SEC lays framework for revival of futures bourse

The Securities and Exchange Commission is laying down the legal framework that will allow the revival of the country’s futures exchange which was closed due to massive fraud.

The SEC is working on amendments that will clearly define commodities as any financial instrument or agricultural product that may be subject of futures contract.

The term commodity is used in the Securities Regulation Code but no definition is currently provided.

The SEC has also defined futures contract as any agreement to buy or sell for future delivery a standardized quantity and quality of a commodity, currency, stock index or debt instrument.

Like all derivatives, futures are used to manage financial risks arising from movements or fluctuations in commodity prices, stock indices, foreign exchange and interest rates.

The SEC hopes to reopen the financial futures exchange by the third quarter of this year.

The reopening of the futures market was delayed after the Court of Appeals ruled that the SEC has no jurisdiction over commodities.

Noting the advantages of a futures contract as an alternative hedge instrument in managing foreign exchange, interest rate and equity portfolio risks, the SEC said it was about time the government resuscitate the futures market.

A futures exchange is a facility through which investors bet on the future of a commodity such as gold or copra.

Commodity futures trading in the country has been suspended following the closure of the Manila International Futures Exchange Inc. (MIFE) in July 1997 due to alleged anomalies in its operations.

To prevent a repeat of the fraudulent activities that led to the demise of MIFE, the SEC has drafted a set of criteria for operating a futures exchange.

The new futures exchange must have a minimum paid-up capital of P200 million to answer for investors’ claims in case it runs into financial difficulties.

The SEC also wants proponents to organize an electronic clearing house which must be able to process trades as well as update positions and cash continuously as transactions take place.

The clearing house must be flexible to support an expanding universe of simple and complex products applicable to the domestic market. It must also be efficient and rapid in new product launches. It must be adaptable to international standards and must provide the link up to other international clearing organizations.

The SEC wants the clearing house to be organized as a separate corporation independent from the management of the futures exchange. The ownership structure must be open to one or several foreign international clearing operations that will assure the success of the domestic futures operations.

Proponents who want to operate a futures exchange will also be required to submit a draft of the business plan for the exchange, including its business objectives, estimated timetable for different activities and trading activity flow chart.

The Bankers Association of the Philippines (BAP) wants to ensure that tighter rules and regulations are implemented if and when the country’s futures exchange industry is revived.

The SEC said it will be very careful in screening groups that intend to open a new futures exchange.

The commission will issue a licensee to only one futures exchange. So far, only Pilipinas Mercantile Exchange Inc. (Philmerc) has complied with the SEC requirements.

Philmerc is composed of stockbrokers and investment bankers, including Victor Limlingan, Eusebio Tanco, Rodolfo Cruz, Paulino Soo, Roberto Panlilio, Don Calderon and Norberto Ong, among others.

The Philippine Stock Exchange had earlier signified interest to operate a futures exchange.