No market merger, so what next?

Ben D. Kritz

Ben D. Kritz

ABOUT a week ago I had a chance to sit down with Philippine Stock Exchange Inc. President and CEO Hans Sicat and learn more about the derailed plan for the PSE to acquire a controlling interest in the PDS Group, which operates, among other things, the country’s bond market.

Earlier, the Securities and Exchange Commission (SEC) rejected PSE’s petition for exemptive relief from a provision that limits the ownership stake in an exchange by a single company or a venture to 20 percent. The decision, which makes less sense the more details about it emerge, effectively put a stop to the plan, which has been under development for nearly five years, to integrate the country’s financial markets.

In my conversation with PSE’s Sicat, it became clear there are three large issues that need to be resolved. The simplest one, and the one that understandably seems to infuriate Sicat the most, is the poor—it would not be an undeserved stretch to call it unprofessional—manner in which the SEC handled the entire matter. Sicat and the rest of the PSE management learned of SEC’s rejection of the bourse operator’s petition through the media, which was at best impolite.

That move followed weeks of red tape-laden back-and-forth between the exchange and the regulator, in which the latter was requested to file and refile information that had been provided months earlier, and provide additional but not obviously relevant information such as employment details for everyone down to the level of managers. In the end, the decision was a remarkable example of inconsistency; the SEC has already extended exemptive relief on the ownership limit more than once for shareholders of both exchanges, and in particular has already done so on PSE’s behalf for its present 21 percent stake in the PDS Group. The Bankers’ Association of the Philippines, which collectively owns 28.9 percent of the bond market operator, has also been granted an exemption. The inconsistency and apparent informality in SEC’s approach, Sicat opined, “is setting a dangerous precedent.”

The second major problem is an evident lack of understanding on SEC’s part of the essentially sound business case the market merger represents; whether this is intentional or actually indicative of a lack of competence in the agency is an open question.

With all due respect to the management of PDS, which is doing a fine job considering what it has to work with, the fixed-income exchange only exists because PSE allows it to; the largest part of the PDS Group’s revenue is generated by the Philippine Depository & Trust Corp. (PDTC), and most of PDTC’s revenue comes from handling depository and clearing business from the equity exchange. Integrating the presently separate market systems is a significantly positive risk-management move with respect to the all-important busywork that is required to make sure buyers and sellers both get what they’re expecting from their market transactions.

Under the current arrangement, Sicat pointed out, the separate systems mean trades have to be cleared in batches, which slows things down in general, and complicates the task of correcting bad transactions (such as when a buyer has overdrawn his account, which apparently happens with some regularity). Putting everything under one roof, so to speak, speak, would reduce operating costs, which would obviously result in lower fees for customers. That makes a competitive difference for the segment that really counts, the institutional and other large-cap investors; transaction costs at that scale, when large values of equities or fixed-income securities are moving according to fractional percentage changes in prices, transaction costs are a significant factor in determining whether a trade happens or not.

The third issue is harmonization. Contrary to the SEC’s assertion that combining the markets is not necessarily considered best practice, there is no other country among our regional peers with the same arrangement. With the exception of Vietnam—which only has an over-the-counter market for bonds, although the government is working toward the creation of a market structure like everyone else’s—combined markets are the norm.

On a larger scale, the separation the SEC insists must be maintained between the equities and fixed-income markets complicates the country’s inclusion under the Asean Financial Integration Framework. Even though AFIF is a region-scale program, because of the way Asean works it will require many individual agreements between member countries regarding things like mutual recognition of registrations of securities. The Asean countries are already working on it—Thailand, Singapore and Malaysia have a mutual recognition deal—and gain yet another competitive advantage over the Philippines as a result.

What I really wanted to know from Sicat, however, was what the PSE intends to do now, since it is apparent there really was no Plan B in case the acquisition of PDS fell through. On this topic I was disappointed, not because Sicat wouldn’t say anything except in very general terms, but because it was quite obvious he couldn’t. The SEC’s illogical decision wasn’t delivered with any sort of alternative suggestions, because there isn’t any that won’t damage the “public good” the SEC is trying so hard to defend. All the PSE can do now, Sicat suggested, is to review its circumstances while it waits for the outcome of the election, which may or may not bring some changes to the business and regulatory environment.


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