sec presentation sbl june 22 2006

8/9/2019 SEC Presentation SBL June 22 2006

1/35

Securities and Exchange Commission

REGULATORY FRAMEWORK FORSECURITIES BORROWING AND LENDING

IN THE PHILIPPINES

By: JOSE P. AQUINO

Director, Market Regulation Department, SEC

PSE SECURITIES LENDING SEMINAR 2006

Philippine Stock Exchange Auditorium, Pasig City, Philippines

June 22, 2006


2/35


3/35


ELEMENTS OF SBL TRANSACTION

1. The lender temporarily transfers thetitle over borrowed securities to the

borrower.

2. The borrower provides the lenderwith collateral as security for the

loan. The parties may agree that the

title over collateral securities shall

likewise be transferred to the

lender.


4/35



3.The lender earns a fee as consideration

for the loan.

4.The borrower is entitled to the economicbenefits of owning the borrowed

securities but the borrower is obliged to

create or manufacture equivalent

benefits and deliver these to the lender.


5/35



5. A lender of equity securities loses titleover said securities and so he is not

entitled to vote, but may reserve the

right to vote.

6. At the end of borrowing period or

maturity of the loan, the borrower

returns the borrowed securities orequivalent to the lender

while the lender returns the collateral.


6/35


MODES OF CONDUCTIONG SBL

*THROUGH LENDING AGENT

*DIRECT LENDING

*OTHER SCHEMES

THAT MAY BE APPROVED BY SEC:

*Lending Pool System

*Competitive Auction

*Bid Offer

*Others


7/35


LENDING AGENT

* A juridical person who acts on

behalf of a client with respect to

the lending of securities.

* No person shall act as lending

agent unless registered as such

by the SEC.


8/35


REGISTRATION REQUIREMENTS FOR

LENDING AGENT

a. Application Form.

b. Board Resolution/Authorizationallowing the lending agency service.

c. Organizational and functional charts

of the securities lending unit.


9/35



LENDING AGENT

d. Names and Curriculum Vitae

of securities lending unit personnel.

e. Detailed description of automated

Securities Lending System.

f. Manual containing risk management

and internal control procedures.


10/35



LENDING AGENT

g. Copy of BSP license if the applicant is

accredited securities custodianfor banks and NBFIs

h. A registration fee of Php 50,000.00

i. Copy of pro-forma MSLA

j. Copy of pro-forma SLAA


11/35


OTHER REQUIREMENTS

FOR LENDING AGENT

*Securities Lending System

* Securities lending unit personnel

with functional knowledge and

sufficient technical expertise in

operating the securities lending system


12/35


THIRD PARTY SERVICE PROVIDER

The lending agent may appoint a thirdparty to perform any or all the functionsof the Securities Lending System.

Provided that, the engagement of a thirdparty service provider be disclosed in theapplication.

Provided further, the lending agent shallbe accountable for the acts, errors andomissions of third party service provider.


13/35


BASIC REQUIRED FUNCTIONS OF

SECURITIES LENDING SYSTEM1. Provide price quotation, trade matching

and confirmation services.

2. Run a lender selection process ifnecessary.

3. Deliver the borrowed securities to the

account of the borrower.


14/35



SECURITIES LENDING SYSTEM

4. Receive collateral securities from the

borrower.

5. Perform daily valuation of borrowedand collateral securities.

6. Determine the adequacy of total

collateral value against total market valueof borrowed securities for each borrower.


15/35




7. Issue margin calls or effect margin

releases as appropriate.

8. Track corporate actions on borrowed &collateral securities, collect & distribute

benefits to the borrower & lender.

9. Execute loan and collateral return andrecall processes.


16/35




10. Receive borrowed securities from the

borrower on maturity date.

11. Return collateral to the borrower atthe end of borrowing period or earlier.

12. Collect lending fee on agreed due date

and distribute the same to the lender.


17/35




13. Inform borrower of the occurrence of

default.

14. Report failed settlements.

15. Monitor foreign ownership of equity

securities.


18/35


WHO MAY ENGAGE IN DIRECT LENDING

1. Domestic banks & branches of foreign banks

2. Investment houses

3. Investment companies

4. Insurance companies

5. Pension funds or retirement plans

6. Securities dealers7. Entities that may be authorized by the SEC.


19/35


REQUIREMENTS FOR DIRECT LENDING1. MSLA between Borrower and Direct Lender

2. Securities Lending System of Direct Lender

NO REGISTRATION REQUIREMENTS WITH SEC


20/35


PROVISIONS IN THE MASTER

SECURITIES LENDING AGREEMENT

1. Capacity of parties

- principal, agent, other capacity

- a party may be lender in one

transaction but borrower in another

2. Term of loan

- open/on demand, specified/fixed


21/35




3. Requirements for delivery of securities

4. Eligible collateral & Collateralmanagement procedures

5. Statement that there is transfer of title

over the borrowed securities (and overcollateral securities, if agreed)


22/35




6. Valuation methodology

7. Arrangement for dealing with

manufactured dividend, payment, votingright, corporate action

8. Return and recall of securities and

consequences


23/35




9. Events of default & remedies of parties

10. Grounds for termination of loan and

rights of parties upon termination

11. Lending fee & other charges

12. Representations, warranties and

liabilities of parties

13. Dispute resolution


24/35


LOANABLE SECURITIES

1. Securities listed in an Exchange

2. Securities issued by Bureau Treasury

3. Securities issued by BSP4.Other securities allowed by SEC

Provided, the securities are in electronic form or, ifcertificated, must be in electronic form at the time

of SBL, and free from all liens and

encumbrances.


25/35


ELIGIBLE COLLATERAL

1. Cash

2. Securities listed in an Exchange

3. Securities issued by Bureau Treasury4. Securities issued by BSP

4.Other forms allowed by SEC

Provided, collateral securities are in electronic form or

if certificated, in electronic form at the time of SBL

and free from all liens and encumbrances.


26/35


DELIVERY OF

BORROWED SECURITIES

* After the delivery of collateral, or

*Simultaneous with the delivery ofcollateral.

The parties shall execute documents

or issue instructions to ensure that thetitle over the borrowed securities shall

pass from lender to borrower.


27/35


DELIVERY OF COLLATERAL

Be deposited or delivered

to the account of lender

* Prior to the delivery of borrowed

securities, or

* Simultaneous with the delivery of

borrowed securities.


28/35


OPTIONS OF PARTIES REGARDING

COLLATERAL SECURITIES

1. Provide in MSLA that title over

collateral securities shall also pass

from borrower to lender.

2. Provide in MSLA that the collateral

securities shall be pledged to lender,

or other arrangements.

* Consider tax impact and risk.


29/35


COLLATERAL LEVEL

* By agreement of parties.

* If without agreement:

At least 102% of current market valueof borrowed securities, if the collateral

is in the form of cash or GS.

At least 105% of current market valueof borrowed securities, if the collateral

is in the form of equities.


30/35


OTHER REQUIREMENTS ON

COLLATERAL

* Mark to Market at least once daily.

* Margining method may be done on:

- Aggregated or per account

- Loan by loan or per transaction

(Must be indicated in MSLA)


31/35


RESTRICTION ON FOREIGNERS

*Cannot borrow from Filipinos suchequity securities of companies

engaged in activities whose

foreign ownership is limited

by the Constitution & other laws

IF there is no mechanism monitoring

foreign ownership.

(eg. public utility companies)


32/35


TERMINATION OF LOAN

* Borrower to return borrowedsecurities or equivalent.

(If not, then default. Transaction

deemed sale transaction with

corresponding tax impact)

* Lender to return collateral.


33/35


*DOCUMENTATION Confirmation Notice

specifying details of SBL transaction.

*RECORD KEEPING Lending Agents and

Direct Lenders

must keep SBL ledgers.

*REPORTING- Lending Agents and Direct

Lenders to submit to SECbi-annual Summary Report

of SBL transactions.


34/35


COMPLIANCE WITH BIR RULES

For SBL transaction to qualify for tax

exemption, the parties must comply

with BIR regulations.

(eg. Registration of MSLA with BIR

within specified period)


35/35


THANK YOU

sec presentation sbl june 22 2006

Documents