Traders take calls at the Philippine Stock Exchange trading floor. —ELOISA A. LOPEZ
After an aborted union last year, the Philippine Stock Exchange (PSE) and Philippine Dealing System Holdings Corp. (PDS Group) have rekindled their engagement, the primary goal of which is to unify the country’s capital markets for better efficiency. But beyond the unification, this deal has also given Philippine banks a chance to rethink the current government securities (GS) trading platform, possibly finding a way out of a system long loathed by most bank treasurers.
Compared to the last attempt to merge PSE and PDS under a lock-stock-and-barrel acquisition framework, this time, the strategy is different because the GS trading business of fixed income trading platform Philippine Dealing and Exchange Corp. (PDEx) will be carved out of the transaction.
This is why the new deal with the Bankers Association of the Philippines (BAP)—the single-biggest controlling shareholder in PDS—valued the PSE’s rekindled takeover bid at P2 billion for 100 percent. This is slightly lower than the P2.25-billion valuation in 2015 to price in the potential exclusion of the GS over-the-counter business under PDEx.
PDS is the holding firm for PDEx, Philippine Depositary and Trust Corp. (PDTC) and Philippine Securities Settlement Corp.
To recall, a group led by former congressman Luis Villafuerte challenged PDEx’s operation of the country’s sole fixed-income platform under PDEx in 2013, accusing financial regulators of extending “special favors, undue advantages and unwarranted benefits” to create a “monopoly” in the government securities market. The case is still pending in the Supreme Court but back-channel discussions have apparently persuaded Villafuerte to possibly drop the case in exchange for the GS business being carved out of the deal.
The PSE, for its part, will instead work on creating a real exchange for corporate bonds under PDEx.
A banking source told the Inquirer that there was now a growing realization that there was no need for the BAP to “cling” to the GS trading model under PDEx, which to date was yet to be a real working exchange. Banks still trade GS over the counter (OTC) but they are required to report all transactions to PDEx, whose mapping out mandate gives the market a mechanism for price discovery. For many years, banks subsidized PDEx even when most bank treasurers felt there was no added value to them. Nonetheless, banks supported PDEx over the years in deference to banking regulators.
But now that the PSE is taking over PDS—and with it PDEx minus the GS component—the BAP has to find a new model for GS trading.
“What we have now is a hybrid market where the public deals in the exchange and the dealers have an OTC market. The brokers, with whom the public deals with, are required to follow the rule of ‘best execution,’ meaning they have to give the public investor the best price available. To ensure that this happens, all deals are required to be reported to the PDEx platform and the public and the dealers ‘meet’ in the platform. There is better price transparency and deeper liquidity and therefore better chances for public investors to get the better prices. This is the snapshot of how the current market works,” said Antonio Moncupa, president of East West Bank.
“I understand that some countries have the same framework and others still are looking at the way we do things. So far, we have not been told of any changes in the way government securities are dealt. I just hope that whatever changes are forthcoming, the public will only be better off,” added Moncupa, who is endorsed by the ruling political party PDP-Laban to be the next Bangko Sentral ng Pilipinas governor to succeed the retiring Amando Tetangco Jr. by July.
Industry sources said bankers were now looking at how wire service providers like Bloomberg and Reuters could fill in the mapping-out functions for GS trading once the PSE takes over PDEx and affiliate firms.
Retired banker Victor Valdepeñas—a longtime president of Union Bank of the Philippines and one of the few bank presidents who openly criticized GS trading under PDEx—welcomed the possibility that the GS trading system could revert to the old system.
“The GS market, which remains and always has been a bilateral system of trading, should be devoid of de facto taxes being imposed by a pseudo fixed income exchange—not a real exchange as the professional traders know it. So it’s good news if the GS market will finally be free of unnecessary friction cost and not just a transfer from one entity to another,” Valdepeñas said.
Current status
To date, the PSE has gained control of an initial 49.91 percent of the PDS group after signing last March an agreement to resume discussions on the purchase of a 28.91-percent stake held by the BAP. Subject to terms and conditions, the parties intend to execute an amended share-purchase agreement not later than May 31. Separate deals will have to be signed with other shareholders at different times.
“This occasion underscores our commitment to see a unified equities and fixed income exchange. We remain cognizant of the advantages of this consolidation to capital market stakeholders and the Philippine economy and we hope to realize these benefits the soonest possible time,” PSE president Hans Sicat said.
BAP president Nestor Tan explained that the planned consolidation of both exchanges would help shape a better capital markets for the Philippines. “We welcome this opportunity to bring this deal into completion with the PSE. BAP remains supportive of the goal to have a more efficient financial market through this transaction,” he said.
As the PSE already owned 21 percent previously, the agreement with BAP gives the local bourse effective control of around half the voting shares of PDS.
After gaining control of the shares held by the BAP, the PSE still has to make an offer to acquire the shares held by other groups in PDS based on the updated valuation. Although most of these parties have previously agreed to sell their shares, they will still have to be convinced to accept the change in valuation through a new tender offer.
Apart from the BAP, another big shareholder of PDS is Singapore Exchange, with a 20-percent stake. Other minority shareholders are Tata Consultancy Services (8 percent), Computer Technology Services (8 percent), San Miguel Corp. (4 percent) and Financial Executives Institute (3.1 percent).
The agreement in principle with BAP brings the PSE a step closer to the much-awaited unification of the country’s capital market infrastructure, subject to approval by the Securities and Exchange Commission (SEC) and the Philippine Competition Commission.
In 2016, the SEC rejected 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—a precondition to the proposed consolidation. The SEC argued that 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.
But for the proponents of this merger, the much-awaited unification of the PSE and PDS is seen to boost volumes and unlock huge savings in maintaining and continuously enhancing financial market architecture.