SEC OKs guidelines on securities borrowing, short selling

The Securities and Exchange Commission (SEC) said Thursday it has given the thumbs up for the Capital Markets Integrity Corporation’s (CMIC) implementing guidelines on securities borrowing and lending and short selling.

In a statement, the SEC said its Commission En Banc approved the implementing guidelines during its meeting last Dec. 17, 2019, “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 chairperson Emilio Aquino said.

“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,” Aquino said.

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 (securities borrowing and lending) 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,” the SEC said.

“Among others, the Implementing Guidelines reiterates 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,” it said.

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

Trading participants' lending securities of one client to another must be registered with the SEC and have a Securities Lending Authorization Agreement in place, it said.

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 SEC said.

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.
• 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.

Short selling orders must be clearly noted as “short” in the order tickets and confirmation invoices issued by the concerned trading participant to the client.

The trading participant, through its account with Philippine Depository & Trust Corp., shall indicate whether a transfer of shares to another depository participant is for the purpose of short selling through express comments in the depository system.

The guidelines also outline the impact of movements in the trading participants’ certain accounts on the RBCA requirement. For instance, receivables for securities borrowed could prompt trading participants to recognize an increase in their net liquid capital and credit risk requirement.

In addition to the reportorial requirements provided in the CMIC Rules, parties to SBL transactions shall maintain a confirmation notice specifying the details of each transaction.

The guidelines also require the submission of bi-annual summary reports of outstanding and liquidated SBL transactions and stock returns, and a certification of submission of said reports to the Bureau of Internal Revenue.

"Failure to abide by any provision of the Implementing Guidelines and other related rules may be considered as a violation. CMIC may take the appropriate disciplinary actions on erring trading participants after the conduct of an investigation," the SEC said. —LDF, GMA News