PSE drafts guide­lines for short sell­ing trans­ac­tions

Business World - - CORPORATE NEWS - Arra B. Fran­cia

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. —

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