The Market Monitor Minding the Nation's Business
By Riza Lozada
The Securities and Exchange Commission (SEC) has turned down a petition of the Philippine Stock Exchange (PSE) for an exemption on ownership limits on financial markets in its planned merger with the Philippine Dealing Systems Holdings Corp (PDS), effectively putting in limbo the consolidation of the local equities and fixed-income or bond market.
The SEC said it believes allowing the exemption would make the PSE the de facto monopoly owner of all the exchanges in the country.
The PSE wanted to completely take over the PDS, which goes against the 20-percent ownership limit to an industry group, as written in Section 33.2(c) of the Securities Regulation Code that was meant to ensure that no single stakeholder in the exchanges becomes dominant.
The SEC, thus, wanted a mer ger of equals for the two exchanges.
PDS is the parent company of the Philippine Dealing and Exchange Corp. (PDEX) and the Philippine Depository and Trust Corp. (PDTC) that constitutes the local fixed-income or bond market.
The SEC, in its resolution, said the proposal was denied considering the PSE’s failure to present “clean and convincing evidence” that it is entitled to an exemption from the ownership limit, and that its proposed acquisition of PDS would not negatively impact on PDS’s ability to effectively operate in the public interest.
Under the proposal, the PSE would become the parent company of PDS Holdings, whose current shareholders are the Bankers’ Association of the Philippines, the Financial Executives Institute of the Philippines (Finex), Golden Astra Capital, Investment House Association of the Philippines, Philamlife, San Miguel Corp., SGX Singapore Stock Exchange, the Social Security System, TATA Consultancy Services, and Whistler Technologies.
In rejecting the proposed PSE-PDEX merger, SEC Chairman Teresita Herbosa said the SEC needed to make sure that allowing it “would not negatively impact on the exchanges’ ability to effectively operate in public interest and its operations.”
“Based on what they put in the written application that the PSE submitted on Jan. 26, we couldn’t find a specific set of synergies. They didn’t define what the cost savings would be,” SEC Commissioner Ephyro Luis Amatong said.
He added that the PSE failed to convince the SEC on the “clear connection” between the consolidation and the offering of new products and services, as well as timelines and commitments, even the specific products and services intended, for its capital-market development initiatives.
“The only thing they were willing to provide us is that there would be a decrease of 0.001 percent on depository fees,” Amatong said. “It doesn’t make sense to allow the acquisition, with all the concerns we have if the only thing that is sure to go to the investing public would be such a small increase.”
Amatong added that the merger may go against the recently enacted Philippine Competition Act related to monopolies.
Under the proposal, the stock exchange would buy out PDS and make it a subsidiary from its current 21-percent stake in PDS.
Still, Amatong said the SEC would consider the merger if a better plan were proposed.
“We don’t necessarily reject the combination of the two exchanges. We just could not justify the current submission,” he said.
PSE President Hans Sicat expected the consolidation of exchanges to provide benefits, as it allows synergies and efficiencies, particularly in the information technology infrastructure, to be introduced, as well as provide expanded resources and expertise in coming up with more financial products and services.
“In fact, in the developed markets mentioned by the SEC, we have been seeing consolidation taking place. The Tokyo Stock Exchange and the Osaka Securities Exchange are now under the Japan Exchange Group. Also, as recent as two years ago, the Intercontinental Exchange has acquired the New York Stock Exchange,” he said.
Sicat also addressed the issue of monopoly by saying: “We believe we have more than sufficiently explained our points on the monopoly issue. Even if we proceed with the acquisition, we cannot look at ourselves in a vacuum but rather, one player among many in a global field of capital and investment instrument providers.”
The PSE board recently submitted for public comment the proposal to issue dollar-denominated securities (DDS), which are securities denominated in US dollars that will be listed at the Exchange.
As part of the PSE strategies, the PSE said the DDS would provide issuers with the flexibility to meet their capitalization requirements.
The DDS will also provide alternative investment instrument for investors with US dollar deposit accounts.
This will also attract offshore investors and reduce their currency risk exposure, the exchange said.
Sicat told the media the PSE provided the SEC with timelines on the consolidation, the information-technology infrastructure changes and the restructuring.
“We have said that we are very much aware of the need to ensure continuity and minimize disruptions in the market and part of the strategy to achieve this is to retain the structure for a 12-month period. In terms of services, we specifically said that we will support the plans of PDS to enhance its product lines, including interest-rate swaps, non-deliverable forwards, forward rate agreements and forex futures,” he said.