Issue of January 5, 2020
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Regulatory agency OKs rules on securities transactions
by Press release

The Securities and Exchange Commission has cleared Capital Markets Integrity Corporation’s (CMIC) implementing guidelines on securities borrowing and lending (SBL) and short selling.

The Commission en banc approved the implementing guidelines during its meeting last month subject to the adoption of certain amendments outlined by the SEC Markets and Securities Regulation Department.

“With the implementing guidelines on short selling in place, we look forward to more robust activity in the stock market,” SEC Chair Emilio Aquino said in a statement.

“The Commission, however, notes that it shall not balk at exercising its authority to suspend or prohibit short selling in an exchange when necessary for the protection of investors.”

In short selling, an investor views a security as being overpriced and anticipates that its price will go down. He or she borrows the security from another person and sells it.

When the price goes down, he or she buys it back and delivers it to the lender. The investor profits from the price difference and the lender benefits from the transaction by receiving fees similar to loan fees and charges.

The SEC earlier approved Philippine Stock Exchange’s (PSE) guidelines on short selling transactions in an en banc meeting on June 5, 2018.

Pursuant to the memorandum of agreement entered into by PSE and CMIC on Jan. 26, 2012, the former shall remain responsible for and retain full jurisdiction over the implementation and enforcement of trading rules on short selling.

The implementing guidelines of CMIC address concerns over the effect of SBL and short selling transactions on trading participants’ books and records, error transactions, and the possible impact on trading participants’ risk-based capital adequacy (RBCA) ratio.

Among others, the implementing guidelines reiterate that short sale transactions shall be limited to “eligible securities” which shall refer to securities of companies comprising the PSE index and to exchange traded funds.

Trading participants have the responsibility to ascertain that the parties have entered into the necessary borrowing arrangements prior to entering a short sale transaction.

Trading participants lending securities of one client to another must be registered with the SEC and have a securities lending authorization agreement in place.

Meanwhile, those lending and borrowing shares with the counterparties should have a master securities lending agreement.

The implementing guidelines also reiterates the prohibition on naked short selling, requiring customers to execute a notarized undertaking prior to entering a short sale.

The undertaking must specify, among others, that the customer understands the relevant securities laws, rules and guidelines.

To ensure fair presentation and reporting, the implementing guidelines require trading participants to record the lending of securities in the following manner: for borrowing shares, stock credit memo for the entry of securities for the borrower and stock debit memo for securities of the lender; and for the return of shares, stock debit memo for the entry of securities for the borrower and stock credit memo for the securities of the lender.

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