PSE Clears Regulatory Hurdles for Short Selling with New Rules

The Philippine Stock Exchange Inc. (PSE) is preparing to remove regulatory hurdles for short selling by submitting its proposed amended rules on securities borrowing and lending (SBL) to the Securities and Exchange Commission (SEC). PSE President and CEO Ramon Monzon stated that this regulatory adjustment should address all hurdles to short selling, a long-overdue investment strategy. The PSE met with the SEC on May 6 to discuss the proposed amendments to the SBL rules. The SEC provided comments, notably requesting the inclusion of responsibilities for onshore custodians in the proposed SBL rules, citing their significant role in the proposed framework for directed pooled lending. The commission also asked the exchange to provide benchmarking on how brokers and dealers typically function as SBL facilitators rather than lending agents. Furthermore, the SEC inquired about the progress of the proposed annex or supplement to the standard Global Master Securities Lending Agreement (GMSLA). Under the PSE's proposed directed pooled lending framework, onshore custodians, along with trading participants, will act as agent-facilitators to expedite negotiated SBL transactions. They will enter SBL details into the onshore lending agent's system and liaise between their clients and the onshore lending agent. Onshore custodians and trading participants serving as agent-facilitators will be responsible for executing a service agreement or securities lending authorization agreement (SLAA) with their clients and an SLAA with the onshore lending agent before the first SBL transaction. They will also facilitate the transfer of borrowed or returned securities and relay default or termination notices from their clients to the onshore lending agent. The PSE has a working draft of the GMSLA supplement but awaits approval of the revised SBL rules to incorporate provisions related to the proposed directed pooled lending framework. Subsequently, the draft supplement will be forwarded to the International Securities Lending Association and/or the Securities Finance Association Asia Pacific (formerly PASLA) for comments, as they are the intended users. The PSE aims to complete this process as soon as possible. This initiative aims to incorporate a framework for executing offshore SBL transactions involving PSE-listed securities, aligning with global SBL processes and mechanisms, and encouraging foreign participation in its SBL program. Meanwhile, the PSE has released for public comment a proposal to allow negotiated trades, addressing an operational gap in executing pre-arranged transactions. Currently, the PSE has a block sale facility for large pre-arranged transactions meeting minimum value and price criteria. However, trades not meeting block sale requirements and failing to satisfy price constraints for cross transactions have no execution facility. The proposal seeks to allow negotiated trades as a variant of the block sale framework to accommodate pre-arranged transactions falling outside existing execution frameworks. This is expected to enhance transparency and price discovery by enabling trading participants and investors to execute and report smaller, pre-arranged transactions on mutually agreed commercial terms. Under the proposed amendments, negotiated trades would be governed by parameters such as no volume and value restriction, an execution window of 15 minutes after run-off/trading-at-last, an execution price within +/- five percent from the full day volume-weighted average price (VWAP), and only one-firm trades will be allowed.