Business World, 23 January 2013


In the present “straight path” regime of President Aquino, one would think that the days of corrupt officials and financial schemers and scammers will be numbered. Apparently not. I’m referring to the activity of an amorphous organization, the Philippine Dealing and Exchange Corporation (PDEx) which has been lording it over the trading of government securities (GS) in the secondary market in the previous Gloria Macapagal-Arroyo administration. To date, after three years of the Aquino III administration, nothing has changed.

If you were to engage in secondary trading of government securities, you cannot avoid doing business with PDEx. This private sector (it’s got to be: none of its officials are appointed by Executive officials) organization dominates, monopolizes, trading of government securities. Its existence is a demonstration of government failure of commission or omission, aided by senior public officials who failed to exercise their responsibilities or have simply turned a blind eye on what is likely to be the worst financial scam in Philippine history.

Let me be clear: President Aquino has nothing to do with PDEx. It was born long before his presidency. It was organized under hazy circumstances, nurtured and blossomed under the GMA administration. But by allowing its existence to continue is an act of omission. And when finally its unjustified existence is unveiled and the financial mess it has created exposed, Mr. Aquino might be blamed for presidential inaction and neglect.

The sooner this growing financial mess is nipped the better. If one trades — buy or sell — government securities in the secondary market, one has to pay PDEx. Why and why to PDEx?

The responsibility for securing the integrity of government treasury bills, notes and bonds, both their initial issuance and subsequent trading, is the responsibility of the Department of Finance (DoF).

The Securities and Exchange Commission (SEC) has no role in it. The SEC is responsible for corporate bonds not government securities.

Assuming that the DoF can delegate its functions to a private partner, such as the “mapping” of secondary transactions of GSs, then the appropriate thing to do is conduct a public bidding for such services. The Procurement Reform Act requires the conduct of competitive public bidding in the procurement of services. This way the best private institution will be chosen and the government will get the highest compensation from the winning bidder.

But then, it is questionable if the Treasury can bid out the “mapping” services because of the confidentiality of GS transactions. Worse, PDEx is foreign-owned.

Right now, PDEx is exercising what is clearly a DoF function without the benefit of public bidding. This act is highly disadvantageous to the government. The Commission on Audit should look into this. At the same time, the Ombudsman should look at the liabilities of public officials responsible for this messy affairs.


PDEx collects ad valorem fees from both buyers and sellers of government securities. It collects fees even from transactors who didn’t use its trading platform, charging them purportedly for “mapping” purposes.

Which agency of the government gave PDEx the privilege of collecting fees? This is a questionable act. By definition, if the fees are coercive in nature, then it is a tax. But since the fee is mandatory, paid for by sellers and buyers alike, it takes the nature of a tax.

But under the Philippine Constitution, only Congress may pass tax laws. So, who gave PDEx the power to tax? Which agency of the government usurped the powers of Congress?

A fundamental tenet in taxation is that the real burden of any tax falls on real people (shareholders, workers, consumers) and not on corporations, banks or traders. The higher the fees (taxes), the higher the burden. Imagine its impact on financial intermediation.


The last time this convoluted issue was brought to the public eye was on March 22, 2011. The Senate committee on banks, financial institutions and currencies conducted a hearing to look at the proposed Senate Resolution No. 347, “Resolution… to Conduct an Inquiry in Aid of Legislation into the Implementation of Republic Act No. 8799 which has Resulted in Undue Delegation, Monopoly and Restraint of Trade and Violation of Other Related Laws such as the General Banking Law and the Secrecy of Bank Deposits Act with the End in View of Enacting Legislative Measures to Address the Same and Protect National and Financial Security, and the Investing Public.”

The hearing was presided by Senator Francis Escudero, chairman of the sub-committee on fixed income securities. Senator Sergio Osmeña III, chairman of the committee on banks, financial institutions and currencies, was also present.

The hearing was attended by no less than the Bangko Sentral Governor, the Chairman of the Securities and Exchange Commission, the Deputy Treasurer, and prominent personalities from the Philippine financial world — past and present.

Both Escudero and Osmeña asked the right questions. Not surprisingly, none of the top government officials took responsibility for giving the PDEx the cloak of legitimacy that it now enjoys. Even some of the prominent banking and finance officials tried very hard to dodge questions and issues raised by the two senators and their counterpart in the House of Representatives, Congressman Luis Villafuerte.

It is clear that none of the senior public officials present were willing to acknowledge paternity for PDEx’s birth. This suggests that there must be something terribly wrong with it.

Unfortunately, the Senate hearing was adjourned before any of the major issues were resolved.

Two years later, I am not aware of any subsequent Senate hearing on the matter. But it is important that the conversation on the issue should continue in order to clarify issues and to introduce amendments to existing laws, where warranted.

In the meantime, the Aquino government has been installed in July 2010. The BSP Governor has been reappointed. The Finance Secretary, who served but resigned the previous administration is back. A new National Treasurer, new SEC Chairman, and new Commission on Audit Chairman have been appointed. Surprisingly, despite the present administrations commitment to good governance, openness, and fiscal responsibility, nothing has changed. The financial scam continues.

Every day of delay means that a private institution continues to rake in billions of pesos in the guise of performing public function. Worse, a big chunk of the funds collected goes to foreign investors, since 80% of PDEX shares are owned by foreign institutions.

The existing arrangement is going to make the cost of public borrowing costlier. Because of its monopoly power, PDEx can charge any fee it wants. Potential buyers of government securities will certainly consider the uncertainty of how much PDEx will charge in the future (already unreasonable high according to some traders) for transactions of government securities. The DoF authorities should fret about this, since it is expected to borrow heavily from domestic sources in the next few years.

To date, the outstanding government securities stood at more than 3 trillion. The government is expected to borrow some half a trillion pesos or more in the next few years. The cost of government borrowing is going to be higher because of the PDEx fees. The higher the stock of government securities, the higher the costs of borrowing for the government, and the higher the returns to PDEx owners.

Why allow a privileged few — and mostly foreigners at that — get away with tons of money on their way to their banks at the expense of bank shareholders and government securities owners, including small savers?

It would have been more acceptable if the fees (taxes) for secondary trades of GS are collected by the government, rather than PDEx. Because then the taxes will form part of public funds which can then be used to build roads, bridges, schools, health units, and other public infrastructure.

What is the President, the legislators and other public authorities doing to correct what is patently wrong? One can’t talk of good governance at the same turn a blind eye on this grand financial scam.