ASK Dr. NOET
Circular 14: Little-known milestone for individual investors
By Dr. Johnny Noet Ravalo
INQUIRER.net
First Posted 16:17:00 12/19/2007
It may or may not be the banner business story but today, the 19th of December 2007, is a watershed date for the investing public. Today marks the end of the transition period called for under the Securities and Exchange Commission’s Circular 14 Series of 2006.
The most common concerns raised by individual investors in this space involve finding market professionals whose advise can be trusted, knowing where to get different securities and getting fair prices for these securities. There is also a fair amount of concern regarding the handling of funds, making sure that the money will not be siphoned into ghost investments and dealing with the fact that many retail investors reside outside Metro Manila.
Well folks, circular 14 addresses all that.
Starting today, individual investors must course buy/sell orders only through designated brokers. The old practice was for you and me to transact with institutions (dealers) that sold selected securities from their own inventory. This practice is no longer allowed because circular 14 specifically segregates dealers from brokers.
Unlike dealers who acquire and trade securities for their own account, brokers are legally mandated to act strictly in behalf of investors. Taking this one step further, brokers and their salesmen must be specifically licensed by the SEC before they can deal with the public.
So for those of us who are still looking for trustworthy financial agents who can help us out with our individual investments, there is now a corps of professional brokers whose innate function is precisely to act on our behalf. The minimum “credential” must be that they are duly licensed by the SEC. This does not guarantee good service or large returns for you but certainly dealing with someone who is not SEC-licensed should be an obvious bad idea.
And how do we know that the brokers are providing us fair prices?
Circular 14 requires the use of a “quotation system” which is what a broker will use to take our buy or sell orders. This provision cannot be fulfilled by a basic phone because there is an added requirement that price details of every consummated transaction must be “captured” and for this information to be broadcasted eventually to a central reporting system.
In fact, circular 14 goes further by setting time limits for the capture and broadcast of information. By SEC’s guidelines, the broker has all of one minute — yes, 60 seconds — to input all the details of the transaction into the quotation system that the broker uses. The quotation system must also be connected to a central reporting system which must broadcast the trade transactions 15 minutes after it has been executed.
There is also a provision for all trades to be handled in Delivery-versus-Payment (DvP) mode. This is the best-practice jargon used in securities settlement but the simple local translation is “kaliwaan”. Essentially, the system first checks if the seller has sufficient securities and the buyer has adequate cash balance before the exchange in value is even executed.
These are a far cry from the old regime and the benefits accrue to Juan Dela Cruz the investor.
Individual investors now have a market agent who can provide us the professional service of placing orders into the market strictly on our behalf. The design of the quotation system guarantees that participants are made aware of the price at which each security is currently commanding. This ensures that all the buzz words are met: [1] price discovery (we know what is the price of a security), [2] transparency (we see how the market is trading across the board and on each security) [3] accessibility (the investor gets the latest/best price for the security through his broker) and [4] safety (we take comfort in the “kaliwaan” process).
It also addresses the reality of our being an archipelago. Investors in (let’s say) Bacolod need not have to fly to Manila to invest. They basically talk to accredited brokers in Bacolod who are connected to the public market.
If you are wondering how all of these bright ideas and best intentions will actually be operated, the answer today is that the PDS Group is launching its Public Market trading platform. Since I am affiliated with the PDS Group as I write this piece, let me leave it at that so that I don’t appear to be “selling” anything.
The only point that is of concern right now is that the long-standing mystique of the capital market is beginning to be brought down. As of today in fact, retail investors have both the regulatory framework and the market infrastructure to participate in the capital market.
Whether we transform ourselves from “savers” into “investors” of course remains to be our individual choice. But as it stands today, this market is more organized with defined investor protection covenants that are in place to allow for a workable participation.
Let me just belabor the point that none of these guarantee that we will always make tons of money from our investments. What it does guarantee is that there is system for the individual investor, one where all investors are of equal footing and have access to the same information and the same price in the same way. That in itself is a milestone.
(Have a question for Dr. Noet? Email personal_finance@inquirer.net)
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work for multilateral and foreign agencies. His current engagements are with the Bangko Sentral ng Pilipinas and the PDS Group. Over the past 12 years, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinosí personal finances.)
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