The Securities and Exchange Commission already cleared guidelines on short-selling and securities borrowing and lending (SBL) that the Capital Markets Integrity Corporation set.
In an official statement made on January 2, the SEC affirms the guidelines’ usefulness. The new guidelines effectively resolve issues on the effects of SBL and short-selling on books and records as well as error transactions.
According to Rappler, the possible impact of these activities on the risk-based capital adequacy ratio of trading participants has also been discussed thoroughly in the new guidelines.
Short-Selling Explained
In short-selling, investors earn by expecting the price of a stock to drop. In anticipation of the drop, an investor would borrow the security from another person and then sells this.
If the stock price indeed drops, the investor then repurchases it and gives it to the lender. The price difference serves as the profit of the investor. Meanwhile, the lender benefits as well, for receiving fees akin to loan fees as well as other relevant charges.
Short-selling serves, therefore, as an advanced form of strategy by investors to profit off the stock market.
Naturally, when the stock price in question increases, the investor loses money for repurchasing the stock at a higher price.
The Philippine Stock Exchange (PSE) initially wanted to introduce short-selling way back in 2018 in the bid for higher market liquidity.
Safeguards and Limits
The guidelines are not approved without some safeguards and limits.
Based on these guidelines, short-sale transactions are only for companies part of the PSE Index. The SEC also limits these transactions to exchange-traded funds.
Naked short-selling is also not allowed. This refers to the short-selling of shares not yet determined to exist. To prevent such from happening, customers have to first execute a notarized undertaking before engaging in a short-sale.
In the said undertaking, the customer has to specify the comprehension of relevant security laws. Trading participants must also affirm that they entered into the essential borrowing arrangements before engaging in the short-sale transaction.
Fair Presentation and Reporting
The guidelines also include fair presentation and reporting rules. Trading participants have to comply to a particular manner of recording the lending of securities:
- to borrow shares, the borrower must secure a stock credit memo for the entry of securities while the lender has to obtain a stock debit memo.
- to return the shares, the borrower must secure a stock debit memo for the entry of securities, while the lender has to obtain a stock credit memo.
Apart from this manner of recording, short-selling orders must be clearly specified as such across tickets. Trading participants must also issue confirmation invoices.
The trading participant also has to indicate if the transfer of shares to another depository participant is out of a short-selling transaction. The participant makes this disclosure through its account with the Philippine Depository and Trust Corporation.
Impact of Movements
The guidelines also contained the possible effects of movements in the trading participants’ accounts on the RBCA requirement.
Some receivables for securities borrowed could trigger an increase in the trading participants’ net liquid capital as well as credit risk requirement that they should be mindful of.
Confirmation Notices
All participants to SBL transactions have to keep a confirmation note that covers the details of each transaction.
The guidelines mandate them to submit biannual summary reports of SBL transactions and stock returns.
The reports will be showing which transactions have already been liquidated and which are still outstanding.
They will receive a certification of submission of these reports to the Bureau of Internal Revenue, which they need to keep.
According to SEC chairperson, Emilio Aquino, these implementing guidelines on short-selling can stimulate more robust activities in the stock market. However, if necessary, the commission will use its authority to prohibit a particular transaction to protect the investors.
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