Unification of stock, bond exchanges dims

The unification of capital market infrastructure in the Philippines is not happening at this time as regulators are not convinced that the merger of the country’s stock and bond markets—under the structure proposed by the Philippine Stock Exchange—will ultimately benefit the investing public.

The Securities and Exchange Commission (SEC) rejected a request from the PSE to be exempted from the 20-percent limit that any single industry can own in an exchange.

In a briefing yesterday, top SEC officials said the PSE has not been able to demonstrate any meaningful benefit to the investing public and capital markets under a monopoly or any concrete plan to improve trade surveillance and transparency, clearing and settlement stability, business risk mitigation as well as governance and management competence.

SEC Chair Teresita Herbosa said there was a reason why such 20-percent limit was prescribed by the law. “Any exemption is warranted only if it will “not negatively impact PSE’s ability to operate for the public interest,” she said.

Such exemptive relief is a precondition to the closing of a deal to raise the PSE’s interest in Philippine Dealing System Holdings Corp. (PDS Group) to 100 percent. PDS is the holding firm for fixed-income trading platform Philippine Dealing and Exchange Corp. (PDEx), Philippine Depositary and Trust Corp. (PDTC) and Philippine Securities Settlement Corp.

SEC Commissioner Ephryo Luis Amatong said there was a big question on how the shareholder structure would look like. Instead of having a merger of equals—the route preferred by the national government and one which would no longer have required the exemptive relief in the first place—the SEC was not keen on the PSE buying out all other shareholders to gain 100-percent control of the unified entity.

Amatong said the PSE was not able to fully explain what its plan was for the combined entity, which provided no compelling reason for the SEC to grant the request for exemptive relief.

“The larger fear here is that the PSE does not appear to fully appreciate the central importance of the fixed-income market in financial intermediation and does not have a concrete plan on how to develop and manage such a market going forward,” based on a position paper distributed by the SEC during the press briefing.

On the claim that the best practice would be to consolidate the equity and fixed-income markets, the SEC said that while a consolidation might produce benefits, regulators were not convinced that this acquisition of PDS would produce any benefit to the investing public, issuing companies or capital market development in general.

“PSE’s proposal failed to provide clear and time-bound commitments to demonstrate that the consolidation will translate to meaningful benefits for various stakeholders,” the SEC said in its position paper.

With the integration of the depository system under PDTC, for instance, the SEC is not too happy with a “marginal” and “tokenistic” commitment to reduce depository fees by 0.001 percent. If it was just 0.001-percent decline in depository fees, Herbosa said this could be achieved even without the consolidation.

The SEC position paper also refuted the theoretical benefits of the acquisition, noting that the PSE itself had not been able to iron out the details of the transaction. “Should the cost of these improvements prove prohibitive, it is unlikely that the PSE will deliver on these projects in the end,” the paper said.

“PSE would then be a de facto monopoly owner of all exchanges in the country. This would significantly reduce any incentives to lower costs or improve quality on their part. This is a fear that the SEC takes seriously,” it said.

The PSE board previously made an offer to buy out the stake held by the Bankers Association of the Philippines (BAP), Singapore Exchange Ltd. and other shareholders at an enterprise value of P2.25 billion for 100 percent of PDS. Collectively, the BAP, through its member banks, and SGX own about 45 percent of PDS. The other shareholders are Tata Consulting (8 percent), Computershare Technology (8 percent), San Miguel Corp. (4 percent), Philippine American Life and General  Insurance Co. (4 percent), Financial Executives Institute of the Philippines (1.54 percent), Investment Houses Association of the Philippines (1.12 percent) and Social Security System (1.54 percent).