Philippines may see ETFs and sec lending by Q3

Last year’s appointment of a new chairman at the Philippine securities regulator has led to swift progress on developing new products and services for the market, says Hans Sicat, chief executive of the stock exchange.

Teresita Herbosa, formerly co-managing partner of the Angara Abello Concepcion Regala & Cruz law office, took up the post at the Securities and Exchange Commission last April. “We are working particularly closely with the SEC now,” says Sicat, “and the focus seems to be on market-enhancing strategies and products, not just on rule creation."

He expects to see the arrival of exchange-traded funds and a workable framework for securities lending in the second half of 2012, hopefully as early as the third quarter, he said during a trip to Hong Kong for the launch of asset manager EIP’s Xie Shares range of ETFs this week.

Such moves should further boost trading volumes on the Philippine Stock Exchange (PSE), following a 40% rise in average daily volumes since afternoon trading to 3:30pm was re-introduced in January, Sicat tells AsianInvestor. Lengthening the trading hours has not been the only factor contributing to the volume increase, but it has certainly helped, he notes.

Banks are helping to develop the ETF framework, but certain regulations need changing before it will be possible to list such products. The main constraint is that the Philippines requires registration of each security, which means continuous creation or redemption of securities is not possible. “It’s a basic thing but the rules need updating,” says Sicat.

Once they are, he expects to see ETFs being cross-listed on the PSE by foreign firms or feeder fund products being set up. “ETFs would be an additional and complementary asset class for the Philippines,” adds Sicat, “to help expand the securities market beyond cash equities.”

The PSE is also working with the SEC to create a workable securities borrowing and lending (SBL) framework. There is a framework for SBL but it is over-sophisticated, says Sicat. The rules are too onerous, he notes, largely because of fears that stock lending is a tool for speculation rather than for facilitating risk management. Similar concerns have led to temporary bans on short-selling in other markets.

For example, lenders must be capitalised to the same level as universal banks, meaning smaller brokers can’t lend securities. “We are working with the SEC to change this so that hopefully we can encourage more natural lenders into the system,” says Sicat. “[A usable framework] will form a basic building block for exchange-based hedging, shorting and so on.”

Existing broker-dealers must maintain capital levels of P30 million, and new entrants must capitalise at P100 million. The current SBL rules require lenders to have a capital base of P300 million, meaning they would need to hike capital significantly just to be able to lend. As a result, there is a dearth of eligible lenders.

However, as in the banking system, there are bilateral arrangements whereby a broker-dealer can take the credit risk of another counterparty up to the credit risk limit. The PSE is proposing a review of the eligibility rules so that certain broker-dealers can borrow and lend within that context of limited credit risk.

Short-selling of securities is already allowed, but more lenders are needed before activity will actually increase. That said, Sicat agrees that naked shorting should not be allowed, but argues that standard shorting is a useful risk management tool.

Sicat says SBL would increase securities trading volumes by 10% straight away, with further increases coming in time; he cites developed markets where shorting accounts for as much as 30% of overall volumes.

Another likely move to be made will be towards closer integration between the Philippine Dealing System Group (an over-the-counter fixed-income exchange) and the stock exchange. At present they have separate clearing systems. “It makes logical sense to utilise one computer for both," he notes, "but the format of cooperation is something that has to be worked out."

The PSE is also seeking to increase the number of stock listings and trading volumes. “We think listing volumes will nearly double this year,” says Sicat.

He was reported earlier this month saying that overall funds raised on the PSE could double to a record of about P200 billion – from P107.5 billion in 2011 – through initial public offerings, follow-on share sales and private placements.

All primary PSE listings are currently domestic firms, although there are two cross-listed companies, Canadian insurers Sun Life and Manulife. At some point he hopes to see primary foreign listings in Manila and suggests mining companies may be potential candidates.

However, the bourse faces an obstacle to attracting foreign investment in the form of the low level of corporate governance standards among Philippine firms. It plans to tackle this by introducing a framework of rules setting more rigorous requirements for listed companies, known as the Maharlika Board. The original plan had been to have the rules in place by September, but they have been postponed to early this year.