1 price of this transaction when generating the Weighted Average Price of that specific benchmark security a. Calculate Clean Value per transaction of the specific benchmark security (Face Amount times Price/100) b. Sum all the Clean Values traded for that benchmark security (T+1) c. Sum all the Face Amounts traded for that benchmark security (T+1) d. Divide Sum of Clean Value by Sum of Face Amounts and multiply by 100. This shall be the Weighted Average Price of a Benchmark Security (T+1). Apply the Price to Yield formula on the Weighted Average Price and the result shall be the Weighted Average Yield of the Benchmark Security

3.

4.

Sample Conversion of Value Today to Value Tomorrow Equivalent Price Series Coupon Maturity YTM Settlement Date Clean Price FXTN 03-13 8.5000% 02/17/2009 5.5000% 12/22/2006 106.0008598

Value Tom Equivalent 12/27/2006 105.9649388

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