Background - Securities and Exchange Commission · 2016-03-30 · Even PSE’s own continuity plan only cites the salient features of BSP Circular 808, but does not present details

Securities and Exchange Commission

PSE SMC Re)rement

10.3%

GSIS 9.09%

BDO Unibank 9.09%

First Resources Management

Corp. 11.76%

Lucky Securi)es, Inc.

5.34% Papa Securi+es,

Inc. 5.14%

Other shareholders

49.28%

Philippine Stock Exchange

Securi)es Clearing Corpora)on of the Philippines (SCCP)

Capital Market Integrity Corp

(CMIC)

Philippine Dealing System (PDS)

Philippine Depository and Trust Corp

(PDTC) Philippine Dealing

and Exchange (PDEX) Philippine Securi)es SeWlement Corp

(PSSC)

PDS Academy for Market Devt Corp

(PDSA)

Background •  The Commission has evaluated 10 submissions from PSE, the earliest was from 27 April 2015 and the latest was from 26 January 2016. •  The Commission has repeatedly requested PSE to provide detailed, specific and time-bound commitments in their plans. •  PSE has admitted that it has only just convened a joint working group with PDS Management to sort out the operational details of the

transaction. As yet, PSE has not determined synergies and efficiencies that will indeed translate to meaningful benefits to the investing public and issuers. Without sufficient basis, the Commission cannot grant PSE exemption.

PDS PSE 21%

BAP Members 28.9%

Singapore Exchange

20%

Tata Consultancy Services

8%

Computer Technology Services

8%

San Miguel Corp. 4%

Financial Execu)ves Ins)tute 3.1%

Other shareholders

7%


Proposed Shareholder Structure

PSE Shareholders

100%

PSE

SCCP CMIC PDS

PDEX PSSC PDSA PDTC PSE

SCCP CMIC

PSE and PDS Shareholders

PDS

PDSA PSSC PDEX PDTC

Structure envisioned by the Na)onal Government Structure proposed by PSE

Singapore Exchange

BAP Members

GSIS

SMC

BDO Unibank

Financial Execu)ves Ins)tute

PSE Others


Prohibition against Concentrated Ownership •  Section 33.2 of the SRC provides a mandatory limit on ownership in an Exchange by an individual (5%) or by

an industry (20%). The SEC, however, was provided authority to issue exemptive reliefs guided by the following principles:

•  Exceptions are subject to the rule of strict construction. (Lokin, Jr. v. Commission on Elections) •  Any person who intends to avail of an exemption must present clear and convincing evidence to show to

make such applicant covered and entitled to the exemption prayed for. (In the matter of Petition of Amando Ong Pacible v. Republic)

•  A favorable recommendation by a governmental agency to a merger or acquisition shall give rise to a disputable presumption that the proposed merger or acquisition is not violative of the Philippine Competition Act.


Standard 1: Reduction and rationalization of fees 1.  PSE has not substantiated claimed operational and cost efficiencies.

•  PSE did not specify where efficiencies will come from, how they will be implemented, and what cost savings can be expected from them.

•  The Commission cannot evaluate the effects of the proposed operational integration on the stability of the market due to lack of information from PSE.

•  The PSE failed to comply with required submission of full due diligence and valuation reports on the acquisition undertaken by JP Morgan on PDS.

2.  PSE has failed to demonstrate that the consolidation will result in meaningful benefits for the investing public. •  PSE only commits to a marginal decrease of 0.001% to depository fees. •  PSE did not even commit to keep at present amounts all the other fees

that both exchanges are currently charging.

In the proposed Deutsche Boerse and LSE merger, the parties disclosed: 1.  Forecast f inanc ia ls for the

combined entity, 2.  Cost savings per annum per cost

center, 3.  Costs of the integration, 4.  Undertakings for reduction of

t r a d i n g , c l e a r i n g , a n d information fees,

5.  Undertakings not to raise these fees.

PSE has failed to provide these crucial details.


Standard 2: Capital market development PSE has not shown that the acquisition is necessary for capital market development and that its claims of launching new and improving the old products and services are backed by credible plans and commitments. 1.  PSE has failed to provide a clear connection between the consolidation and the offering of new products and services.

2.  PSE has failed to provide timelines and commitments, even the specific products and services intended, for its capital market development initiatives.

3.  PSE has failed to demonstrate a clear vision for the fixed income market and has not addressed the following key concerns: a.  The capacity of the planned structure to operate the combined entities, b.  Resilience of the new structure and potential systemic impact in case of failure; c.  Maintenance of critical services presently offered to investors; and d.  Guarantees of market surveillance and market access.


Regional Integration Efforts •  PSE failed to identify any regional links it has already worked on. •  It merely provided a summary of its outstanding issues for consideration in

connection with the ASEAN trading link and argue that acquisition of the depository will allow PSE to align any post-trade enhancement that may be required in setting up a multilateral linkage infrastructure.

PDS and Bond Pricing Agency Malaysia (BPAM) •  On October 2015, PDS and BPAM, entered into an agreement to make available

their bond pricing and information services through a link to each other’s websites. This is the first collaboration between the Philippines and Malaysia to further promote and support the bond markets of the region •  PDS is also active in the ASEAN+3 Multi-currency Bond Issuance Framework

(AMBIF)


Size Comparison of Equity vs Bond Market

0.00

1,000,000.00

2,000,000.00

3,000,000.00

4,000,000.00

5,000,000.00

6,000,000.00

7,000,000.00

2011 2012 2013 2014 2015

Value Turnover Comparison (in million PHP)

PSE PDS


Standard 3: Trade surveillance and transparency PSE presented no plans to mandate the use of the Name On Central Depositary (“NOCD”) facilities of both PDTC and SCCP, failing to demonstrate commitment to increase the transparency of trading. PSE has also not identified the role of CMIC and the PDS Market Governance Board in the consolidated exchange. Standard 4: Clearing and settlement stability 1.  PSE claims that vertical integration of the depositors will lead to improved market stability.

PSE’s submissions lack any details as to what exactly that consolidation will entail other than a change in ownership of the depository, despite repeated requests from the Commission.

A mere change in ownership of the depository will not lead to a more stable market, only more profits for PSE and less competition among depositories. 2.  PSE has claimed that it will shift of the fixed income market to a multilateral netting settlement system

PSE, however, fails to explain how it will capitalize the Central Counterparty required for such a system. To shift from the Real Time Gross Settlement System run seamlessly by the Bangko Sentral to an undercapitalized or poorly planned Central Counterparty jeopardizes the stability of the market and the economy at large.


Standard 5: IT integrity and continuity of business 1.  PSE has failed to present a continuity plan for PDS. Even PSE’s own continuity plan only cites the salient features of BSP

Circular 808, but does not present details as to how these principles will be operationalized. (BSP) 2.  PSE experienced three trading halts in 18 August (44 mins), 24 August (50 mins) and 25 August (almost 5hours) which

have yet to be resolved. The fixed income (bond) market cannot be exposed to these kinds of glitches that the PSE experiences.

3.  Worse, PDS was already on track to be compliant with the three full levels of resiliency required by CPSS-IOSCO financial market infrastructure principles by June 2016. PDS’s plans, however, have been delayed following PSE’s direction to put on hold all technological spending for both exchanges for six months.

The PSE does not show any capital investment plans to improve the quality if its own infrastructure in spite of repeated trading glitches, and in fact, has already hindered the PDS from making investments for technological spending that will improve its resiliency. This negatively impacts the ability of the bond exchange to operate.


Standard 6: Governance and management competence 1.  While PSE represents that it may dilute ownership over PDS through public offerings and private placements

within 3-5 years of closing, PSE stresses that it is seeking permanent and unconditional exemption.

2.  PSE’s Share Purchase Agreement precludes the significant market players from establishing rival exchanges and constitutes PSE as a de facto monopoly. PSE did not demonstrate in its submissions that the dangers of having a monopoly will be well mitigated.

3.  PSE’s ability to run a bond exchange has not been established and its failure to elaborate on its plans shows that it is not qualified to run a consolidated bond and stock exchange.

*The Share Purchase Agreement has a provision allowing PDS, through BAP, to designate a qualified individual to be elected as a Director and as a member of the Executive Committee for a period of five (5) years from and after the transaction. PSE shall assign to the designee shares to qualify him as a director. PSE undertakes to take such actions necessary to allow the designee to be elected as director. 4. Most alarmingly, in its final submission, PSE does not present its proposed SRO structure and the justification for

this structure.


PSE Market Governance Structure

In the PSE Group, the CMIC acts as the independent audit, surveillance and compliance arm of the Exchange. It supervises not just market conduct but also the capital adequacy of its members. PSE Board of Directors approves the rules on listing disclosure, listing request and exercise, through its issuers’ regulation division, supervision and enforcement over listed issuers.


PDS/ PDEx Market Governance Structure The rule making body of PDS is the Market Governance Board. The enforcement body is the Market Compliance and Discipline Committee. PDS has created 4 committees to advise it on rule making and address the needs and concerns of its stakeholders.

Documents

Background - Securities and Exchange Commission · 2016-03-30 · Even PSE’s own continuity plan only cites the salient features of BSP Circular 808, but does not present details