Enforce PSE ownership rules

The long standing aspiration of the Philippine Stock Exchange (PSE) to acquire Philippine Dealing System Holdings Corp. (PDS) is under threat from Land Bank of the Philippines (Landbank).

By way of background, PSE is the facility through which stocks of the country’s corporations are traded, while PDS deals with fixed-income securities or corporate bonds and foreign exchange.

When PDS started operations in 2003, its turnover was a shadow of that of PSE. The new kid on the block was considered a poor cousin to the more lucrative stock trading.

The initial sluggish transactions in PDS increased when several companies opted to raise additional capital through the sale of corporate bonds to the public rather than by way of stock sales. Since then, the preference for bond offerings has grown in tandem with the growth of the economy.

In 2015, PSE initiated moves to gain control of PDS by buying its shares from its owners. Pursuant to the Securities Regulation Code (SRC), PSE sought clearance from the Securities and Exchange Commission (SEC) for that action.

Although the SEC was, in principle, agreeable to the consolidation of stock and bond trading in one trading floor, it imposed certain conditions on PSE that aim to ensure that trading activities are transparent and public interest will not be adversely affected.

A critical element in PSE’s planned acquisition of PDS is its compliance with the SRC provision which states that “… no industry or business group may beneficially own or control, directly or indirectly, more than twenty percent (20 percent) of the Exchange.”

Read in relation to the PDS transaction, this means the stockbrokers of PSE, taken as a whole, cannot own or control by themselves or through their affiliates (or dummies), 20 percent of the consolidated PSE and PDS trading facilities.

Congress imposed this prohibition to address its earlier findings that control by a group of stockbrokers who have vested interests in maintaining the status quo resulted in abuses to the detriment of the public.

Although PSE has promised last year to comply with this ownership requirement, its actions toward this end have been slow-moving.

Finance Secretary Carlos Dominguez III has expressed frustration over the continued failure of PSE to take the proper steps to compel its stockbrokers to divest some of their stocks to meet the 20-percent ownership requirement.

According to Dominguez, PSE’s protracted compliance with the law is slowing down the development of the capital markets and thwarting the administration’s goal of achieving a robust and inclusive financial system.

Thus, upon Dominguez’s direction, Landbank, which he chairs, is making a bid to gain controlling interest of PDS and, if successful, enable the government to play a substantive role in the capital market.

The refusal of PSE to abide with the ownership ceiling in the proposed PDS acquisition does not come as a surprise. This is not the first time PSE thumbed its nose at the government’s efforts to enforce transparency and accountability in the stock market.

In 2010, prior to the 2011 election of PSE’s board of directors, the SEC ordered PSE to comply with the 20-percent ownership ceiling. In a deft move, the Philippine Association of Securities Brokers and Dealers Inc., an organization of PSE stockbrokers (do you see the connection?), filed a complaint at a regional trial court to stop the SEC from enforcing that order.

Despite the clear provision of the law that the SEC decisions are appealable only to the Court of Appeals, the trial court took hook, line, and sinker the convoluted arguments of the stockbrokers and restrained the enforcement of the SEC order. To date, that case is still pending in court.

There is no room for compromise on the clear intent of the law on the limits of ownership of an industry in an exchange. If PSE persists in thinking that it is above the law on this issue, Dominguez should make it pay dearly for that frame of mind by denying it, through Landbank, control of PDS.