MANILA, Philippines — Regulatory hurdles to short selling will soon be addressed as the Philippine Stock Exchange Inc. (PSE) readies the amended rules on securities borrowing and lending (SBL).
The PSE has submitted its proposed final rules on SBL to the Securities and Exchange Commission (SEC).
“This should address all regulatory hurdles to short selling and this long-overdue investment strategy,” PSE president and CEO Ramon Monzon said.
The PSE met with the SEC on May 6 to discuss the proposed amendments to the PSE rules on SBL.
The SEC has provided its comments, one of which is for the PSE to include the responsibilities of onshore custodians in the proposed SBL rules, citing the significant role they play in the proposed framework for directed pooled lending.
The SEC likewise asked the exchange to provide benchmarking that brokers and dealers normally function as SBL facilitators rather than as lending agents.
The commission also requested that the PSE provide an update on the proposed annex or supplement to the standard Global Master Securities Lending Agreement (GMSLA).
In the directed pooled lending framework proposed by the PSE, the onshore custodians, like the trading participants, will serve as agent-facilitators to expedite the execution of the negotiated SBL transaction between the lender and the borrower by entering the SBL details/instructions into the onshore lending agent’s directed pooled lending system and liaising between its client and the onshore lending agent.
The onshore custodians and the trading participants who will serve as agent-facilitators will also be responsible for executing a service agreement or securities lending authorization agreement (SLAA) with their client and an SLAA with the onshore lending agent before the first SBL transaction, for the facilitation or execution of the negotiated SBL transaction.
They will likewise facilitate the transfer of borrowed or returned securities to their client and relay the notice of default or notice of termination of the loan from their client to the onshore lending agent, among other things.
The PSE said it currently has a working draft of the GMSLA supplement but is still awaiting approval of the revised SBL rules so it can incorporate provisions relating to the proposed directed pooled lending framework.
It will then forward the draft supplement to the International Securities Lending Association and/or the Securities Finance Association Asia Pacific (formerly PASLA) for comments, as they are the intended users of the agreement.
“Once we have addressed the comments from foreign participants, we will submit the draft supplement to the commission and the Bureau of Internal Revenue for approval. We target to complete the process as soon as possible,” the PSE said.
The proposed amendments to the SBL rules aim to incorporate a framework for the execution of offshore SBL transactions involving PSE-listed securities.
The PSE said the initiative is being undertaken not only to align with global SBL processes and mechanisms, but also to induce foreign participation in its SBL program.
Meanwhile, the PSE yesterday released for public comment a proposal to allow negotiated trades to address an operational gap in the execution of pre-arranged transactions.
At present, the PSE has a block sale facility for the execution of large pre-arranged transactions that meet the minimum transaction value and allowable execution prices prescribed by the exchange.
For regular block sales, the minimum transaction value is P20 million, and the execution price should not be more than five percent above or below the reference price (previous closing price or last adjusted closing price in the event of corporate actions).
Special block sales, on the other hand, must have a transaction value of at least P50 million.
The PSE said a pre-arranged transaction that does not meet the minimum requirements for block sale cannot be executed in the block sale market but may be entered as a cross transaction in the regular market, provided the execution price is within the best bid and offer.
“However, there is presently no execution facility for trades that do not meet the minimum value thresholds required for block sales, but likewise fail to satisfy the price constraints for cross transactions because the price is outside the BBO (best bid and offer),” it said.
Thus, the PSE is proposing to allow negotiated trades as a variant of its block sale framework to accommodate pre-arranged transactions that fall outside the existing execution frameworks.
“This will allow trading participants and investors to execute and report smaller, pre-arranged transactions on commercial terms agreed upon by the parties, enhancing transparency and price discovery,” it said.
Based on the proposed amendments to the revised trading rules, execution of negotiated trades would be governed by certain parameters, such as having no volume and value restriction, execution window of 15 minutes after run-off/trading-at-last, execution price of within +/- five percent from the full day volume-weighted average price and only one-firm trades will be allowed.