The Philippine Stock Exchange (PSE) Securities Borrowing and Lending (SBL) Program was implemented in conjunction with the PSE Short Selling Program in November 2023. An SBL transaction operates as a collateralized loan facility, where securities are borrowed against collateral. This arrangement involves a lender, who temporarily lends securities to a borrower for trading strategies or settlement obligations, such as a short-sale transaction. In return, the borrower provides collateral and commits to return equivalent securities within a specified period, not exceeding two years.
During the SBL period, the lender temporarily forfeits ownership of the securities but retains the right to receive associated benefits, such as dividends or stock rights. Upon demand by the lender or at the end of the borrowing period, the borrower returns the securities, and the lender returns the collateral. In case of failure of the borrower to return the borrowed securities or in case of default on the part of the borrower, upon written notice to the borrower, the lender shall have the option to dispose of the assigned collateral and offset the market value of the collateral against the borrowed securities and the balance, if any, shall be promptly returned or refunded to the borrower.
The Securities and Exchange Commission (SEC) issued the Rules Governing SBL Transactions in 2006, which were complemented by the PSE Rules and Guidelines on SBL, which both became effective in 2007. Eligible securities for lending include those listed in the PSE, and those issued by the Bureau of Treasury and the Bangko Sentral ng Pilipinas. These securities must be in electronic form or if certified, the same must be in its electronic form at the time of SBL transaction and free from all liens and encumbrances.
Risks associated with SBL transactions include credit risks, collateral risks, and settlement risks. To mitigate these risks, borrowers must provide acceptable collateral, which can include cash, equity, government securities, or other assets approved by the SEC. In 2023, the SEC approved the following offshore collateral for transactions involving at least one foreign party: (i) cash in USD, EUR, JPY, GBP and AUD, (ii) government and agency debt of member-countries of the Organization for Economic Co-operation and Development with a minimum of BBB rating, and (iii) constituents of benchmark indices of World Federation of Exchanges member exchanges.
Foreigners are restricted from borrowing equity securities of Philippine companies engaged in nationalized activities unless proper monitoring mechanisms are in place to ensure compliance with ownership restrictions.
SBL may be conducted by the securities owner directly or through a Lending Agent. A Lending Agent is a juridical person which acts on behalf of a client with respect to the lending of securities. A Lending Agent must be registered as such with the SEC. SBL may also be done using other methods such as through lending pool system, competitive auction, bid offer transaction or other schemes subject to the evaluation and approval of the SEC.
Prior to engaging in any SBL transaction, all borrowers shall execute a Market Securities Lending Agreement (MSLA), which is the contract that defines the terms and conditions of the SBL transactions. The PSE provides a downloadable form which conforms to the Global Master Securities Lending Agreement (GMSLA) text by the International Securities Lending Association.
In September 2023, the BIR accepted the filing and registration of a GMSLA in case at least one party to an SBL transaction is a foreign national, for purposes of eligibility of the parties’ SBL transaction for a tax-free status. As a SBL transaction is not a “straight up sale” but a “borrow” of securities, it is exempted from capital gains tax, stock transaction tax and documentary stamp tax. This tax-free status is achieved if the corresponding MSLA is approved by both the PSE and the SEC and is duly registered with the Bureau of Internal Revenue (BIR).
Further, the SBL transaction must not be a “deemed sale” transaction. Otherwise, it loses its tax-free status. Any of the following circumstances makes a SBL transaction a deemed sale: (i) there is no stock return in whole or in part of the borrowed shares at the end of the borrowing period, (ii) the borrowed shares have not been used for other than the specified purposes stated in BIR RR 01-2008, (iii) the borrower is in default in accordance with the terms in the MSLA for the return of whole or part of borrowed shares, (iv) there is failure to comply with the essential features of a valid MSLA, (v) there is failure to register or there is delayed registration of MSLA, or (vi) the SBL transactions were entered into by the parties outside of the MSLA.
A Trading Participant (TP) acting as a TP or an Agent Facilitator shall also enter into a Securities Lending Authorization Agreement (SLAA) with its client, and as a lender, with the Lending Agent. SLAA is a written contract between the owner of the securities and the Lending Agent or the Agent-Facilitator by which the former authorizes the latter to offer his or her securities for lending under the terms agreed between them. Such SLAA does not have to be approved or registered but shall be kept for inspection and audit of the Capital Markets Integrity Corporation.
Overall, the implementation of the PSE SBL Program is a positive step forward as it facilitates securities settlement, expands trading strategies, and enhances market liquidity, further accelerating the development of capital markets in the Philippines.
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