The Securities and Exchange Commission (SEC) has approved the guidelines on securities borrowing and lending (SBL) and short selling to be implemented by the Capital Markets Integrity Corp. (CMIC), the independent market regulation arm of the Philippine Stock Exchange (PSE).
“With the implementing guidelines on short selling in place, we look forward to more robust activity in the stock market,” SEC Chair Emilio Aquino said in a press statement on Monday. “The Commission, however, notes that it shall not balk at exercising its authority to suspend or prohibit short selling in an exchange when necessary for the protection of investors.”
In short selling, an investor views a security as being overpriced and anticipates that its price will go down. The investor can borrow the security from another person and sell it. When the price goes down, the investor buys it back and delivers it to the lender, making a profit from the price difference. The lender, on the other hand, benefits from the transaction by receiving fees similar to loan fees and charges.
SBL and short selling transactions are widely seen as necessary to help improve the liquidity of the local stock market. CMIC’s guidelines, however, seek to address concerns on the effect of such transactions on trading participants’ books and records, error transactions, and risk-based capital adequacy ratio.
Under the rules, short selling transactions must be limited to “eligible securities,” referring to stocks comprising the PSE index and exchange traded funds.
Trading participants lending securities of one client to another must be registered with the SEC and have a securities lending authorization agreement in place. Meanwhile, those lending and borrowing shares with counterparties must have a master securities lending agreement.