Securities Borrowing and Lending (SBL) and Short Selling in the Philippines: Implementing Guidelines

The SEC announced that in its en banc meeting on 17 December 2019, it approved the Implementing Guidelines on Securities Borrowing and Lending (SBL) and Short Selling issued by the PSE’s Capital Markets Integrity Corporation (CMIC). The Securities Regulation Code and the 2015 SRC Rules provide for the general regulations on short selling. The salient features of the Implementing Guidelines on SBL and short selling, which took effect on 25 February 2020, are as follows:

1. Short sale transactions shall only be limited to “eligible securities“, which shall refer to securities of listed companies in the Philippine Stock Exchange (PSEi) and exchange traded funds. Short selling of non-eligible securities is strictly prohibited

2. Naked short selling is not allowed. Customers are required to execute a notarized undertaking prior to entering a short sale specifying, among others, that the customers understand the securities laws, rules, and guidelines related to short selling, including the prohibition on naked short selling. 

3. Upon receiving an order to sell short, the order should be indicated on the selling order and throughout all the records pertinent to the sale. Short selling orders must be clearly noted as “short” in the order ticket and confirmation invoices issued by the Trading Participant (TP) to the client. 

4. Short sale transactions shall be distinguished from selling error transactions. Short sale transactions shall be recorded directly on the account ledger of the customer while selling error transactions shall be recorded in the TP’s error account.

5. The mere presentation of authorization letters from lending clients shall not be sufficient to prove compliance with the rules on short selling. The TP shall ascertain that the parties have entered into the necessary borrowing arrangements prior to entering a short sale transaction, specifically:

  • a. A TP who lends securities of one client to another client must be registered with the SEC and have a Securities Lending Authorization Agreement (SLAA) in place.
  • b. TPs who are lending and borrowing shares with their counterparties should have a Master Securities Lending Agreement (MSLA).

6. The reportorial requirements in relation to short selling transactions of a TP include the following:

  • a. Calculation. The TP shall calculate, as of 15th day and as of the last day of each calendar month, the aggregate position of each individual account in respect of each security. 
  • b. Written Report. The TP shall file a written report of the calculation of the short position to CMIC within 2 days following the date of computation. 

7. Regulation of short sale transactions shall be governed by the pertinent securities laws, including, but not limited to the CMIC Rules, these Implementing Guidelines, and other applicable laws. [See Short sales (short selling) under the Securities Regulation Code]

P&L Law

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