By Christianne Grace F. Salonga
The Philippine Stock Exchange (PSE) implemented the PSE Short-Selling Program on November 6, 2023, following the effectivity of the PSE Guidelines for Short Selling Transactions in October 2023. This program came to fruition after achieving significant milestones related to the PSE Securities Borrowing Lending (SBL) Program, notably the approval by the Securities and Exchange Commission (SEC) in May 2023 of offshore collaterals for SBL and the acceptance for registration by the Bureau of Internal Revenue (BIR) in September 2023 of the Global Master Securities Lending Agreement (GMSLA).
Short-selling involves the sale of borrowed securities, with the seller committing to return the borrowed securities or their equivalent by a predetermined date. The borrower anticipates selling the borrowed securities at a price higher than the purchase cost for the equivalent securities that will be returned to the securities lender, aiming to benefit from an anticipated decline in the price of the borrowed securities.
Although the PSE Trading Rules included provisions on short selling in 2010, the implementation of short selling required both the establishment of the PSE’s new trading system and the approval of the SBL Program. SBL is a pre-requisite of short-selling particularly because “naked” short-selling, which involves selling of securities not yet borrowed, is prohibited in the Philippines. A “naked” short sale is assumed to have no real intent or certainty of delivering the subject securities within the prescribed settlement period, which makes it akin to prohibited gambling activity that bets on the fluctuation in the prices of the subject securities. SBL serves as a mechanism to ensure compliance with this restriction. SBL, essentially a collateralized securities loan agreement in the form of a Master Securities Lending Agreement (MSLA), provides access to loanable securities necessary for the borrower-seller to fulfill settlement obligations.
As SBL is considered as a “borrow” and not a “straight up sale” of securities, SBL transactions may enjoy provisional tax-free status and exemption from capital gains tax and stock transaction tax, provided that the MSLA is approved by the PSE and the SEC, registered with the BIR, and the subject securities are returned to the lender within the prescribed borrowing period.
Aside from a MSLA, another relevant documentary requirement for SBL is the Securities Lending Authorization Agreement (SLAA), which the lender of the securities will execute in favor of the Trading Participants (TPs) or the Lending Agent. This SLAA will not have to be approved or registered with the PSE, the SEC and the BIR, but shall be kept for inspection and audit of the Capital Markets Integrity Corporation. Further, each SBL transaction shall be covered by a SBL Confirmation Notice that contains the details of the SBL transactions.
Not all securities are eligible for short selling. Only listed securities meeting specific criteria set by the SEC, including market capitalization, tradability, liquidity, and other applicable guidelines, qualify for short sale. The list of eligible securities, as outlined in the PSE Guidelines for Short Selling Transactions and the PSE MC No. 2023-0048, are the PSEi constituents, MidCap Index constituents, Dividend Yield Index constituents, and exchange-traded funds.
Before the launch of the PSE Short Selling Program, TPs were advised to undertake various activities, including system recertification of their Front-End Order Management System to allow the proper tagging of short sale orders, execution of relevant agreements such as the MSLAs and SLAAs, and undertaking other procedures to ensure operational readiness.
Eligible securities are subject to a 10% outstanding short position threshold. Securities breaching this threshold become ineligible for short selling until they fall back within the prescribed limit. Compliance with the 10% threshold is monitored daily, and the outstanding short position of eligible securities is published by the PSE at the end of each trading day.
Short selling, a long-awaited addition to the Philippine capital markets, offers a trading strategy that can benefit investors with both long and short market views, thereby promoting trading activities and liquidity even during downturns.
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