Philippine Depository and Trust Corp. (PDTC)

Philippine Depository and Trust Corp. (PDTC)•Formerly known as PCD (Philippine Central

Deposit).

•A private company owned by major capital market players in the Philippines.

•Was organized in 1995 to implement technology-driven reforms in the clearing and settlement of securities transactions in the Philippines in compliance with the international standards.

Philippine Depository and Trust Corp. (PDTC)

•As a depository, PCD uses a computerized book-entry system to record the ownership of securities paving the way for scripless trading of securities.

Book-Entry System (BES) 

PCD uses book-entry system to record the ownership of shares. When a trade is done at the Philippine Stock Exchange (PSE), securities are moved via electronic debit and credit of Participants' securities accounts to effect settlement. There will be no need for the physical movement of stock certificates (scrip) between buyer and seller. 

Philippine Depository and Trust Corp. (PDTC)•The PDTC performs book-entry transfer of

securities:

1.    From seller’s to buyer’s accounts during settlement of Exchange trades;2.    From one PDTC participant to another per client instruction, and;3.    From lender’s to borrower’s account for loan transactions.

Scripless trading 

•trading system where settlement is carried out via BES, rather than by the physical movement of certificates and documents

Settlement 

•completion of a transaction

•actual exchange of securities and funds

Philippine Depository and Trust Corp. (PDTC)

•Obtained its license to operate as a clearing entity in December 1996 and started live operations in January 1997, starting with stocks listed at the Philippine Stock Exchange.

Philippine Depository and Trust Corp. (PDTC)

•PDTC will also provide clearing and settlement services for debt securities.

•PDTC currently provides depository and nominee services for all stocks listed at the Phil. Stock Exchange; clearing and settlement facilities for PSE trades; clearing infrastructure for domestic dollar transfers among commercial banks.

Philippine Depository and Trust Corp. (PDTC)•Acts as securities depository or

“custodian” of listed shares of stock that are traded at the PSE. 

•It was organized to establish a central depository in the Philippines and to implement scripless trading.

DEPOSITORY

Depository

•“An entity that provides securities accounts, central safekeeping services, and asset services, which may include the administration of corporate actions and redemptions, and plays an important role in helping to ensure the integrity of securities issues (that is, ensure that securities are not accidentally or fraudulently created or destroyed or their details changed)”.

Depository

• A depository is much like a custodian of securities. For markets, however, a depository does not provide services directly to investors; rather, it serves as a master custodian for the market, it being a securities custodian for all other custodians and market players.

Depository

•It serves both the Equity and Debt markets providing secure settlement, core safekeeping and corporate action activities for community members.

•It also provides electronic, real-time access for members to keep track of balances under guardianship.

Safekeeping

•As a depository for the equities market, PDTC centralizes management of shareholders information through dematerialization.

Lodgement

•deposit of eligible securities into the PDTC Depository.

•Securities lodged are deemed fungible and eligible for book entry settlement and for other types of transactions such as transfers, pledges or encumbrances.

Pledge

•an electronic process by which securities can be flagged to serve as an accessory to a contract intended as collateral to a principal obligation.

Pledge Initiation

•The process will commence with the pledgor- participant entering the pledge instructions in the system. The pledgee- participant will confirm the entries made by the pledgor- participant consistent with their pledge agreement.

Pledge Closure

•This shall pertain to the full release of the pledged securities upon the agreement of both the pledgor/ pledgee- participant.

Corporate Action

•an action taken by an issuer as a corporate entity requiring (mandatory events) or involving the participation (voluntary events) of the holders of its Securities, such as but not limited to shareholders meetings, interests, dividends, redemptions and right offerings.

•PDTC computes the entitlements for all securities lodged with the Depository. The amount of entitlement for lodged securities in respect of a Corporate Action shall be determined based on:

•Total number, as of Record Date, of the proper Securities registered in the name of Depository Nominee

•The number, as of Record Date, of the proper Securities in the Securities Account of each Participant, as computed and confirmed by the Transfer Agent and reconciled by PDTC, rounded down to the nearest whole number or centavo as the case may be.

Entitlements are paid and distributed by PDTC Depository by crediting the bank account and/or the securities account of the Participants.

Upliftment

•withdrawal of securities from the PDTC Depository.

•Upon entry of the Uplift instructions by the Participant, the Securities sought to be uplifted shall be frozen in the Participant’s Securities Account and shall no longer be eligible for Settlement through the PDTC System.

•Under Philippine law and regulations, there is no specific definition of a Central Security Depository (CSD). However, the legal definition of a clearing agent is provided under the Securities Regulation Code (SRC) as follows:

• Section 41. Prohibition of Use of Unregistered Clearing Agency. – It shall be unlawful for any broker, dealer, salesman, associated person of a broker or dealer, or clearing agency, directly or indirectly, to make use of any facility of a clearing agency in the Philippines to make deliveries in connection with transactions in securities or to reduce the number of settlements of securities transactions or to allocate securities settlement responsibilities or to provide for the central handling of securities so that transfers, loans and pledges and similar transactions can be made by bookkeeping entry or otherwise to facilitate the settlement of securities transactions without physical delivery of securities certificates, unless such clearing agency is registered as such under Section 42 of this Code xxx.

Section 41 of the SRC attributes the following acts to the clearing agent as defined:

(i) to make deliveries in connection with transactions in securities

(ii) to reduce the number of settlements of securities transactions

(iii) to allocate securities settlement responsibilities

(iv) to provide for the central handling of securities so that transfers, loans and pledges and similar transactions can be made by bookkeeping entry or

(v) otherwise to facilitate the settlement of securities transactions without physical delivery of securities certificates

•PDTC as a depository is likewise covered under Section 4441Q.6 of the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI), which provides that a securities custodian shall have the following basic functions and responsibilities:

•a. Safe keeps the securities of the client; •b. Holds title to the securities in a

nominee capacity; •c. Executes purchase, sale and other

instructions; •d. Performs at least a monthly

reconciliation to ensure that all positions are properly recorded and accounted for;

•e. Confirms tax withheld;

•f. Represents clients in corporate actions in accordance with the direction provided by the securities owner;

•g. Conducts mark-to-market valuation and statement rendition;

•h. Does earmarking of encumbrances or liens such as, but not limited to, Deeds of Assignment and court orders; and in addition to the above basic functions, it may perform the following value-added service to clients:

• i. Acts as a collecting and paying agent: Provided, That the management of funds that may be collected shall be clearly defined in the custody contract or in a separate document or agreement attached thereto: Provided, further, That the custodian shall immediately make known to the securities owner all payments made and collections received with respect to the securities under custody;

• j. Securities borrowing and lending operations as agent.

 

The Creation of PDTC

• In the 1990s, following through on movements to reform the clearing and settlement environment of the equities market to achieve delivery-versus-payment (DVP) and thus avoid the risks due to the extended settlement cycle in a paper-based environment, the Philippine Stock Exchange (PSE) and Bankers Association of the Philippines (BAP) forged a relationship to lead stakeholders towards the formation of a central securities depository.

•From the start, the infrastructure envisioned was to serve both the equities and fixed income markets. The PSE-BAP relationship forming the depository is testament to the historical recognition of their cooperative stance by both the private and public sectors. The Securities and Exchange Commission (SEC) took a fairly prominent and supportive role in establishing the depository at the time of its creation.

•The actions of the stakeholders in the equities market proceeded along the premise that the equities and fixed income markets would be hosted in a single depository infrastructure. These acts were part of a multi-sectoral program in pursuit of a long-term market development plan undertaken jointly by the private and public sectors through different vehicles, including the Capital Markets Development Council and the Market Reforms Program.

•In carrying out this vision, the infrastructure bidded out (as early as 1994) and procured should be capable of handling multiple asset classes (i.e, fixed income (FI) securities and equities). Thus, the only system capable then, FINTRACs, emerged as the sole solution.

•  

•Accepting BAP’s invitation to invest, PSE took a 31.75% stake, equivalent to that of the BAP. PSE and BAP were thus the largest stakeholders among all the shareholders. The understanding was that the costs would be spread between the equities and FI markets. The equality of the stake between the banking sector and the equities brokers sector was based on their joint and equal interest in the singular depository that would service the requirements for both the fixed income and equities markets.

•The ownership of the BAP and the PSE as equal lead shareholders of the enterprise was for the very reason that the depository was to service both the communities of the equities brokers in their equities activities and the banking sector in their fixed income activities. Pursuant to the foregoing understanding, the Philippine Central Depository, Inc. or PCD (now PDTC) ownership turned out as follows:

• PCD OWNERS • PSE • 31.72% • BAP • 31.72% • FINEx • 10% • DBP • 10% • IHAP • 6.56% • SSS • 5% • Citibank • 5% •  

• This ownership structure reflected the community of stakeholders that were involved in the equities and fixed income markets. Mirroring this ownership and leadership paradigm, PSE and BAP took annual turns in appointing the chairman of PCD. The only exception was during the period when the equities depository was to be launched in the live environment, when PSE took the chairmanship for two consecutive years since the leadership of PSE was deemed critical to the success of the depository engagement for their market.

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•An important milestone in the Market Reforms Program was the establishment of PDS Group in 2003. At this time, PCD shareholders affirmed their commitment to the depository mandate for the fixed income and equities market by converting their investment in PDTC to an investment in the holding company of the PDS Group, PDS Holdings, the corporate vehicle that would carry forward the stakeholders’ vision for the fixed income markets.

•These PCD investors included PSE, BAP, Social Security System, Investment Houses Association of the Philippines, and FINEX. The organizational effort to create PDS moved forward with the invitation of other market stakeholders to invest in the Group through PDS Holdings on the representation that, among others, the depository company, a key member of the Group, would be a full service depository hosting the equities and FI asset classes.

•  • In 2007, PSE fortified its commitment to the PDS Group by

increasing its stake to the maximum percentage allowed by law, signing commitments to strengthen its relationship with the PDS Group.

• Up to the present, PSE representatives and nominees continue to sit in the Boards of Directors of PDS Holdings and each of its operating companies. By virtue of its special status as a strategic shareholder (sharing such status with the BAP and Singapore Exchange Ltd.), PSE was given the privilege to have direct representation in each Board of Directors of PDS Group, as well as to nominate an independent director who will sit in the Audit Committee, the Risk Committee, and the Nominations and Remunerations Committee.

Clearing ang Settlement

•• Clearing Services determines the fixed income security and monetary obligations of the trading participants, particularly as to who will deliver or receive either cash or security, in a transaction.

••It validates and reconciles details of transactions between trading participants prior to Settlement

•• A straight-through (end-to-end) process is observed in performing securities activities in the Fixed Income, Foreign Exchange, and Repo Markets.

•• PDTC likewise operates the Corporate Action Auto-Claim System (CAAC) which facilitates the trades of fixed income securities in a non-restricted environment among holders of different withholding tax statuses.

•• DEPOSITORY It serves both the Equity and Debt markets providing secure settlement, core safekeeping and corporate action activities for community members. It also provides electronic, real-time access for members to keep track of balances under guardianship. • It is capable of performing tax services for both the equities and fixed income markets.

••Safekeeping As a depository for the equities market, PDTC centralizes management of shareholders information through dematerialization.

•• Dematerialization eliminates the need to deliver paper certificates for securities traded, hence it eliminates the risk associated with maintaining physical certificates and speeds up the processing and settlement of a trade transaction. • The securities held in the depository are registered under the legal name

••Lodgement refers to the deposit of eligible securities into the PDTC Depository.

••Pledge Pledge is an electronic process by which securities can be flagged to serve as an accessory to a contract intended as collateral to a principal obligation.

••Pledge Initiation�The process will commence with the pledgor- participant entering the pledge instructions in the system. •The pledgee- participant will confirm the entries made by the pledgor- participant consistent with their pledge agreement.

••PDTC shall have no obligation to verify the terms of the Pledge or compliance therewith by either party thereto. •Securities that have been pledged are flagged in the pledgor’s securities account and shall not be eligible for any transaction unless confirmed by the pledgee- participant.

••All dividends, rights and entitlements due for the pledged securities shall pertain to the pledgor- participant.

••Pledge Closure�This shall pertain to the full release of the pledged securities upon the agreement of both the pledgor/ pledgee- participant.

•●Corporate Action Corporate Action refers to an action taken by an issuer as a corporate entity requiring (mandatory events) or involving the participation (voluntary events) of the holders of its Securities, such as but not limited to shareholders meetings, interests, dividends, redemptions and right offerings.

••PDTC computes the entitlements for all securities lodged with the Depository. The amount of entitlement for lodged securities in respect of a Corporate •Action shall be determined based on:

•→Total number, as of Record Date, of the proper Securities registered in the name of Depository Nominee →The number, as of Record Date, of the proper Securities in the Securities Account of each Participant, as computed and confirmed by the Transfer Agent and reconciled by PDTC, rounded down to the nearest whole number or centavo as the case may be.

••Entitlements are paid and distributed by PDTC Depository by crediting the bank account and/or the securities account of the Participants.

••Upliftment Upliftment refers to the withdrawal of securities from the PDTC Depository. •Upon entry of the Uplift instructions by the Participant, the Securities sought to be uplifted shall be frozen in the Participant’s Securities Account and shall no longer be eligible for Settlement through the PDTC System.

••The Uplift Instruction may be cancelled by the Participant at any time prior to its confirmation by PDTC. •Upon confirmation from the Transfer Agent or Registry that the Securities have been deducted from the holdings of the Depository Nominee, the uplifted securities shall be debited from the Securities Account of the Participant.