PSE formulates guidelines on borrowed securities

MANILA, Philippines - The operator of the country’s stock exchange has formulated its guidelines covering the sale of borrowed securities during anticipated downturns.

In a memorandum circular, the Philippine Stock Exchange (PSE) released for public comment the proposed Guidelines for Short Selling Transactions which was approved by its board of directors on Nov. 27, 2013.

“These guidelines set out, among others, the eligibility criteria for qualified securities, duties and responsibilities of trading participants who engage in short selling, and reportorial requirements,” PSE said.

Short selling refers to the sale of borrowed securities with the expectation that the share price would decline. During the price downturn, the seller could then return the borrowed stock by buying it from the market at lower rates, allowing profit from betting on a forecasted price drop.

In the guidelines, a security is eligible for short selling if market capitalization is at least P10 billion and the stock has been traded 95 percent in the regular board six months prior to the publication of the list of eligible securities.

“Exchange-traded funds and their underlying securities traded in the PSE shall be considered as eligible securities,” PSE said, adding that all constituent stocks of the 30-member PSE index are deemed as eligible securities.

However, when the ratio of short interest to outstanding shares of a security exceeds three percent, it is no longer eligible for short selling until the next review.

“In the event that a particular security subsequently becomes not eligible for short selling, no short selling orders will be accepted by the trading system,” PSE said.

In terms of execution, only trading participants are allowed to enter short selling orders. Hence, investors, even those with direct market access privileges, should course their orders through brokerage firms, the local bourse said.

“Trading participants are not allowed to execute short selling orders and buyback orders for aggregated/bundled accounts, the odd lot market and block sales,” PSE said, adding that short selling orders are valid only for the entire trading day.

Trading participants are allowed to amend a trade from short sale to a regular sale and vice-versa using the PSE’s trade amendment facility. But buyback orders should be manually recorded by brokerage firms, PSE said.

“A trading participant shall be responsible for all short selling orders and buyback orders that are entered into or executed in the PSE, regardless of whether such orders are for its own account or for its client’s account,” PSE said.

The proposed guidelines also formulated reportorial requirements regarding short selling transactions.

For instance, the brokerage firm should submit to the PSE every 5 p.m. of the trading day a report on short interest and other reportorial requirements.