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APP. Q-15 96.12.31

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The institution should also have approved policies that specify documentation requirements for derivatives activities and formal procedures for savings and safeguarding important documents that are consistent with legal requirements and internal policies.

Legal Risk - is the risk that contracts are not legally enforceable or correctly documented.

Before engaging in derivatives activities, an institution, in consultation with its
legal counsel, should be satisfied that its counterparties have the legal authority
to engage in such activities.

The terms of any contract governing derivatives activities should be legally sound.
The institution should use the International Swap Dealers Association, Inc. (ISDA)
Master Agreement insofar as the same is not inconsistent with existing laws,
rules and regulations.

Q Regulations

Manual of Regulations for Non-Bank Financial Institutions

APP. Q-16 96.12.31

RISK DISCLOSURE STATEMENT FOR DERIVATIVES ACTIVITIES
(Appendix to Subsec. 4603Q.3)

Similar to other financial transactions, derivatives activities may provide significant benefits and involve a variety of significant risks.

Before entering into any derivatives activity, you should carefully consider whether the transaction is appropriate for you in light of your objectives, experience, financial and operational resources, and other relevant circumstances. You should ensure that you fully understand the nature and extent of your exposure to risk of loss, which may significantly exceed the amount of any initial payment by or to you.

In general, all derivatives activities involve risks, which include, among others, the risk of adverse or unanticipated market, financial or political developments, risk of counterparty or issuer default and other credit and enforcement risks, and risk of illiquidity and related risks. In addition, you may be subject to operational risks in the event that you do not have in place appropriate internal systems and controls to monitor the various risks, funding and other requirements to which you may be subject by virtue of your activities in derivatives and other financial markets.

As in any financial transaction, you should ensure that you understand the requirements applicable to you that are established by your regulators or by your board of directors or other governing body. You should also consider the legal, tax and accounting implications of entering into any derivatives activity.

In entering into any derivatives activity with, or arranged by, us or any of our subsidiaries/ affiliates, you should also understand that is acting solely in the capacity of an arm's length contractual counterparty and not in the capacity of your financial adviser or fiduciary unless has so agreed in writing and then only to the extent so provided. Whether or not you and have established a written financial advisory or fiduciary relationship, may, from time to time, have substantial long or short positions in, and may make a market in or otherwise buy or sell instruments identical or economically related to, the derivatives activity entered into with you; may also have an investment banking, corporate advisory, or other commercial relationship with the issuer of any security or financial instrument underlying the derivatives activity entered into with you.

THIS BRIEF STATEMENT DOES NOT PURPORT TO DISCLOSE ALL OF THE RISKS OR OTHER RELEVANT CONSIDERATIONS OF ENTERING INTO DERIVATIVES ACTIVITIES. YOU SHOULD REFRAIN FROM ENTERING INTO ANY SUCH ACTIVITY UNLESS YOU FULLY UNDERSTAND ALL SUCH RISKS AND HAVE INDEPENDENTLY DETERMINED THAT THE ACTIVITY IS APPROPRIATE FOR YOU.

Manual of Regulations for Non-Bank Financial Institutions

Q Regulations

APP. Q-17 96.12.31

ACCOUNTING GUIDELINES FOR DERIVATIVES
(Appendix to Subsec. 4603Q.4)

The following guidelines shall be observed by any NBQB and/or its subsidiaries/affiliates authorized to engage in derivatives activities:

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Derivatives contracts shall be recorded in the books of accounts as contingent items using the accounts prescribed in the Revised Manual of Accounts, whenever applicable. The amounts to be recorded shall either be notional or actual, depending on the nature of the contract. The purpose of the contract shall be specifically stated, i.e., for trading or for hedging. At maturity of the contract the recorded entries shall be reversed.

Recognition of gains or losses shall be as follows:

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For derivatives contracts entered into for trading purposes, gains and losses shall be recognized/recorded in the books at the end of every month.

For derivatives contracts entered into for hedging purposes:

(a)

During the life of the underlying contract/transaction, unrealized
gains and losses resulting from marking-to-market shall be recorded
under "Deferred Hedging Gain/Loss" account, and shall serve as
an adjustment to the gain/loss of the underlying contract/transaction.
Upon maturity of the underlying contract/transaction, the deferred
gain/loss shall be realized, and shall then be recorded as trading
gain/loss.

(b)

After the life of the underlying contract/transaction, gains and losses
shall be recorded directly as trading gain/loss.

A contract should be accounted for as a hedge when the following conditions are met:

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APP. Q-17 96.12.31

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For derivatives contracts entered into as agent/broker, the notional amount shall be recorded as a contingent item. Income therefrom shall be in the form of fees, commissions or spreads only.

Any NBQB and/or its subsidiaries/affiliates shall disclose, by way of footnotes to its audited financial statements, the following:

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SEC BASIC RULES AND REGULATIONS TO IMPLEMENT
THE PROVISIONS OF PRESIDENTIAL
DECREE NO. 129, OTHERWISE KNOWN AS
"THE INVESTMENT HOUSES LAW"
(Appendix to Secs. 4604Q and 4656Q)

To effectively carry out the provisions of Presidential Decree No. 129, otherwise known as "The Investment Houses Law", the Commission, pursuant to the powers vested in it by said Decree, and by Republic Act Nos. 1143 and 5050, hereby promulgates the following rules and regulations for the information and guidance of the public:

Sec. 1. Scope of Applicability. These rules and regulations shall apply to any enterprise which engages or purports to engage in the underwriting of securities.

Sec. 2.

Definitions. The following terms as used in Presidential Decree No. 129 and these rules shall be understood to mean as follows:

a) Investment House is any enterprise which engages or purports to engage, whether regularly or on an isolated basis, in the underwriting of securities of another person or enterprise, including securities of the Government and its instrumentalities.

b) Underwriting of securities is the act or process of guaranteeing the distribution and sale within the Philippines of securities issued by another person or enterprise, including securities of the Government or its instrumentalities. The distribution and sale may be on a public or private placement basis.

c) Securities are written evidences of ownership, interest or participation, in any enterprise, or written evidences of indebtedness of a person or enterprise. It

includes, but is not limited to, the instruments enumerated in Section 2 of the Securities

Act.

d) Guarantee is any commitment and/ or undertaking made by a person, firm or entity to an issuer or holder of securities to raise funds for said issuer or holder, by the distribution of such securities for sale, resale, or subscription, either through an outright purchase or through a corresponding commitment to purchase the balance not subscribed or sold.

e) Private placement refers to the underwritten sale of securities to less than 20 persons or enterprises.

f) Public distribution refers to the underwritten sale of securities to at least 20 persons or enterprises.

g) Voting stock is that portion of the authorized capital stock of an investment house, as are subscribed and entitled to vote.

h) Paid-in capital are all payments on subscriptions to the authorized capital of an investment house, including premiums paid in excess of par.

i) Officer shall be understood to mean a senior officer of an Investment House or bank, which includes the President, Executive Vice-President, General Manager, Vice-President, Assistant Vice-President, Corporate Secretary, Head of an Operating Department and Branch Manager and such other officers as the Commission, in consultation with the BSP, shall determine.

j) Organizers are persons who undertake to form an Investment House, among themselves and others, and who are

Manual of Regulations for Non-Bank Financial Institutions

Q Regulations

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