PSE to introduce hedging mechanisms

The new Philippine Stock Exchange chief plans to introduce new hedging mechanisms to the stock market and contribute to efforts to create real estate investment trusts (REITs) as part of efforts to deepen the local capital market.

In a press briefing on Saturday after the PSE’s stockholders meeting, newly installed PSE president Ramon Monzon said among the new products in the pipeline would be to refine and finalize the rules on short-selling as well as to launch structured warrants within the year.

Short-selling allows investors to sell stocks they did not own yet by borrowing the underlying securities. This practice is already allowed under the Securities Regulation Code (SRC).

“It’s also very timely because if our deal to purchase PDS (Philippine Dealing System Holdings Group) is approved, then we’re taking over the operations of (PDS subsidiary) PDTC (Philippine Depository and Trust Corp.) and PDTC has a license to engage in the borrowing and selling of securities. So we can tie that up with short-selling product that we’d like to launch,” Monzon said.

PSE chief operating officer Roel Refran said the bourse had already engaged the Securities and Exchange Commission in discussions over short-selling as far back as 2009. “What we’re refining is under SRC, there are certain requirements, for example, the eligibility of securities for purposes of short-selling,” he said.

“So I think there’s a lot of interest from the market participants to allow for hedging mechanisms. It’s really a hedging facility that will be available subject to certain standards,” Refran said.

Although the old framework for short-selling had been approved by the SEC as early as 2009, Refran said the PSE did not make any big push for this because of the Wall Street-epicentered global financial crisis that erupted at that time.

“Now that we’re now under a more normalized environment, it’s up for review and discussion,” Refran said. “It’s timely because if there are system changes, then we can already prepare for whatever requirements there will be for the trading system or the front-end system. It’s really tying it all up,” he said.

A structured warrant, on the other hand, is a financial instrument issued by third-party financial institutions. This instrument offers investors an alternative way to ride on the price performance of an underlying asset at a fraction of the underlying asset price, in both bullish and bearish markets. It can be used as a hedging tool or to extract cash from equity investment.

Refran said market participants were likewise very keen on using structured warrants. As such, he said the PSE had revived discussions with the SEC on the introduction of this instrument.

REIT is also a product that Monzon would like to see taking off, while noting how the taxation and public ownership issues had constrained appetite on this instrument.

REIT is an instrument that gives investors the option to invest directly in finished real estate products that are already earning money—such as residential and office units, hotels or shopping malls or infrastructure ventures like toll roads and power plants—and not just in the property developer. This was meant to attract investors because the REIT law of 2009 requires the distribution of 90 percent of income yearly.

Although the enabling law for the REIT had long been passed, this product has not taken off due to the imposition of a 12-percent value added tax (VAT) on the initial asset transfers, resulting in significant upfront costs. In previous years, such property transfers to a company in exchange for shares of stock in that company were not subject to VAT. The Bureau of Internal Revenue (BIR), however, issued a revenue regulation that imposes a 12-percent VAT on such transfers.

Apart from scrapping such BIR revenue regulation, the PSE has long been proposing to scrap the rule requiring a multi-year increase in public float of REITs beyond the 33 percent minimum requirement prescribed by the original implementing rules of the REIT Law.

REIT proponents have long been saying that while the initial 40 percent minimum public ownership rule applicable in the first three years of the operation of a REIT was acceptable to the private sector, they don’t favor the increase in mandated public ownership to 67 percent by the third year as this would require a significant mandatory sell-down by the REIT sponsor.