Merger of two exchanges

There is light at the end of the tunnel for the aborted merger of the Philippine Stock Exchange (PSE) and Philippine Dealing and Exchange Corp. (PDEx).

PSE is the trading platform for the stocks of the country’s top corporations. PDEx, on the other hand, is the venue for trading the fixed-income securities or debt papers of companies with good credit ratings.

Except for Vietnam and the Philippines, the equities and securities markets of our neighbor countries are integrated, meaning, they operate on a single trading platform.

To reap the benefits of unified trading, PDEx’s major stockholders agreed last year to sell their shares to PSE to enable the latter to gain control of PDEx and, in the process, consolidate the two exchanges.

Since the law prohibits an industry or business group from owning or controlling, directly or indirectly, more than 20 percent of an exchange, PSE asked the Securities and Exchange Commission (SEC) to exempt it from that restriction.

The SEC may grant the exemption if it “finds that such ownership or control will not negatively impact on the exchange’s ability to effectively operate in the public interest.”

Unfortunately, the SEC turned down the request for exemptive relief. Citing various reasons, it ruled that the merger will create a monopoly that will be prejudicial to the public’s best interests.

Although the stockbrokers and bond traders felt that the grounds cited by SEC were strained and questionable, they opted to keep their peace lest they incur its ire. After all, “you don’t fight City Hall” or the people who issue the permits or licenses that enable businesses to legitimately operate.

From the looks of it, however, the sand may soon shift on the fate of the PSE-PDEx merger.

According to reliable sources, Finance Secretary Carlos Dominguez III is amenable to the unification because of its expected positive effect on the trading market and, at large, the national economy.

With this endorsement, it is not farfetched to expect SEC to adopt a more flexible attitude in its interpretation of the ownership restriction and to take a less critical stance on the concerns it earlier raised over the merger.

Although SEC is under the Department of Finance (DOF) for administrative purposes only, the reality on the ground is the DOF can—through the budgetary mechanism and other bureaucratic processes—”persuade” SEC to look at certain regulatory issues along its lines.

Barring any hitches in ironing out the kinks with SEC, PSE and PDEx can confidently look forward to securing corporate regulatory approval, or fulfilling the first of two requirements, to their planned marriage.

After SEC, the exchanges have to contend with the Philippine Competition Commission (PCC), the body tasked to implement the national policy of prohibiting anti-competitive agreements and ensuring that market forces and participants operate on a level playing field.

There is no question that the merged exchanges, if the deal is approved, would constitute a monopoly in the transaction of corporate securities and debt papers (and perhaps government debt notes later) in the country.

Equities and securities trading is a capital intensive business. It requires, among others, highly trained participants, sophisticated infrastructure and state of the art facilities that can efficiently handle the volume of trade generated in active exchanges.

There is nothing in the domestic horizon to indicate that any businessman or group of businessmen, and even if they have foreign partners, will be able to come up with a competing facility in the next five to 10 years.

Besides, the volume of equity and securities trading in the country is not that big to accommodate another exchange to trade the limited amount of equities and securities in the local market.

In a manner of speaking, the merged exchanges may be compared to a “natural monopoly” or a business activity that, on account of economies of scale, high fixed costs and other business reasons, makes it more efficient to be undertaken by only one entity.

It is for this reason that the United Kingdom, Japan, Germany, Australia and South Korea, where daily trades in equities and securities run in billions of dollars, maintain single trading platforms.

PSE and PDEx have to convince PCC that it can, although in a much smaller scale, replicate the operation of the exchanges in those developed economies without violating the anti-competitive policy of the government.

In PCC’s case, it has to do a balancing act of making sure that in its effort to live up to its mandate, it does not unduly hamper the operation of businesses that play significant roles in our economy’s growth.