PSE drafts guidelines for short selling transactions

THE PHILIPPINE Stock Exchange (PSE) is seeking public comments on its draft rules for short selling transactions, a mechanism that is already allowed under the Securities Regulation Code (SRC) but has yet to be implemented due to the lack of guidelines.

In a memorandum posted last Nov. 10, the PSE said they are accepting comments for the draft rules until Nov. 24, after which it will deliberate on the comments and make revisions accordingly. Short selling pertains to the sale of a security that is not owned by the seller, but will be settled by the delivery of borrowed securities. This benefits the investor by selling borrowed securities at a time when prices have declined, and buying securities at a lower price in the future.

The PSE noted this mechanism is already in place in many international markets, including members of the Association of Southeast Asian Nations (ASEAN).

The proposed guidelines are divided into seven sections, with the first indicating that only companies listed in the Philippine Stock Exchange are deemed as eligible securities. The securities must in turn comply with a short interest ratio of less than or equal to 10% of its outstanding shares.

Failure to comply would make the security ineligible until such time the short interest ratio is met.

The 10% short interest ratio requirement is similar to the limit imposed to exchanges in Bursa Malaysia, the Stock Exchange of Thailand, and Taiwan Stock Exchange. The three markets are part of the seven exchanges the PSE reviewed in coming up with the guidelines. The others are the Hong Kong Exchanges and Clearing, Indonesia Stock Exchange, Korea Exchange, and Singapore Exchange.

The second guideline notes that only trading participants are allowed to enter into transactions for short selling orders. Clients with direct market access would still have to course their transactions through trading participants.

Short selling transactions are also not allowed during the market’s pre-open, pre-close, and run-off phases.

The PSE’s draft noted that short selling orders must comply with Rule 24.2 to 2.5 of the SRC. The provision states: “No broker or dealer shall use any facility of a securities exchange to effect a short sale of any security unless ( 1) at a price higher than the last sale or ( 2) at the price of the sale if that price is above the next preceding different sale price on such day.” This is otherwise known as the “uptick rule.”

The guidelines also indicate that trading participants must flag short selling orders accordingly.

The PSE also outlined the securities borrowing and lending procedures for short selling transactions, wherein depository participants must indicate whether a transfer of shares to another depository participant is for short selling.

In addition, the transfer of shares of clients within a depository participant’s omnibus account must be reported to the PSE.

Violations of these guidelines will be subjected to the same penalties as indicated in the Revised Trading Rules.

Once approved, the short selling guidelines will supplement Article IV, Section 5 of the PSE’s Revised Trading Rules, or the existing rules on short selling. —