No PSE-PDS unification for now

It’s officially dead.  The proposed merger of the Philippine Stock Exchange and the Philippine Dealing System Holdings Corp. Group that would have unified the capital market structure in the country, that is.

The deal-breaker was the Securities and Exchange Commission’s decision to reject the PSE’s request for exemption from the 20 percent cap in the ownership of a single industry in an exchange, given its intention to buy out all other shareholders of PDS, the holding firm for fixed-income trading platform Philippine Dealing and Exchange Corp. (PDEx), Philippine Depository and Trust Corp. (PDTC) and Philippine Securities Settlement Corp.

For now, sources from the PSE said the top leadership was not keen on re-calibrating the proposal or submitting any appeal.

In a nutshell, top SEC officials said the PSE had 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 the 20-percent limit was prescribed by the law. An exemption is warranted only if it will “not negatively impact the PSE’s ability to operate for the public interest,” she said.

SEC Commissioner Ephryo Luis Amatong cited concerns on how the shareholder structure would look like. Instead of having a merger of equals–the route preferred by the government and one that would not require “exemptive” relief–the PSE’s plan was to buy out all other shareholders to gain 100 percent control of the unified entity.

Amatong said the PSE was not able to fully explain what the plan was for the combined entity and did not provide a compelling reason for the SEC to grant an 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,” according to the SEC position paper.

The SEC said that while a consolidation might produce benefits, as claimed by the PSE, regulators were not convinced the acquisition of PDS would produce any benefit to the investing public, issuing companies or to capital market development in general.

“The PSE’s proposal failed to provide clear and time-bound commitments to demonstrate that consolidation will translate to meaningful benefits for stakeholders,” it said.

With the integration of the depository system under PDTC, for instance, the SEC was not happy with the “token” commitment to reduce depository fees by 0.001 percent.  If it’s just 0.001 percent, Herbosa said it could be achieved even without the consolidation.

The SEC 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.

“The PSE would then be a de facto monopoly owner of all exchanges in the country.  This would significantly reduce any incentive to lower costs or improve quality on their part,” it said.

The SEC also noted that the PSE’s share purchase agreement with the BAP included a five-year non-compete clause. “Banks are the largest players in the bond market. Should the quality of PDS deteriorate or experience trading glitches, as the PSE had experienced three times in August 2015, a very significant market player is constrained from setting up an alternative market.  Not only has the PSE not provided safeguards to mitigate the risks of a monopoly, it put up even more barriers to competition and to setting up contingencies.”

‘Unfair’ attack

PSE president Hans Sicat lamented how the SEC had spun a deal-breaking ruling into what he perceived as an unfair attack against the PSE’s competence to run a fixed income exchange and concern for the investing public.

With the unification now out of the picture, the PSE is pursuing its own strategy of widening the array of services and products it offers.

“It’s good there’s a decision now from the SEC on the PDS acquisition… It’s better to know what the answer is as opposed to waiting for quite sometime,” Sicat said.

Sicat said he was surprised at the manner the SEC had communicated the ruling.

“It appears like they have a new modus operandi wherein they mentioned everything to the press and gave us the official answer by fax some three hours later. I just feel that as a major issuer and partner in capital market development, that’s not the correct process,” Sicat said. He said some SEC officials—in briefing the press about the decision—had even “added adjectives” and resorted to “name-calling” against the PSE.

“It’s quite obvious to us, at least in the way they spun it to the media, that they either intentionally glossed over some of the facts or decided not to tell you a lot of the issues,” Sicat said.

“I think that’s not the right way to do things. I think the adjectives used to describe the PSE as either being incompetent or not understanding the themes are distortions of the truth.”

Sicat said SEC officials had also “intentionally missed bits and pieces” of facts.  He took exception to statements made questioning the PSE’s concern on the fixed income business.

“As a shareholder of PDS (where PSE has a 20-percent stake), it’s farthest from the truth that we don’t care about the fixed income exchange nor we do not know anything about it,” Sicat said.

The PSE chief said the SEC’s rejection might have more to do with the proposed structure of the future unified exchange given that regulators preferred a merger of equals than a scenario where the PSE would buy out all other shareholders and take full control of the entire capital market infrastructure.  Given that the PSE is five times larger than the PDS, even a share-swap scenario will give only other shareholders meager interest in a unified entity.

“We abandoned that because valuation requirements of different shareholders were different,” he said.

On the common desire to improve services and operating efficiency for the public, Sicat said this remained the PSE’s role.

On the issue of monopoly, Sicat said, “even if we proceed with the acquisition, we cannot look at ourselves in a vacuum but rather, one player among many in a global field of capital and investment instrument providers.”

After all is said and done, the unification is not happening at this point in time.