SEC Certification Exam Phase 2 (2) PDF
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This document is a past paper for a financial examination, it details the trading rules and regulations of the Philippine Stock Exchange. Understanding stock market operations, procedures, and rules are key aspects of the examination.
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TP Trading participant PHASE 2 I. Philippine Stock Exchange PSE Trading Rules Trading Operations Definition of Terms 1. Best Bid and Offer BBO- the highest buying price and the lowest selling price 2. Reference Price shall be:...
TP Trading participant PHASE 2 I. Philippine Stock Exchange PSE Trading Rules Trading Operations Definition of Terms 1. Best Bid and Offer BBO- the highest buying price and the lowest selling price 2. Reference Price shall be: ○ a. the previous Trading Dayʼs Closing Price ○ b. the Adjusted Closing Price ACP in the event of corporate actions that would result to an adjustment of the Closing Price; or ○ c. the Last Traded Price or the Last ACP in cases where there is no trading activity for the Security in the immediately preceding Trading Day 3. Trading Threshold- the allowable price range for any Security as may be determined by the Exchange from time to time ○ A. Static Threshold Trading Band)- shall mean the lower and upper price limits (i.e., ceiling and floor prices) of Securities for a given Trading Day ○ B. Dynamic Threshold- the permitted difference in price between two Last Traded Price updates for a given security ○ Ex: A stock closes at ₱100 yesterday. Static Threshold: The stock can trade between ₱50 and ₱150 for the entire day. Dynamic Threshold: If the last traded price is ₱120, the stock can only trade between ₱114 and ₱126 for the next interval. If the price hits ₱126, a cooling-off period is triggered. 4. Board Lot- the standardized number of shares set by the Exchange based on a given price range for a Security. ○ Ex: For most stocks, a board lot might be 100 shares. If you want to trade, you must buy or sell in multiples of 100 shares (e.g., 100, 200, 300 shares). 5. Price Fluctuation Tick Size)- the allowed price step based in a given price range for a Security ○ Ex: If the tick size is $0.01, a stock priced at $50 can move up or down in increments of $0.01 (e.g., $50.01, $50.02, etc.). 6. Odd Lot- an order with volume or quantity less than the defined Board Lot Trading Schedule Trading Day- Everyday shall be a Trading Day except for Saturdays, Sundays, legal holidays, special holidays, days when the Bangko Sentral ng Pilipinas BSP is closed, and such other days as may otherwise be declared by the SEC or the Exchange to be a non-Trading Day. Trading Hours 900AM PREOPEN Orders are accepted but no matching occurs 915AM PREOPEN No cancel): Orders can no longer be cancelled 930AM OPENING Opening prices are calculated CONT. TRADING Continuous order queuing and matching 1200NN MARKET RECESS No orders can be posted; no order modification and cancellation 130PM CONT. TRADING Continuous order queuing and matching 245PM PRECLOSE Orders are accepted but no matching occurs 248PM PRECLOSE No cancel): Orders can no longer be cancelled 250PM CLOSING Closing prices are calculated RUNOFF/TRADING AT LAST: Trading continues but only at closing prices 300PM MARKET CLOSE Page 1 of 45 TP Trading participant Order Types 1. Limit Order ○ A limit order specifies the maximum price you are willing to pay for a buy order or the minimum price you are willing to accept for a sell order ○ Entered with a specified price within the instrumentʼs defined authorized limit, as set by the Exchange ○ Any remaining unexecuted portion of a Limit Order will be added to the Central Order Book at the entered limit price 2. Minimum Quantity ○ Orders which must be executed immediately to the extent of a specified minimum quantity, with any remaining unexecuted portion being added to the Central Order Book; ○ In case of Order with Minimum Quantity, the Minimum Quantity specified must be filled immediately upon order entry otherwise order will be eliminated. ○ Minimum Quantity applies only to the first trade. (the Minimum Quantity condition is enforced only for the initial execution of the order. After the first trade that satisfies the minimum quantity requirement, the remaining quantity of the order can be executed in smaller lots without the minimum quantity restriction.) 3. Iceberg Disclosed) Quantity: Orders which are successively entered in the Central Order Book, and disclosed to the market at specified tranches ○ Purpose: This is used to reduce the market impact of large orders and prevent signaling effects that might influence price movements. ○ Example: Total Order Quantity: 10,000 shares Disclosed Quantity: 1,000 shares Only 1,000 shares will appear in the order book at any given time. Once this is filled, another 1,000 shares are disclosed until the total 10,000 shares are executed. Page 2 of 45 TP Trading participant By Lot Size 1. Normal Main order with volume in multiples of the board lot 2. Oddlot: order with volume less than the board lot or minimum shares requirement Account Code All investors must be identified with a PSE account code The account code will identify the investor type and its nationality flag Account code must be used when posting order for an investor in the PSE trading system Each account code must correspond to a unique back-office code in the TPʼs system By Account Type Principal if order is for the account of the Broker-Dealer Retail if order is for a Taxable Retail Client Institutional if order is for a Taxable Institutional Client Tax-exempt if order is for a Tax-Exempt Client Aggregate if order is for various clients that are grouped such as funds Related Party if order is for the owner, director, officer, employee or other associated persons of the Corporate Trading Participant Error if order is to offset a trading error like overbuying or overselling By Nationality Local if order is for local investors Foreign if order is for foreign investors Foreign Ownership Limit Certain securities have ownership limit restriction to foreign investors The trading system automatically adjust the foreign ownable shares as orders/trades occur in the market The system will reject any incoming foreign buying order that will breach the foreign limit Trade Amendment Amendment of account codes is allowed provided that it comply with the following provisions: Local account code can only be amended to another local account code and error account Foreign account code can only be amended to another foreign account code and error account Nationality of error account will always follow the nationality of the broker Aggregated account cannot be amended A processing fee of ₱100.00 will be charged for every amended contract Deadline for submission of amendment is 1200 nn of T1 Page 3 of 45 TP Trading participant Aggregation of Client Orders a. Trading Participant shall maintain an account code that exclusively caters to aggregated Orders; b. Trading participants shall ensure compliance with the System Order Ticket Rule and Best Execution Rule when aggregating an Order of a client with the order of another client; c. Salesman/ Traders shall not aggregate the Order of a client with their proprietary account; d. A foreign aggregated Order can be unbundled into a foreign, local and/ or error account; e. A gated Order can only be distributed to local clients and/ or error account; Partially Matched Aggregated Order: Distribute in a fair and reasonable manner, consistent with the best interest of the clients. Done-Through Transaction a trade that is executed at a price that falls outside the prevailing market bid-ask spread. A Trading Participant TP may execute a transaction through another TP Only client orders can be subject of a Done-Through transaction Done-through transaction is always composed of a requesting TP and an executing TP Executing TPs shall maintain a designated account for done-through transactions Done-through orders cannot be part of an aggregated order Amendment of done-through transaction is prohibited Both the requesting and executing TPs shall report to CMIC the details of the done-through transaction no later than 1200nn of T1 Trading Thresholds 1. Static Threshold (also known as trading band) ○ the maximum price allowed for the day ○ Currently set at 50% up and 30% down from the previous close price ○ An incoming order with a limit price beyond the Lower or Upper Limits will be rejected by the system 2. Dynamic Threshold DT ○ allowable price change from one trade price to the next trade price ○ triggered during continuous trading only ○ securities are grouped into three clusters: Security Trade Frequency Qualifier DT % A traded 20 times or less in the past six months 20% B traded 500 times or less but greater than 20 times in the past six months 15% C traded more than 500 times in the past six months 10% Types of Board Normal Market ○ Continuous matching based on Price-Time-Broker Priority ○ Trading at the defined board lot and price fluctuation Block Sales ○ Big lot transaction which is negotiated between parties Oddlot Trading ○ Trading of shares less than the defined board lot Page 4 of 45 TP Trading participant Cross and Automatic Cross Transaction Cross transaction: trade where the buyer and the seller of a security are represented by the same broker or trading participant Cross transactions shall be made only in accordance with the following requirements: a. Its price shall be within the BBO; b. In the absence of the BBO, the price shall observe the limitations set out in the Implementing Guidelines; c. It shall not be entered during the Pre-Open/ pre-Close Period; d. When done during the Run-Off/Trading-at-Last period, it shall be at the Closing Price; e. All pre-arranged transactions meeting the requirements set by the Exchange shall be executed in the Block Sale Market and not through a Cross Order entry. Automatic Cross There shall be an automatic cross during the Market Open/Continuous Trading and Trading-at-Last/ Run-Off Period TP has a posted Order and posts another counterpart Order at the same or better price. In such events, the Trading Participant shall have the priority among other Trading Participants Odd Lot Allows trading of shares less than the defined board lot Partial matching of odd lot orders is allowed No dynamic threshold for odd lot market Price of odd lot is subject to the static threshold the same as the Normal Market Oddlots can be traded only during the Continuous Trading Phase 930 – 1200 and 130 – 315 Order Modification Modification of orders is not allowed during the last 15 minutes of the Pre-open period and last 2 minutes of the Pre-close period. A posted and unmatched Order may be modified without losing its priority in the Order queue if it involves any or a combination of the following: ○ i. a decrease in its volume; ○ ii. a modification of validity type; or ○ iii. a modification of client account code. A modified Order loses its priority when it involves any or a combination of the following: ○ i. an increase in its volume; ○ ii. a modification of the price entered; or ○ iii. a modification of the trigger price entered. Order Cancellation Cancellation of orders is not allowed during the last 15 minutes of the Pre-open period and during the last 2 minutes of the Pre-close period. However, the Exchange will cancel all orders in the ff instances: ○ If the security has a corporate action that would affect the closing price ○ On ex-date for security which declared cash or property dividend ○ Security that crosses a board lot Page 5 of 45 TP Trading participant Trade Cancellation The Exchange cannot cancel matched Orders or Trades except in the following instances: a. Evident mistake b. Computer or system error Trading Halt a. The Exchange or the SEC may halt the trading of a Security pursuant to existing Rules, applicable laws and regulations. b. Orders, other than Cross Orders, can be posted, modified or cancelled notwithstanding the Trading Halt of a Security. c. The trading of any warrant, preferred or any Security that directly derives its value from the Security subject of the trading halt will also be halted. Trading Suspension The Exchange or the SEC may suspend the trading of a Security pursuant to Rules, implementing Guidelines and applicable laws or regulations No order management Circuit Breaker Three 3 levels of Circuit Breaker is implemented in the PSE trading system, as follows: Level Circuit Breaker Duration of Halt Explanation 1 10% 15 Minutes PSEi decreases by at least ten percent 10%, trading will be halted for 15 minutes. Under the current schedule, level 1 CB can be triggered up to 225 p.m. 2 15% 30 Minutes PSEi decreases by at least fifteen percent 15%, trading will be halted for 30 minutes. Under the current schedule, level 2 CB can be triggered up to 210 p.m. 3 20% 60 Minutes PSEi decreases by at least twenty percent 20%, trading will be halted for 60 minutes. Under the current schedule, level 3 CB can be triggered up to 140 p.m. Each level of the Circuit Breaker shall be triggered only once at any given day. In the event that the percentage decline in PSEi breaches the higher level of Circuit Breaker, the duration of trading halt corresponding to that higher level shall be observed. In the event that the higher Circuit Breaker level is breached in the PSEi calculation update, the lower level shall no longer be triggered on that day. In the event that any of the Circuit Breaker levels is breached before Market Recess, market shall be halted for the corresponding halt duration period, which shall include the Market Recess period. Block Sale Rules Volume can be non-multiples of board lot Price may not follow the price fluctuation Can be executed intra-firm or inter-firm Requires submission of form and approval of the Exchange Execution can be done from Pre-open to Trading At Last Regular Block Sales Min value of Php 20M Price should be within the +/- 5% from the previous close Requires approval of the Market Operations Division MOD Head only Application shall be acted upon within 30 minutes from receipt Special Block Sales Min value of Php 50M Can be at any price Requires approval of the COO Page 6 of 45 TP Trading participant Supporting documents shall be submitted PSE will act on the application within two trading days SUMMARY 900AM PREOPEN Orders are accepted but no matching Cross transactions not allowed occurs Block sales 915AM PREOPEN No cancel): Orders can no longer be Cross transactions not allowed cancelled Order modification and cancellation not allowed anymore 915930AM Block sales 930AM OPENING Opening prices are calculated Cross transactions Automatic Cross Block sales CONT. TRADING Continuous order queuing and Odd lots matching Cross transactions Automatic Cross Block sales 1200NN MARKET RECESS No orders can be posted; no order modification and cancellation 130PM CONT. TRADING Continuous order queuing and Odd lots matching Cross transactions Automatic Cross Block sales Level 3 CB can be triggered up to 140PM Level 2 CB can be triggered up to 210PM Level 1 CB can be triggered up to 225PM 245PM PRECLOSE Orders are accepted but no Cross transactions not allowed matching occurs Block sales 248PM PRECLOSE No cancel): Orders can no longer Cross transactions not allowed be cancelled Order modification and cancellation not allowed anymore 248250PM Block sales 250PM CLOSING Closing prices are calculated Block sales RUNOFF/TRADING AT LAST: Trading continues Cross transactions (only @ closing price but only at closing prices if done during this time) Automatic Cross Block sales 300PM MARKET CLOSE Page 7 of 45 TP Trading participant III. Risk Based Capital Adequacy Ratio RBCA Rules Key RBCA Terms Minimum level of capital Required to be maintained by the TP at all times In relation to size and complexity of operations Incorporates different business risks Main objectives Manage TPʼs risk appetite level of capital vis-à-vis level of business risk Aid in complying with regulatory requirements Provide common denominator across all TPs. RBCA Rules If equal or more than 120% No problem If less than 120% but more Notify SEC in writing within 24 hours and daily thereafter than 110% 10 days to reduce total risk exposure Less than 110% TP to cease operations (to be put under temporary suspension) Notify SEC and CMIC regarding the breach Reportorial Requirements Bi-monthly submission of RBCA reports with SEC and CMIC (through iPSE Covered Period Date of Submission 1st to 15th day of the month 20th day of the same month 16th to 31st day of the month 5th day of the succeeding month RBCA Formula A Net Liquid Capital NLC. B Total Risk Capital Requirement TRCR A Net Liquid Capital NLC In laymanʼs terms, liquid assets less liquid liabilities ○ Excludes mostly non-current FS items and special deductions ○ Actual NLC should be more than the Minimum Required NLC ○ Required NLC = higher between 5 Million or 5% of Aggregate Indebtedness* In case of Breach: TP to cease operations; notify CMIC and SEC immediately Equity per books + Subordinated Liabilities - Deposit for Future Stock Subscription No Application with SEC - Deferred Income Tax Asset - Minority Interest. Equity Eligible for NLC - Contingent Liability - Guarantees or indemnities - Negative Exposure SCCP - Ineligible Assets (e.g. Fixed Assets, net of accumulated depreciation excluding those used as collateral) Net Liquid Capital Aggregate Indebtedness TPʼs total liabilities less non-cash liabilities, secured loans, and equity-converted loans 1,700% or less of NLC No problem Page 15 of 45 TP Trading participant More than 1,700% but less Notify SEC in writing within 24 hours and daily thereafter than 2,000% of NLC 10 days to reduce total risk exposure More than 2,000% of NLC TP to cease operations (to be put under temporary suspension) Notify SEC and CMIC regarding the breach B Total Risk Capital Requirement Business risks affecting a Trading Participant Operational: ORR = 20% of average of three-year gross revenues based on audited FS Position: PRR = Market value x Position Risk Factor Counterparty: CRR = Net Counterparty Exposure x Counterparty weight x Credit Risk Factor Large exposure B.1 Operational Risk Requirement ORR Operational risk can be defined as the risk of monetary losses resulting from inadequate or failed internal processes, people, and systems or from external events. ORR = 20% of average of three-year gross revenues based on audited FS Net of final tax, if applicable Losses not netted against revenues ORR must be less than Core Equity at all times ○ Core Equity = shareholders funds and other capital reserves In case of breach, TP must submit a capital build-up plan realizable within 90 days B.2 Position Risk Requirement PRR Market risk is the risk that the value of an investment will decrease due to moves in market factors. ○ Hedge Fund Consistency Index Sources of PRR ○ Held-for-trading securities of the TP such as: (a) Within the PSE Index (b) Outside the PSE Index (c) Equities not listed but marketable ○ Debt securities such as bonds and fixed income securities ○ Foreign currency accounts Type of Instrument Valuation Debt or Equities listed in the Exchange End-of-day closing prices or Bid price in the absence of closing prices Equities not listed but marketable Zero or last traded price, whichever is determinable Debt securities not listed Face value Foreign currency accounts End-of-day exchange rates from BSP or PDEx Haircut or Position Risk: Artificial reduction in the value of an asset to account for possible decline in the market value of such asset that can be realized through sale or continuing use of the asset. Equities Equities WITHIN PSEi 25% of total market value Equities OUTSIDE PSEi 35% of total market value Equities not listed but marketable 100% of total market value ROP Bonds or Treasury Bills Up to 1 year 1.2% of face value 1 to 5 years 3.9% of face value 5 to 10 years 5.3% of face value 10 to 20 years 7.6% of face value Page 16 of 45 TP Trading participant > 20 years 10% of face value Other Corporate Bonds Regardless of term 100% of face value Foreign Currency Accounts Based on translated amount 8% of translated amount PRR = Market value x Position Risk Factor Netting of long and short positions are allowed provided it is the same security Short positions generally are not subject to PRR B.3 Counterparty Risk Requirement CRR Credit risk arises from the potential that a borrower or counterparty will fail to perform on an obligation. CRR = Net Counterparty Exposure x Counterparty weight x Credit Risk Factor Customer receivable - Collateral, net of haircut - Allowance for doubtful accounts = Excess of Customer Receivable Provision for Doubtful Accounts CRR for Margin Accounts Margin Account Receivable - Collateral, net of haircut = Counterparty exposure x Credit risk factor 100% B.4 Large Exposure Risk Requirement LERR Risk of investing a proportionally large amount on: ○ (a) A particular counterparty ○ (b) A single issuer of debt security ○ (c) A single issuer of equity security or issuer group LERR for Single Client = Net counterparty exposure - 10% of Core Equity Based on net counterparty exposure Net counterparty exposure exceeds 10% of Core Equity Maximum exposure is 30% of Core Equity In case of breach, TP to report to SEC and CMIC all clients to which it is largely exposed to. LERR for Single Debt = Face value or market value of debt security - 10% of Core Equity) x Applicable Issuer position risk factor Maximum exposure is 30% of Core Equity In case of breach, TP has to report to SEC and CMIC all issuers of debt securities to which it is largely exposed to. LERR for Single Equity Higher of: Issuer or Issuer Group Market value of equity security - 10% of Core Equity x applicable position risk factor AND Market value of equity security - 5% of total market capitalization of listed issue x applicable position risk factor Maximum exposure is 250% of Core Equity In case of breach, TP to report to SEC and CMIC all issuers of equity securities to which it is largely exposed to. Page 17 of 45 TP Trading participant Unimpaired Paid-Up Capital UPC Par value or stated value of capital stock Payment made on subscribed capital stock Capital stock to be distributed arising from stock dividends Additional paid-in capital and donated capital DEFICIT Negative Retained Earnings) Appropriated Retained Earnings Based on the latest audited net income Percentage of appropriation is based on the UPC level of the TP Shall not be available for declaration of dividends If RE beginning balance is a deficit: ○ Net income during the year, if any, shall be applied first on the deficit ○ Excess net income shall then be appropriated Special Reserve Bank Account For the “Exclusive Benefit of Customersˮ Should be covered by a Reserve Bank Agreement Should be maintained in cash accounts or qualified securities Reserve Requirement: Computations may be made weekly or monthly, as deemed applicable ○ ○ However, this does not preclude TPs who are qualified to compute their reserve requirement on a monthly basis to compute on a weekly basis. Additional deposits should be made not later than one 1 hour following the opening of the second banking day Withdrawals from the account should be duly supported by prior computations Page 18 of 45
