Business World,


First of 3 parts

This is an incredible and deplorable saga of how a bunch of private, financial opportunists (PDS Group), in connivance with top bankers and key public officials (from Bangko Sentral ng Pilipinas (BSP), Department of Finance, Treasury, and Securities and Exchange Commission (SEC), have enriched themselves at the expense of the Filipino people. The scam continues. I wonder why the present administration, which is supposed to be committed to good governance, has totally ignored it.

When the story is finally told, the ordinary man on the street would have the right to be mad at its political leaders. Indeed, he would have the right to ask: How can any decent and self-righteous administration allow such monumental financial scandal to exist and persist?

This is a story of how trading of the country’s government securities (GS) has been monopolized by a small group of private individuals, with the active participation of the SEC, the BSP, the Secretary of Finance and the National Treasurer, in gross violation of the constitutional provision against illegal monopolies and combinations in restraint of trade.

The members of the Senate and the House should pay keen attention to this great financial scam as they put flesh and blood to the skeletal constitutional provision against illegal monopolies and combinations in restraint of trade.

Trading of GS is DOF’s call

The sale and secondary trading of government securities is outside the domain of the Securities and Exchange Commission. Thus, when SEC assumes jurisdiction over the trading of government securities, it commits grave abuse of discretion. Even worse is SEC’s act of conferring a non-existent authority on PDEx, a purely private non-profit entity.

Below is the chronology of this tale of opportunism, government failure and regulatory capture:

August 10, 2000 — The Chairman of the Bankers Association of the Philippines (BAP) Open Market Committee raised the idea of setting up a fixed income exchange in the guise of promoting market reforms in response to the 1997 Asian financial crisis.

Sept. 14, 2000 — The BAP Board formalized the recommendation to organize the fixed income exchange. Board Resolution 2000-10 authorized the creation of the fixed income exchange and the formation of a working team that will put together the plans for the project. Thus, the fixed income exchange project was born. An advisory company called BAP Consulting Inc. (BAPCI) was organized to account for all activities and expenses. The intent was to eventually upgrade BAPCI to be one of the component entities of the fixed income exchange project.

Jan. 11, 2001 — BAP, through Resolution 2001-10 allocated ₱5 million from the funds of the BAP-Credit Bureau, Inc. for the pre-operating and other expenses related to the incorporation of BAPCI.

April 14, 2001 — BAPCI was incorporated. The corporation was later renamed Philippine Dealing System Holdings Corp. It was eventually decided to implement the work through a group of related companies composed of:

1. PDEx, which was to provide the trading platform for fixed income securities,

2. PSSC, which was to operate as a central clearing and settlement institution for trading activities,

3. PDTC, which was to act as depository, registry, custodian for fixed income securities, and

4. PDSHC, which was to be the holding company for three corporations.

The group of companies later came to be known as the “PDS Group.”

July 12, 2001 — In the BAP Board Meeting, it was reported that ₱500 million in initial capital would be needed to start the fixed income exchange (FIE). The Board approved an investment of ₱100 million in the FIE, to be allocated among BAP members.

August 9, 2001 — The BAP Board issued Resolution 2000-15 setting forth the scheme for allocating the said investment, to be based on the asset size of each bank.

Earlier, in 2002, BAP sought the approval of BSP to allow member-banks to invest in a “fixed income exchange.” But at that time the FIE did not yet exist. PDEx was only incorporated on June 17, 2003.

July 18, 2002 — BSP issued Circular No. 338 which amended Section X380 of the Manual of Regulations for Banks by adding “Fixed Income Exchange” as one of the “non-financial allied undertakings” in whose equity universal banks, commercial banks and thrift banks may invest. Since the BSP tightly controls the investment of banks in the equity of other businesses, the natural consequence of Circular No. 338 was to encourage member-banks to invest in the equity of the FIE.

April 10, 2003 — BAPCI issued a document which it called “Information Memorandum” pertaining to an offer of up to 5,000,000 common shares at an offer price of ₱100 per share to be issued only to qualified investors through negotiated payments. Subsequently, BAPCI went on a road show and raised the desired capital.

Undercapitalized, yet doing quasi-bank functions

June 17, 2003 — PDEx was incorporated as an Exchange for fixed income securities, with an authorized capital of ₱150 million. The primary purpose set forth in its articles of incorporation states:

“To carry on business as an Exchange by providing and maintaining a convenient, transparent, efficient and suitable automated platform and infrastructure for the issuance, trading, dealing, brokering, and exchange of fixed income securities, monetary instruments, and their derivatives, including but not limited to bonds, notes, debentures, bills, commercial papers, participations, trusts, asset-backed securities, and quasi-debt securities, as well as currency and currency-based or other monetary instruments, as well as options, swaps, futures, forwards, or other derivatives involving any of the foregoing, whether issued by a private, public, or government entity (collective, the Instruments) to provide an efficient price discovery mechanism in order to promote market transparency and increase market liquidity for these Instruments to deepen, broaden, and diversify the capital market with respect to these instruments; and to develop, manage, and execute rules, principles, standards, and market conventions in the trading, dealing, brokering, and exchange of these Instruments according to global best practices, and regulate its participants and the market as a self-regulatory organization, with the power to impose fees and penalties.”

Comments: How can the SEC allow government securities which are exempt securities to be included in the scope of PDEx’s authority as fixed income exchange? Why was PDEx given an SRO (self-regulatory organization) status for the OTC market, in violation of the SRC? Why did the BSP allow the undercapitalized PDTC that deals with multi-trillion transactions to operate as a quasi-bank? Who gave PDEx virtual taxing powers without enabling legislation? Who granted PDEx the power to penalize member-banks, including the power to refuse membership, thus constituting restraint of trade, which is unconstitutional?