MANILA, Philippines – The Securities and Exchange Commission (SEC) cleared guidelines on short selling as well as securities borrowing and lending (SBL) prepared by the Capital Markets Integrity Corporation (CMIC).

In a statement on Thursday, January 2, the SEC said the guidelines address concerns over the impact of SBL and short selling on books and records, error transactions, and their possible effect on the risk-based capital adequacy (RBCA) ratio of trading participants.

What is short selling?

In short selling, an investor earns by anticipating that the price of a stock would go down. The investor borrows the security from another person and sells it.

When the price of the stock goes down, the investor then buys it back and delivers it to the lender. The investor profits from the price difference. Meanwhile, the lender benefits from the transaction by receiving fees similar to loan fees and charges.

Short selling is an advanced strategy in profiting off the stock market and an investor loses money when company shares rise, since he or she has to buy them back at a higher price.

The Philippine Stock Exchange (PSE) initially wanted to introduce short selling in 2018 so the market could gain more liquidity.

Safeguards

The guidelines approved by the SEC limit short sale transactions to companies comprising the PSE index and to exchange-traded funds.

“Naked” short selling or the short selling of shares that have not been determined to exist is prohibited as well. The guidelines require customers to execute a notarized undertaking prior to entering a short sale. The undertaking must also specify that the customer understands the relevant security laws.

Trading participants also have the responsibility to ascertain that the parties have entered into the necessary borrowing arrangements prior to entering a short sale transaction.

To ensure fair presentation and reporting, trading participants are also required to record the lending of securities in the following manner:

• For borrowing shares, stock credit memo for the entry of securities for the borrower and stock debit memo for securities of the lender.
• For the return of shares, stock debit memo for the entry of securities for the borrower and stock credit memo for the securities of the lender.

Short selling orders must be clearly noted as “short” in the order tickets and confirmation invoices should be issued by the concerned trading participant to the client.

The trading participant, through its account with the Philippine Depository and Trust Corporation, will also be required to indicate whether the transfer of shares to another depository participant is for short selling through express comments in the depository system.

“The Implementing Guidelines also outline the impact of movements in the trading participants’ certain accounts on the RBCA requirement. For instance, receivables for securities borrowed could prompt trading participants to recognize an increase in their net liquid capital and credit risk requirement,” the SEC said.

Parties to SBL transactions are also required to maintain a confirmation notice specifying the details of each transaction. They must also submit biannual summary reports of outstanding and liquidated SBL transactions and stock returns, as well as a certification of submission of these reports to the Bureau of Internal Revenue.

“With the implementing guidelines on short selling in place, we look forward to more robust activity in the stock market. 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,” SEC Chairperson Emilio Aquino said. – Rappler.com