Business World, 20 June 2013


Last of 3 parts.

The emergence of the PDS Group as a trilateral monopolist lording it over the secondary trading of government securities could not have come about without the active support and assistance of the Bangko Sentral ng Pilipinas, the Securities and Exchange Commission, the Department of Finance and the Bureau of the Treasury.

The amount involved is enormous. The total volume of government securities transacted through PDEx from 2005 to Dec. 31, 2010 amounted to ₱12 trillion. The fees and income generated amounted to ₱2 billion. These exorbitant fees, paid for by sellers and buyers, and whether the PDEx trading platform was used or not, made investing in government securities costlier, and the burden was borne by the Filipino people.

SEC illegally expands its mandate

On March 22, 2011, a Senate investigation against PDS group was conducted by the subcommittee on fixed income securities market of the Senate committee on banks, financial institutions and currencies. In that hearing, then SEC Chairman Fe Barin was asked why the SEC included government securities in the definition of “securities” found in Section 3.1 of the SRC. Her reply:

“… Whether or not government securities are securities within the purview of Section 3 is still a question. But in another section, in a following section, I guess it’s Section 9, it’s clearly there. First, government securities were denominated as securities and they were only exempt from registration. There is no other provision in the Securities Regulation Code that exempts government securities from any other rule or regulation prescribed in the SRC. And that’s why the commission unanimously thought that for purposes of secondary trading — that to limit the exemption of government securities where it is expressly provided for in the SRC which is a very specific section providing that it is exempt from registration. That is the only exemption that we see for government securities.”

Wrong answer, Atty. Barin! Her opinion is contrary to the provision of Republic Act 245, as amended by P. D. 142 which states that the “issuance, placement, sale, servicing, redemption and payment” of government securities are prerogatives to be exercised by the Secretary of Finance.

On the trading in the secondary market of government securities, R. A. 245 was equally clear. The Secretary of Finance is vested with power and authority under Section 4 “to prepare and issue such rules, regulations and instructions as he considers necessary for the successful achievement of the purposes of this Act. He shall particularly take such measures as he may deem necessary to protect the Republic of the Philippines and the investing public from fraud or loss.”

On Jan. 3, 2011, Rep. Luis R. Villafuerte, vice-chairman of the House committee on banks and financial intermediaries, wrote a letter to SEC, and raised, among others, the following issues:

• Whether PDEx, a stock corporation, already registered as a fixed income exchange (FIE) and already accorded the status as the SRO for such an exchange could still be legally registered as the operator in over-the-counter (OTC) market and accorded the status of the SRO in such OTC market.

• Does the SEC agree that either a fixed income exchange or a registered OTC market operator or SRO cannot exclusively operate to the exclusion of other trading markets that may be organized as the SEC is empowered under the SRC to determine the number, size, and location of other trading markets?

• Does the SEC agree that even if there is a duly registered SRO in an OTC market that such SRO cannot compulsory require any registered broker or dealer to become a member of a registered association because as expressly provided in Chapter X, Section 39(b) that membership is voluntary and not mandatory?

• Can PDEx, an alleged SRO in the OTC market, assuming such an SRO is validly organized and registered with SEC, disenfranchise an SEC-registered dealer in the “fixed income securities market” because allegedly the SRO can prevent the SEC license as dealer to be used or carried out by said SEC licensed dealer?

• Can PDEx, an alleged SRO in the OTC market, order other SEC licensed dealers not to transact with an SEC licensed dealer that has not applied for “membership” in PDEx or has terminated its “membership” in PDEx or ceased to be a “member” of PDEx, thereby shutting out from the OTC market such SEC licensed dealer that refuses to participate in the PDEx OTC market operations?

On Jan. 17, 2011, Mr. Villafuerte received a reply from SEC. The reply contained the following admissions:

“The Commission agrees with your view that a ‘Fixed Income Exchange or a registered OTC market operator or SRO cannot exclusively operate a market to the exclusion of other trading markets’ as the power to determine the number, size, and location of trading markets is vested with the Commission pursuant to Subsection 36.3….”

“It follows that PDEx cannot compel participants to course their trades of exempt securities and exempt transactions exclusively to the PDEX trading platforms. The trading participants, whether members of PDEX or not, may course their transactions in other platforms….”

“The Commission agrees with your view that an SRO cannot compel any registered broker or dealer to become its members. …The registration granted by the Commission to a broker or dealer can only be revoked, suspended or a limitation placed thereon by the Commission pursuant to Section 29 of the SRC….”

Unhappy with the reply, Villafuerte wrote a follow-up letter to Chairman Barin on Feb. 24, 2011. On March 23, 2011, Barin replied that since Villafuerte’s questions require time to study, the SEC’s reply has yet to be finalized. The reply never came. That month, Barin retired and was replaced by litigation lawyer Teresita J. Herbosa.

On Nov. 28, 2011, Villafuerte wrote a letter to the new SEC Chairman Herbosa to seek confirmation of some points conceded by her predecessor.

Reassuring reply, disappointing lack of action

On Nov. 23, 2011, SEC Chairman Herbosa replied confirming that:

(a) SEC does not authorize any entity to exclusively operate, to the exclusion of other entities, a trading market or an inter-institutional market in government securities or to act as SRO in such OTC market in government securities;

(b) there is no legal impediment for the Money Market Association of the Philippines (MART) or other entities from applying to operate an OTC Market and be recognized as SRO for such OTC market, subject to compliance with the requirements of the SRC and its implementing rules’

(c) an SRO cannot compel any broker or dealer to become its member because membership in the SRO is voluntary; and

(d) PDEx cannot compel trading participants to course their trades of exempt securities and exempt transactions exclusively through the PDEx trading platforms.

Yet, despite the Chairman’s reassuring reply, nothing has changed. The financial scam perpetuated by the trilateral monopoly continues.

SEC has yet to revoke or amend its OTC rules which makes it compulsory for brokers and dealers to join an SRO for the OTC market, thus making it a monopoly.

SEC has yet to lift the one-year deadline from Jan. 30, 2008 for other groups to form and register an SRO, thus making it not possible to form another SRO.

SEC has yet to withdraw its warning that brokers and dealers who continue to trade in the OTC but who are not members of a registered SRO shall be considered in violation of OTC rules.

“The more things change, the more they stay the same,” French critic and novelist Jean-Baptiste Alphone Karr once said. Indeed, A new President of the Republic has been elected and a new SEC chairman has been appointed, yet the great financial scam continues.