SEC Certification Exam Phase 2 PDF

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 Day’s 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 9:00AM PRE-OPEN: Orders are accepted but no matching occurs 9:15AM PRE-OPEN (No cancel): Orders can no longer be cancelled 9:30AM OPENING: Opening prices are calculated CONT. TRADING: Continuous order queuing and matching 12:00NN MARKET RECESS: No orders can be posted; no order modification and cancellation 1:30PM CONT. TRADING: Continuous order queuing and matching 2:45PM PRE-CLOSE: Orders are accepted but no matching occurs 2:48PM PRE-CLOSE (No cancel): Orders can no longer be cancelled 2:50PM CLOSING: Closing prices are calculated RUN-OFF/TRADING AT LAST: Trading continues but only at closing prices 3:00PM MARKET CLOSE Page 1 of 47 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 instrument’s 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 47 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 TP’s 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 12:00 nn of T+1 Page 3 of 47 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 12:00nn of T+1 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 47 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 (9:30 – 12:00 and 1:30 – 3:15) 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 47 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 2:25 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 2:10 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 1:40 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 47 TP: Trading participant Supporting documents shall be submitted PSE will act on the application within two trading days SUMMARY 9:00AM PRE-OPEN: Orders are accepted but no matching Cross transactions not allowed occurs Block sales 9:15AM PRE-OPEN (No cancel): Orders can no longer be Cross transactions not allowed cancelled Order modification and cancellation not allowed anymore (9:15-9:30AM) Block sales 9:30AM 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 12:00NN MARKET RECESS: No orders can be posted; no order modification and cancellation 1:30PM CONT. TRADING: Continuous order queuing and Odd lots matching Cross transactions Automatic Cross Block sales Level 3 CB can be triggered up to 1:40PM Level 2 CB can be triggered up to 2:10PM Level 1 CB can be triggered up to 2:25PM 2:45PM PRE-CLOSE: Orders are accepted but no Cross transactions not allowed matching occurs Block sales 2:48PM PRE-CLOSE (No cancel): Orders can no longer Cross transactions not allowed be cancelled Order modification and cancellation not allowed anymore (2:48-2:50PM) Block sales 2:50PM CLOSING: Closing prices are calculated Block sales RUN-OFF/TRADING AT LAST: Trading continues Cross transactions (only @ closing price but only at closing prices if done during this time) Automatic Cross Block sales 3:00PM MARKET CLOSE Page 7 of 47 TP: Trading participant II. Philippine Depository & Trust Corp. (PDTC) Rules Depository/Central Securities Depository (CSD) A specialized entity that provides Depository Services: (Rule 3.1) ○ central safekeeping services: records ownership and transfers ○ securities accounts: direct and indirect holding system ○ asset services, e.g., administration of corporate actions, redemptions; ○ and plays an important role in helping to ensure the integrity of securities issues (part of the ecosystem that ensures that securities are not accidentally or fraudulently created or destroyed or their details changed) Settlement services: ○ free of payment (FOP) ○ delivery vs. payment (DVP) Trading, Clearing and Settlement, Post Settlement in the Equities Market Transfer Agent, Depository and lodgment and uplift of securities Page 8 of 47 TP: Trading participant PCD/PDTC Rules I. General Rules Definitions ○ “Beneficial Owner” - means the party to which the beneficial title, as against the legal or registered title, over Securities belongs. The beneficial title of the Beneficial Owner will be referred to as "Beneficial Ownership“ (Rule 1.1. Definition) Legal ownership Corporate Action ○ “Defective Securities” - means Securities, whether or not evidenced by Certificate, which are counterfeit, invalid, forged, improperly altered, non-negotiable, subject to an adverse claim, not free from any liens, encumbrances, assessments or charges of any kind, subject to any restriction or prohibition on transfer through the PCD System, or otherwise defective. Rule 1.5.6 Participant Identifier ○ A Participant shall be allocated a unique identification code, and each Account shall be allocated a unique identification code, which shall be used on the face of all forms used by Participant in connection with the PCD System. ○ BP ID + account number Rule 1.7.1 Securities Account ○ A Participant shall open and maintain with PCD one or more Securities Accounts which shall reflect the balance of Securities held by Participant resulting from all Lodgments, Uplifts, Corporate Action Entitlements as well as Transactions. A Participant which acts both as dealer and broker shall be provided and shall maintain with the System at least three Securities Account to be known as the 1) Principal-Local or Principal-Foreign Securities Account, 2) the Client-Local Securities Account and 3) the Client-Foreign Securities Account. Rule 1.7.3 Presumption on Settlement Sub-Account ○ Transactions within the PCD System by a Participant shall be automatically effected in the Settlement Sub- Account of such Participant, without prejudice to the right of the Participant to appropriately move the Securities to another Sub-Account. (Fixed Income) Rule 1.7.5 Transfer of Securities ○ A Participant may appropriately transfer Securities from one Sub-Account to another Sub-Account within the same Securities Account, or from one Securities Account to another Securities Account, subject to compliance by the Participant with the nationality segregation requirement of Rule 1.7.1 and 1.7.2 and such applicable laws or regulations on the transfer of Securities between and segregation of Principal Securities Account and Client Securities Account. IN SUMMARY: Making a book-entry in the Securities Account constitutes a final and irrevocable delivery; the entry serves as conclusive evidence of delivery Rule 1.7.7 Book-Entry Delivery ○ The book-entry delivery of a Security pursuant to an Instruction of Participant is effected by making appropriate entries in the PCD System for debiting and crediting the Securities Sub-Accounts of the delivering and the receiving Participants in accordance with their Instructions. Rule 1.7.8 Finality and Irrevocability ○ The making of entries in the Securities Accounts of Participants reflecting a Transaction occurs when the projected balances of Securities are converted into actual Securities Account balances. The making of appropriate entries in the Securities Accounts effects final and irrevocable delivery of Securities to or from Participants in whose Securities Accounts the entries are made. Rule 1.7.9 Constructive Delivery ○ The making of an appropriate book-entry in the Securities Accounts of Participants to effect a delivery of a Security constitutes conclusive evidence of the agreement of Participants that such Security has been constructively delivered to the transferee-Participant and is held for the transferee-Participant. Rule 1.9.1 Reports ○ Availability of reports in the PCD system Rule 1.9.2 Confirmation ○ Before the close of the Business Day following the Business Day on which a report or record is made available in the PCD System to a Participant, the Participant shall verify the accuracy, completeness and correctness of such report or record and raise with PCD any discrepancy with the Participant's internal records. After that period, the Participant is deemed to have confirmed the accuracy, completeness and correctness of such report or record. Rule 1.9.3 Accuracy Page 9 of 47 TP: Trading participant ○ The Participant shall assume full responsibility for the truth, accuracy and validity of the records and entries in its Securities and System Cash Accounts, and represents that the contents of any print-outs of such records and entries that it may generate are accurate reproductions of its internal records and the records and entries in its Securities and System Cash Accounts. Rule 1.9.4 Correction ○ PCD may, with the consent and cooperation of the Participant, or on orders of competent authority, correct or adjust any entry in any report or record in the PCD System, including any manifest error after the confirmation period, provided that the correction does not prejudice PCD or any other Participant. A Participant shall make its records conform to the records of PCD, which shall prevail over the Participant's records in case of any discrepancy. Rule 1.9.5 Best Evidence ○ The reports and records of the PCD System shall prevail over the Participants’ internal records and shall constitute, with respect to any and all Transactions, the best evidence of such Transactions, without prejudice to the right of the Participants’ clients to prove their rights, title and entitlements. Rule 1.9.8 Confidentiality ○ Any information about a Participant or its Securities Accounts and System Cash Accounts in the PCD System obtained by PCD in the course of its operations shall be kept confidential by PCD, unless: (a) required by law; (b) the Participant for justifiable grounds authorizes and directs the PCD to disclose the Information; (c) made to directors, employees,... of PCD, to the extent required to perform their duty; (d) the disclosure is statistical or summary in nature without identifying the Participant; or (e) limited to Securities held for a Participant, as required by any person concerning the influence of the votes of Security holders,... or any other matter related to the affairs of the Issuer of such Securities. ○ Before disclosing the information under any of the foregoing, PCD shall notify the Participant concerned unless PCD is specifically prohibited to do so. II. Participation Rule: Rule 2.5 Participant Warranties and Representations Rule 2.5.1 Authority to Transact ○ The Instructions given by a Participant to PCD to effect a Lodgement, Uplift or Transaction constitute the representation and warranty of Participant to PCD that the Participant has full power, right and authority to make the Lodgement, Uplift or Transaction in accordance with its Instructions. Any Instruction given by a Participant to PCD for the Settlement of a Transaction, or the book-entry delivery of Securities, or the taking of any steps as the holder of Securities held for the Participant, constitutes the representation and warranty of the Participant to PCD that the Participant has and will continue to maintain a balance in its Securities Account sufficient to support such Instruction. Rule 2.5.2 Authority from Client ○ A Participant is deemed to warrant to PCD that the Participant has obtained the accession of its clients to the PCD Rules and PCD Operating Procedures, and any amendments, supplements or modifications thereto, and that the clients have agreed that: (a) Securities under the clients' control, custody or Beneficial Ownership shall be held by the Participant in the PCD System; and (b) the clients shall abide by the Participant's Instructions with respect to said Securities. (3.1.7) Rule 2.5.3 Segregation of Securities ○ The Participant shall lodge all Securities held on behalf of its clients in a separate Client Securities Account, and shall segregate, keep complete records of, and account for all such Securities including their fruits and rights at all times. Rule 2.5.7 Reporting of Fraud ○ To the extent of its knowledge of such matters, a Participant shall report to PCD: (a) any violation of the PCD Rules or misuse of the PCD System; (b) any error regarding any data in the PCD System; (c) any fraud or criminal activity committed or about to be committed in connection with the PCD System; (d) any unauthorized or criminal access to or use of any Service; or (e) any negligent, fraudulent or willful act or omission by any Participant or staff of PCD. Page 10 of 47 TP: Trading participant III. Depository Services Rule 3.1.1 Securities Depository ○ The Depository Service is the Service provided by PCD where PCD acts as the central depository of Eligible Securities lodged in the PCD System. Without prejudice to the obligation of the Participant to account for Defective Securities, all Eligible Securities of an Issuer when lodged within the System shall be deemed Fungible and may be sold, transferred, pledged, encumbered, cleared and settled or otherwise dealt with through book-entries without physical delivery of any Certificate. Lodgement: means the deposit of Eligible Securities into the PCD System without consideration rendering the Securities eligible for book-entry Settlement within the PCD System. xxx (Rule 1.1 Definition) Fungible: means that certain Securities are substitutable with the other Securities of the same class by mere reference to a quantity of a particular Security without reference to the name of the holder, certificate number or the like. (Rule 1.1 Definition) 3.2.1.2 Participant's Lodgement Representations (for certificated) ○ The delivery of the Certificates for Lodgement constitutes an unqualified representation and warranty of Participant that: (a) the Beneficial Owner of the Securities intends to lodge the Securities into the PCD System; (b) the Participant and the Beneficial Owner of the Securities have, and can be presumed by PCD to have, unconditionally acceded to the PCD Rules and unqualifiedly submitted to the PCD System; (c) the Certificates surrendered and the Securities represented thereby are Fungible and are not Defective Securities, and that any defect shall be rectified and/or indemnified by the Participant. 3.3.1.2 Participant's Lodgement Representations (for scripless) ○ The entry of Instructions by the Participants for the lodgement of Scripless Debt Securities constitutes an unqualified representation and warranty of Participant that: (a) the Beneficial Owner of the Securities intends to lodge the Securities into the PCD System; and (b) the Participant and the Beneficial Owner of the Securities have, and can be presumed by PCD to have, unconditionally acceded to the PCD Rules and unqualifiedly submitted to the PCD System. 3.3.1.3 Warranty on Fungibility of Scripless Debt Securities ○ Lodgement of Scripless Debt Securities in the PCD System shall constitute an unqualified representation and warranty by the party lodging that the Securities lodged are Fungible and not Defective Securities, and that any defect shall be rectified and/or indemnified. 3.3.1.4 Suspension of Lodgement ○ PCD may for cause suspend or prohibit the Lodgement of certain Scripless Debt Securities in the PCD System. Uplift ○ means the withdrawal of Certificated Securities from the PCD System. The terms "uplift", "uplifted" and "uplifting" when used in these PCD Rules shall refer to the verb or adjective forms of Uplift, as the context may imply (Rule 1.1 Definition) Rule 3.2.2.7 No Involuntary Liens ○ In case of any involuntary Lien (such as an attachment, injunction, sequestration, levy, notice of lis pendens or judgment, expropriation, and other similar encumbrances), the Participant concerned shall uplift the Securities for the proper constitution of such involuntary Liens. IV. Settlement Services Rule 4.1.1 Settlement ○ The Settlement Service is the Service in which PCD provides Participants with facilities for the comparison of data respecting the terms of Settlement of Transactions, for the allocation of Settlement responsibilities arising from Transactions, and for the making of payments of the Cash Element and/or deliveries of the Security Element of a Transaction. Rule 4.3 Non-PSE Transactions Rule 4.3.1 Instructed Settlement Page 11 of 47 TP: Trading participant ○ Non-PSE Transactions between Participants (such as but not limited to transfers between custodians and brokers, donations, hereditary transfers, and sales on attachment, foreclosure or execution, as well as Transactions not concluded in the PSE) may be settled within the PCD System upon Instruction by the Participants involved, subject to all applicable laws and regulations which may govern such transfers 4.3.6 Tax Clearances ○ The Participants to Non-PSE Transactions shall ensure that all taxes have been paid and all tax clearances have been obtained prior to the Settlement of the Non-PSE Transactions on Settlement Date. 4.3.7 Failed Trades ○ Non-PSE Transactions which cannot be settled at the close of business on Settlement Date shall not be automatically resubmitted for settlement. A new Settlement Instruction shall first be entered by a Participant before it can pursue to settle a previously failed Trade. 4.3.8 Effect of Settlement ○ Upon Settlement of a Non-PSE Transaction, the Non-PSE Transaction shall be deemed final and irrevocable and no unwinding thereof shall be allowed notwithstanding any laws and regulations of general application relating to the matter. V. Risk Management Rule 5.1 Types of Risks ○ 5.1.1 Theft or Destruction of Securities: There is a "Loss of Securities" when PCD cannot deliver to a Participant any or all Securities held by PCD on its behalf due to the theft, destruction, loss or mysterious disappearance, while in the custody or control of PCD, of any Securities or the Certificate or other instrument evidencing the Securities. ○ 5.1.2 Defective Lodgement: There is "Defective Lodgement" when it is determined that: (a) any Security for which immediate credit was given by PCD to the lodging Participant is a Defective Security; or (b) the registration of any Security in the name of PCD is or would be invalid, improper, defective, ineffective, wrongful, subject to any adverse claim or privilege, or cannot be effectively and rightfully transferred. ○ 5.1.3 System-Related Loss: There is a "System-Related Loss" when a Participant suffers actual loss or damage due to an interruption, disruption, malfunction, or defect in the PCD System. ○ 5.1.4 Operation-Related Loss: There is an "Operation-Related Loss" when a Participant suffers actual loss or damage due to fraud, error or omission directly attributable to PCD or its duly authorized agents. ○ 5.1.5 Counterparty Risk” The failure of a Participant to meet any obligation to deliver the Security Element and/or the Cash Element of a Non-PSE Transaction due to its insolvency or illiquidity problems is solely a "Counterparty Risk", for which PCD shall not in any way be liable. Rule 5.2 Participant Warranty and Indemnity ○ 5.2.1 Participant Depository Warranty: A Participant hereby gives its Warranty to PCD that it shall, in the first instance upon demand by PCD, indemnify and hold PCD free and harmless from and against any loss, damage, cost, expense, liability or claim (including without limitation the cost of legal counsel to advise on or defend against such claims) suffered arising from: (a) A Loss of Securities, System-Related Loss, or Operation-Related Loss, to the extent caused or contributed by any erroneous, negligent, wrongful, reckless, willful, fraudulent or dishonest act or omission of the Participant or of any of its directors, trustees, officers, partners, employees, contractors, agents or other privies; (b) Defective Lodgement. ○ 5.2.2 Participant Settlement Warranty: A Participant shall hold PCD as well as another Participant which is its counterparty in a Non-PSE Transaction free and harmless from and against any loss, damage, cost, expense, liability or claim (including cost of legal counsel) suffered arising from: (a) a Failed Trade due to the inability of the Participant to have sufficient Securities in its Securities Account and/or funds in its System Cash Account and Bank Account on Settlement Date; (b) any erroneous, negligent, wrongful, reckless, willful, fraudulent or dishonest act or omission of the Participant or of any of its directors, trustees, officers, partners, employees, contractors, agents or other privies. ○ 5.2.3 Other Indemnities: PCD shall be indemnified for any loss, damage, cost, expense, liability or claim suffered because of, without limitation: Page 12 of 47 TP: Trading participant (a) The performance by PCD of any procedure which it must or may perform under the PCD Rules or PCD Operating Procedures, including without limitation making corrections of any book-entry, transferring pledged Securities, enforcing any lien on lodged Securities, debiting the Securities Accounts for Defective Lodgement, freezing of a Securities Account, and otherwise; (b) The inability of PCD to effect a Lodgement, transfer, Pledge, Uplift or other Transaction on its records to the extent that PCD has taken reasonable corrective action or acted in accordance with the PCD Agreement. (3.1.8) (c) Any calls, assessments, taxes (except for taxes measured by the income of PCD) and other governmental charges, and any other expenses related to the ownership of Securities while lodged in the PCD System; (d) The reliance by PCD on any declaration, representation, warranty, information or documentation provided by a Participant (e) Any breach of a Participant's obligations, representations or warranties. (2.6.6) ○ 5.2.4 Principal Liability: A Participant acting on its own behalf or on behalf of another Person shall be liable as principal for all obligations incurred with respect to such action. (2.6.6) ○ 5.2.5 Credit Undertaking: For purposes of gaining immediate credit for its Lodged Securities, each Participant may obtain and maintain any acceptable form of Credit Undertaking or such other acceptable form of liquid instrument in favor solely of PCD to cover any loss brought about by Defective Lodgement. Such Credit Undertaking shall be in the amounts and under such terms and conditions as the PCD Board shall determine. (n) ○ 5.2.6 Other Credit Undertaking: The PCD Board may also require the extension of other Credit Undertakings by each Participant for the Depository Service and/or the Settlement Service in such amounts, terms and conditions as may be prescribed by PCD for Participants of a certain Service. The PCD Board may group the Participants into classes for purposes of prescribing the type and amount of credit undertaking that each Participant may be required to extend to satisfy a loss caused by Participant’s failure to satisfy its obligations in the Depository Service or in the Settlement Services. Upon default by any Participant in its obligations in a particular Service, PCD may collect directly on the credit undertaking. (2.8.1) Rule 5.3 PCD Loss Indemnity ○ 5.3.1 Insurance: PCD shall maintain an insurance policy in such amounts and for such coverage as may be reasonably determined by the PCD Board. The policy shall be open to inspection by any Participant at PCD’s office during regular office hours on Business Days. The Participants shall be notified of any material reduction in the amount or coverage of the insurance. In the event of a Loss of Securities, System-Related Loss or Operation-Related Loss not covered by a Participant Warranty under Rule 5.2.1, then PCD shall file a claim on the insurance policy and against any other Person responsible for the loss. In the event of a Loss of Securities, Defective Lodgement, System-Related Loss or Operation-Related Loss for which the Participant Warranty in Rule 5.2.1 is insufficient to fully cover, PCD shall file a claim on the insurance policy. In the event of Defective Lodgement, PCD shall file a claim on the insurance policy should any applicable Participant Warranty under Rule 5.2 is insufficient, and any applicable Credit Undertaking is still insufficient. (111.1) ○ 5.3.2 Limitation of Participant Recovery: The maximum total amount payable by PCD to all Participants for a Loss of Securities, Defective Lodgement, System-Related Loss or Operation-Related Loss shall be limited to actual damages or losses suffered by the Participant, and shall not exceed the net amount recovered by PCD from the insurance policies or any other responsible Person in respect of the loss, except to the extent covered by Rule 5.3.4. If more than one Participant is affected by a loss, the amount recovered by PCD shall be pro-rated among the Participants. The amount payable by PCD for any loss shall be limited to the amount payable pursuant to this Rule and shall not be exceeded in any circumstances or for any reason whatsoever, including without limitation loss arising from or in any way connected with any negligent or reckless act or omission of PCD or any fraudulent, negligent, reckless or wilful act or omission of any director, officer, employee, agent or contractor of PCD, whether or not the possibility of such loss was disclosed to or reasonably could have been foreseen by PCD. (1.11.6) ○ 5.3.3 Exclusion of Liability: PCD, PCD Nominee, a director, officer, shareholder, employee or agent, shall have no personal liability to a Participant for: Page 13 of 47 TP: Trading participant (a) any loss of opportunity, profit, market, goodwill, interest or use of money or Securities, or any other special, indirect or consequential loss, damage, cost, expense, liability or claim suffered or incurred by any Participant, any Participant Loss or any Loss of Securities; or (b) any loss, damage, cost, expense, liability or claim suffered or incurred by a Participant which arises from any action taken by PCD in accordance with a lawful direction given by a regulatory authority having jurisdiction over PCD, its Participants and the Issuers and its contractors. (1.11.8) ○ 5.3.4 Payment from Reserves: If the payment made by PCD to Participants pursuant to this Rule 5.3 is less than the amount required to make good the loss suffered by Participants, then the PCD Board, taking into consideration the best interests of PCD and of all Participants, and the need to preserve the integrity of PCD and the PCD System, may elect to allocate all or any portion of the retained earnings or any contingency reserves of PCD to make good the Participant Loss. If more than one Participant is affected by a loss, the net amount allocated by PCD pursuant to this Rule shall be allocated to each Participant proportionately. ○ 5.3.5 Exclusive Liability: PCD shall not be liable for the performance of any function which is due to be performed by SCCP pursuant to its SCCP Rules. Neither shall PCD be liable for any loss, damage, cost, expense and liability suffered by a Participant arising from the use of the SCCP System under its SCCP Rules. (n) Page 14 of 47 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 TP’s 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 layman’s 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 TP’s total liabilities less non-cash liabilities, secured loans, and equity-converted loans 1,700% or less of NLC No problem Page 15 of 47 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 47 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 47 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 Customers” 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 47 TP: Trading participant IV. Securities Clearing Corporation of the Philippines (SCCP) Rules Definitions Clearance Refers to the process of reporting, matching, correcting and staging securities transactions for settlement. Confirmation Receipts to clients Trade Amendments ○ Flag amendments (deadline is 12 NN of T+1) ○ Trade Cancellation (deadline is 5:00PM of T+0) Settlement Refers to the completion of a PSE Trade effected by the delivery of the Security element and the payment determined by the clearing of the PSE Trade. Brief Overview of SCCP and the Market Participants Market Participants 1. Clearing members or trading participants 2. Settlement banks 3. Central depository (PDTC) 4. Transfer agents 5. Foreign custodian banks Process Flow of PSE Trades TIMELINE T+0: Execution of sell/buy orders; trade cancellations deadline (5pm) T+1: Broker should deliver a confirmation receipt to the client; trade amendments deadline (12nn) T+3: Selling Broker should ensure that sold certificates are cleared at the PDTC; Buying Broker should deliver goods Page 19 of 47 TP: Trading participant (1) Clearing Members Clearing Members are limited to Trading Participants of the PSE. There are presently 125 active Clearing Members, of which 115 are Local, and 10 are Foreign. (2) Settlement Banks Accept deposits of funds for payment of securities bought Confirm payment of Due Clearing Obligations to SCCP Debit Buyer’s Cash Account and credit Seller’s Cash Account during settlement Receive and/or return cash collateral put up by Clearing Members to cover their daily trade negative exposures Accounts maintained with Settlement Banks by Clearing Members 1. Cash Settlement Account 2. Cash Collateral Account 3. Working Account On Trade Date (T+0), SCCP provides the Settlement Bank the following: Settlement Cashlist (T+3 processing) ○ Realignment data which indicates the amount the bank should pay to other banks (net paying bank) or receive from other banks (net receiving bank) ○ A list of net paying and net receiving Clearing Members and the corresponding amounts Collateral Cashlist (T+1 processing) ○ A list of Clearing Members and their collateral requirements (3) Central Depository: PDTC Acts as depository/ “custodian” of securities, which are convertible to fungible shares All Clearing Members are PDTC Participants Performs book- entry transfer of securities: ○ From Seller’s to Buyer’s Accounts during settlement of Exchange Trades ○ From one PDTC Participant to another per client instruction ○ From Lender’s to Borrower’s Account for loan transactions (4) Transfer Agents Provide the Issuer with a list of holders of its securities Effect transfer of beneficial ownership Process Corporate Actions ○ Stock Rights ○ Stock/Cash Dividends ○ Stock Splits ○ Collating Proxy forms (5) Foreign Custodian Banks Banks who keep custody of the cash and securities owned by foreign investors Functions of SCCP (1) Clearing and Settlement of Exchange Trades Page 20 of 47 TP: Trading participant 7:00 AM Start of Day with PDTC 9:00 AM Start of Day with Settlement Banks (SBs) 9:00 AM - 12:00 NN Settlement Process 12:00 NN SETTLEMENT DEADLINE 12:15 PM Realignment with SBs 12:30 PM Crediting of Due Broker Entitlements 3:00 PM End of Day with SBs 3:30 - 4:00 PM File Upload of PSE Data 6:00 PM End of Day with PDTC The Central Clearing And Central Settlement System (CCCS) Multilateral Netting ○ CCCS performs the netting process as soon as the trades are uploaded to the system. ○ Securities settlement instructions are netted multilaterally into a net receipt or delivery position in a given Security by flag for each Clearing Member. ○ All cash debits and credits from these Securities instructions are also netted into a single net cash position for each Clearing Member. ○ Multilateral Netting results in increased productivity due to the reduction in the number of transactions. ○ EXAMPLE Broker Buying (+) Selling (-) Net trade A 50 from B 40 to B Net buying: 15 10 from C 5 to C 60 45 B 40 from A 50 to A Net selling: 20 10 from C 20 to C 50 70 C 5 from A 10 to A Net buying: 5 20 from B 10 to B 25 20 Novation; SCCP as Central Counterparty ○ SCCP Acts as a buyer to every seller and vice versa ○ As a Central Counterparty, SCCP guarantees the settlement of all PSE trades up to the extent of its Clearing and Trade Guaranty Fund (CTGF). ○ When trading is effected, sellers have the obligation of delivering securities and the right of receiving cash, and buyers have the obligation of paying cash and the right of receiving securities. SCCP assumes these obligations and acquires these rights as a Central Counterparty between Sellers and Buyers. ○ The original parties have a claim or a debt against SCCP instead of against each other. Page 21 of 47 TP: Trading participant (2) Maintenance and administration of the Clearing and Trade Guaranty Fund (CTGF) A fund established, maintained and administered by SCCP for the purpose of covering failed trades due to a Clearing Member’s default on his cash or securities settlement obligation. Covers only SCCP-eligible Trades, referring to legitimate trades of Securities which have been executed using the facilities of the PSE, excluding block transactions and negotiated deals. Part of, not substitute for, the overall risk management process. Last resort tool and not a standby loan facility. Composition ○ Seed money contribution from the PSE. ○ Clearing Members’ monthly contributions As a percentage of Aggregate monthly Turn over value (1/500 of 1% of Gross Trades less Block Sales and Cross of the same flag Initial Contribution required from new Trading Participants or Trading Participants resuming trading operations ○ Contribution of SCCP. ○ Interest Income from the investment of the CTGF. Securities issued or guaranteed by the Republic of the Philippines Time Deposits Such other investments as the SCCP Board may approve taking into consideration the safety and liquidity requirements of the Clearing Fund (3) Risk Management And Monitoring The Mark-to-Market Collateral Deposit System T+0 Computation Date T+1 Collateralization Date 4PM-4:30PM 9AM Uploading of Trades and Closing Prices Release of Settlement Bank Notices Calculation of Exposures for the 3 days worth Monitoring of submission of collateral and of unsettled trades execution of Early Deliveries Lifting of pledged securities at PDTC Before 6PM: Submission of notification of CMs who 10AM: Deadline for submission of Early Delivery will do Early Delivery notification of CMs 6:30PM: Release of Collateral Requirement/Collateral 12NN: Deadline for collateralization Refund Notices Beyond 12NN: Non compliance by a CM to the collateral requirement will be subjected to SEC-approved penalty. Mode of Collateralization Acceptable Collaterals ○ Cash ○ Securities ○ Securities comprising the PSE Index, PSE MidCap Index & PSE Dividend Yield Index. Subject to 25% haircut. ○ “PSE” shares in the event that “PSE” shares are not included in the PSEi. Subject to 35% haircut. Early Delivery of stocks which caused the negative exposure Risk Containment Mechanism by SCCP Delivery versus Payment (DVP) Mode of Settlement: Ensures that delivery of securities cannot take place without the corresponding payment and vice versa Clearing and Trade Guaranty Fund (CTGF): Fund established, maintained and administered by SCCP for the purpose of covering failed trades (SCCP-eligible trades) due to a Clearing Member’s default on his settlement obligation Regular Monitoring ○ Net Liquid Capital vs. Daily Average Netted Obligations ○ Highly Unusual Settlement Obligations ○ Designated Stocks Page 22 of 47 TP: Trading participant ○ Total Trade Value of a Stock is > Php6.0 Million and is Traded by < 5 Brokers. ○ Recurring Fails (Cash Payment or Securities Delivery Fails > 2 within 7 trading days. ○ Habitual Late (Cash or Securities Fails > 3 for the year) Daily Mark to Market Collateral ○ To cover fluctuations in market prices of CM’s 3 days’ unsettled trades Mechanisms Risks Contained Delivery vs Payment (DVP) Principal Risk, Liquidity Risk, Systemic Risk Mark to Market Collateral Deposit System Replacement Cost Risk, Systemic Risk Fails Management (BISO) Liquidity Risk, Systemic Risk Use of CTGF Liquidity Risk, Systemic Risk, Replacement Cost Risk Capital Adequacy Rule Systemic Risk Multilateral Netting Systemic Risk (4) Performance of Fails Management Fail Management Mechanisms Temporary credit facilities/lines with the Settlement Banks for temporary funding requirements in order to protect/minimize usage of the CTGF The Securities Lending and Borrowing (SLB) facility of SCCP for securities delivery fails. The Clearing and Trade Guaranty Fund (as the last resort tool). Suspension/Termination of a Clearing Member Failure to settle cash/securities element by 9:15 AM of T+4 (Preventive Suspension) Material or persistent breach by the Clearing Member of the provisions of the SCCP Rules and/or the SCCP Operating Procedures Repeated violations by the Clearing Members of acts punishable with fines Ineligibility, loss of qualification or non-compliance by the Clearing Member with SCCP’s Clearing Membership standards Fines and Penalties Offense Action/Penalty Late Cash Payments (Cash P1,000.00 + 1/8 of 1% or 0.00125 of the value of the cash fail plus any Payments made after 12:00 NN charges incurred by SCCP should advances from the Settlement Bank or from but no later than 2:00 PM on the CTGF have been made, plus any actual out-of-pocket expenses incurred Settlement Date) by SCCP to resolve the cash fail. Page 23 of 47 TP: Trading participant Late Securities Delivery P1,000.00 + 1/8 of 1% or 0.00125 of the market value of the securities fail (Securities deliveries made plus any charges incurred by SCCP should advances from the Settlement after 12:00 NN but no later than Bank or from the CTGF have been made, plus any actual out-of-pocket 2:00 PM on Settlement Date) expenses incurred by SCCP to resolve the securities fail. Cash Fails (Cash payments P1,000.00 + 1/4 of 1% or 0.0025 of the value of the cash fail compounded made after 2:00 PM on daily until paid or until payment of any advances made from the Settlement Settlement Date or not made at Bank or the CTGF is made plus any actual out-of-pocket expenses incurred all) by SCCP to resolve the cash fail and if not paid by 9:15 AM of T+4, a preventive suspension shall be imposed on the Defaulting Member. Securities Fails (Securities P1,000.00 + 1/4 of 1% or 0.0025 of the market value of the securities fail deliveries made after 2:00 PM compounded daily until delivery is rendered or until payment of any on Settlement Date or not made advances made from the Settlement Bank or the CTGF is made plus any at all) actual out-of-pocket expenses incurred by SCCP to resolve the securities fail and if not delivered by 9:15 AM of T+4, a preventive suspension shall be imposed on the Defaulting Member. Page 24 of 47 TP: Trading participant V. Manipulative Devices and Schemes Securities Regulation Code (SRC) Objectives To develop the Philippine Capital Market Encourage wider participation of share ownership Promote self regulation in the securities industry Ensure full and fair disclosure about securities and Minimize and eliminate insider trading and other fraudulent or manipulative devices which create distortions in the free market. Principles of Markets Market prices should reflect the free interplay of the forces of supply and demand. Generally, any distortion to the market forces is prohibited and unacceptable. A sustainable success of the market is dependent on the perception that it is fair, efficient and transparent. Distortion of the market can be realized in several ways: By employing trading schemes that creates a false or misleading appearance relative to the price or activity in a security. (Ref. to pars. (a) and (b), Section 24.1 of SRC) By circulating false information about the security or the unusual movement of a security. (Ref. to pars. (c) and (d), Section 24.1) By practicing other trading methods contrary to rules. (Ref. To par. (e), section 24.1 and Section 24.2) Why manipulate? To gain immediate profit To window dress a trading or loan portfolio To avoid breaching regulatory requirements or business contracts Why are manipulative, fraudulent or deceptive market practices wrong? It erodes confidence in the market as an investment venue as the presence of such practices results in financial losses to victims. It destroys the credibility of the market as a venue for price discovery as it results in inefficient price levels. It robs the nation of an efficient mechanism in allocating and distributing its resources. Parties involved in Price Manipulation Issuers of securities Participants in the securities market Market intermediaries Investors Any combination of the above acting in cooperation with one another (1) Trading-Based Market Manipulative Activities under the SRC Creating a false or misleading appearance of active trading in any listed security traded in an Exchange: By effecting any transaction in such security or performing a similar act which involves no change in beneficial ownership thereof (Section 24.1 (a) i. & iii, SRC). Wash Sales Engaging in transactions in which there is no change in beneficial ownership of a security (Rule 24.1.5.5). By entering order/s for the purchase or sale of such security with the knowledge that simultaneous order/s of SUBSTANTIALLY THE SAME size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties (Section 24.1 (a) ii.). Ex: Trader A owns 1,000 shares of Stock XYZ. To make it appear actively traded, Trader A sells these shares to their own account in another brokerage or to a closely related party and buys them back immediately. Improper Matched Orders Engaging in transactions where both the buy and sell orders are entered at the SAME time with the SAME price and quantity by different but colluding parties (Rule 24.1.5.3). Page 25 of 47 TP: Trading participant ○ Ex: Traders A and B agree to buy and sell 10,000 shares of Stock ABC at ₱100 each. Trader A places a buy order, and Trader B places a sell order for the same amount at the same price. To effect alone or with others, a series of transactions in securities that raises their price to induce the purchase of a security To effect alone or with others, a series of transactions in securities that depresses their price to induce the sale of a security, whether of the same or different class, of the same issuer or of a controlling, controlled, or commonly controlled company by others To effect alone or with others, a series of transactions in securities that creates active trading to induce the purchase or sale through manipulative devices such as MARKING THE CLOSE, PAINTING THE TAPE, SQUEEZING THE FLOAT, HYPE AND DUMP, BOILER ROOM OPERATIONS and such other similar devices [Section 24.1 (b) iii.]. ○ Painting the tape: Engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security (Rule 24.1.5.1). ○ Marking the close: Buying and selling securities at the close of the market in an effort to alter the closing price of the security (Rule 24.1.5.2). ○ Hype and dump: Engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices or vice versa (i.e. selling activity at lower prices and then buying at such lower prices) (Rule 24.1.5.4). ○ Squeezing the float: Taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way as to create artificial prices (Rule 24.1.5.6). Effecting, either alone or with others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by the SRC or by rules of the Commission Fraudulent Transactions It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: 26.1. Employ any device, scheme, or artifice to defraud; 26.3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person Insider Trading Buying or selling securities by an insider while in possession of material, non-public information, unless: The insider proves that the information was not obtained from being an insider That the insider has disclosed the information to the party or his agent to whom he had sold to or bought from The insider had reason to believe that the other party is also in possession of material information (Section 27.1 SRC) Insiders the issuer; a director or officer (or person performing similar functions) of, or a person controlling the issuer; a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or a person who learns such information by a communication from any of the foregoing insiders (Sec 3.8, SRC). Trading of a security by an insider or his spouse or relative by affinity or consanguinity within the 2nd degree, legitimate or common law, creates a presumption that he made such transaction while in possession of material non-public information if: ○ transacted after such information came into existence but before disclosure to the public and ○ the lapse of a reasonable time for the market to absorb such information Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was not aware of the material non-public information at the time of the purchase or sale. (Section 27.1, SRC) Page 26 of 47 TP: Trading participant Elements of an insider trading violation Respondent possessed non-public information about the issuer-company or the market for its shares. Such non-public information was material information. Respondent bought or sold the securities of the company. Respondent owed a duty to disclose to the seller (or buyer) of the securities. Respondent failed to disclose the non-public information he possessed. Factors to consider in determining whether a case can be made for price manipulation Failure to consider these factors shall raise a presumption that the transaction/s is/are manipulative (Rule 24.1.4). Whether the order or execution of the order, would materially alter the market for, and/or the price of, the securities; The time the order is entered or any instructions concerning the time of entry of the order; Whether the person on whose behalf the order is placed, or another person who the Broker Dealer knows to be a related party of that person, may have an interest in creating a false or misleading appearance of active trading in any security or with respect to the market for, or the price of, any security; Whether the order is accompanied by settlement, delivery or security arrangements which are unusual; Whether the order appears to be part of a series of order, which when put together with the orders which appear to make up the series, the order or the series is unusual; and Whether there appears to be a legitimate commercial reason or basis in placing the order, unrelated to an intention to create a false or misleading appearance of active trading in or with respect to the market for, or price of, any security Material Non-Public Information a) If the information has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. (Section 27.2, SRC) (2) Information-based Manipulative Activities To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security [Sec. 24.1 (c), SRC]. To make false or misleading statements with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange [Section 24.1 (d), SRC]. Disseminating false or misleading market information through media, including the internet, or any other means to move the price of a security in a direction that is favorable to a position held or a transaction [Rule 24.1.5.7] Obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact which would lead to misleading statements (Section 26.2, SRC). Use of Information Obtained in a Fiduciary Capacity A Broker Dealer, associated person or salesman of a Broker Dealer, a paying agent, transfer agent, trustee, or any other person acting in similar fiduciary capacity, who has received information as to the ownership of securities shall not make use of such information for the purpose of soliciting or making purchases, sales, exchanges of securities or, except as provided in SRC Rule 30.2.9 (*should be Rule 30.2.10 -- Submission of Names of Stockholders, Members, Participants, Clients and Related Information) provide such information to any person who does not need such information to fulfill his responsibilities under the Code Prohibited Representations It shall be unlawful for any: a) Person to represent that he has been registered as a securities intermediary with the Commission unless such person is registered under the SRC. Registration under the Corporation Code shall not be deemed to be registration under the SRC; Page 27 of 47 TP: Trading participant b) Broker Dealer to represent that registration of the Broker Dealer under the SRC, or the failure of the Commission to deny, suspend, or revoke such registration, indicates in any way that the Commission has passed upon or approved the financial standing, business, or conduct of such broker dealer, or the merits of any security or any transaction/s conducted thereby; and/or c) Person to represent that a security is a particular type of security when such representation is inconsistent with a stated definition under the SRC or rules or regulations adopted thereunder or internationally accepted practice. d) Person to represent that a security to be sold, transferred, pledged, mortgaged, encumbered, used for delivery, or any other purpose to another entity or itself has been legally authorized by the registered owner when such representation is not true and documented in writing at the time and date it was used Rule 26.3.4. (NEW) e) Person, whether as principal or agent, to buy, sell or deal in securities or solicit investments in securities and other investment contracts, unless he is a registered broker, dealer or licensed salesman of a broker dealer and the securities are registered under the Code or exempt from registration pursuant to Sections 9 and 10 thereof. Rule 26.3.5 (NEW) Dealing in Securities includes making or offering to make with any person, or inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to acquiring, disposing of, subscribing for securities. Rule 26.3 (NEW) Solicitation is the act of seeking or asking for business or information and including the act of providing information about a security or investment product being offered for sale with the view of making another person a client or closing or bringing in a sale or purchase of security or investment product. The solicitor need not be a signatory to any contract relative to such offer or sale of the security. Rule 26.3 (NEW) Investment Contract Means a contract, transaction or scheme (collectively “contract”) whereby a person invests his money in a common enterprise and is led to expect profits primary from the efforts of others. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. A common enterprise is deemed created when two (2) or more investors “pool” their resources, creating common enterprise, even if the promoter receives nothing more than a broker’s commission. Rule 26.3 (NEW) It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information Advertisements and Communications with the Public by Broker Dealers, Salesmen and Associated Persons Should be based on fair dealing and good faith. No exaggerated, unwarranted, misleading, false or untrue statements, claims, superlatives, promises of specific results and unfounded opinions and unwarranted forecasts. No omission of a material fact that will make the communication as misleading. [Rule 24.1(d)] Other types of prohibited conduct and/or manipulative practices which include, among others, the temporary funds for the purpose of engaging in other manipulative practices (Rule 24.1.5.8). Sanctions for Securities Fraud, Manipulation & Insider Trading (1) Administrative Sanctions Suspension/Revocation of License of Broker-Dealer, Salesman and Associated Person Monetary Fine Disqualification from being an officer, member of the Board in an issuer Cease and Desist Order Industry Bar Page 28 of 47 TP: Trading participant (2) Civil Liability SEC. 58. Civil Liability For Fraud in Connection With Securities Transactions ○ Any person who engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security, as the case may be, for the damages sustained by such other person as a result of such act or transaction. SEC. 59. Civil Liability For Manipulation of Security Prices. ○ Any person who willfully participates in any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction, and the person so injured may sue to recover the damages sustained as a result of such act or transaction. SEC. 61. Civil Liability on Account of Insider Trading. ○ Any insider who violates Subsection 27.1 and any person in the case of a tender offer who violates Subsection 27.4(a)(i), or Any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him ○ An insider who violates Subsection 27.1 and any person in the case of a tender offer who violates Subsection 27.4(a)(i), or Any rule or regulation thereunder, by communicating material non-public information, shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security Penalties Any person who violates any of the provisions of this Code, or the rules and regulations shall, upon conviction, suffer ○ a fine of not less than P50,000.00 nor more than P5,000,000.00 or ○ imprisonment of not less than 7 years nor more than 21 years, or ○ both at the discretion of the court. Page 29 of 47 TP: Trading participant VI. Capital Markets Integrity Corporation (CMIC) Rules Definition of Terms “Salesman” - Salesman shall refer to a natural person hired to buy and sell securities on a salary or commission basis properly endorsed to the Commission by the employing Broker Dealer. It shall also include any employee of an issuer company whose compensation is determined directly or indirectly on sales of the issuer’s securities. “Trading Participants” -is any broker dealer who has the right, pursuant to the rules of the Exchange or any organized market, to trade in that Exchange or organized market. “Associated Person” — shall mean any person employed full time by the Broker Dealer whose responsibilities include internal control supervision of other employees, agents, salesmen, officers, directors, clerks and stockholders of such Broker Dealer for compliance with the Code and rules and regulations adopted thereunder. He cannot perform other duties without Commission approval and subject to the condition that the broker dealer will maintain the appropriate Chinese Wall between the functions of an associated person and that of his other duties. Relationship of Traders and Salesmen to Clients Always bear in mind that the clients’ interest is paramount at all times and under no circumstance, either by a trader’s or salesman’s act or omission, shall it be prejudiced Transactions that may involve conflicts of interest should be avoided. If they cannot possibly be avoided: ○ trader or salesman should ensure that the client’s interest is not subordinated to his own ○ his client is treated fairly before the transaction is executed (e.g., full disclosure to the client of all material facts related to a transaction involving conflict of interest) exercise due diligence in determining their clients’ financial situation, investment objectives, experience and risk tolerance exert reasonable efforts to keep their clients well-informed of relevant market news, disclosures and other developments in a timely and accurate manner ○ must never fabricate information or spread groundless or false information about a particular security or the market When providing advice: make full, fair and express disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients ○ e.g., relationships between an issuer and the trader or salesman, directorship, consultancy, investment banking, underwriting or financial relationships, broker/dealer market-making activities, and material beneficial ownership of stocks Disclose any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services Relationship of Traders and Salesment to their Firm act and carry themselves in a manner that would promote and maintain the integrity of their firm, in particular, and the market, in general observe all applicable regulatory laws, rules and regulations, comply with all regulatory requirements and abide by the internal rules of their firm at all times should be employed by only one Trading Participant at any given time Relationship of Traders and Salesment to CMIC Trading Participants and their directors, officers, employees and duly authorized agents shall exercise utmost professionalism in dealing with CMIC Liable for any unprofessional behavior or conduct towards any member, employee or duly authorized agent of CMIC: ○ Physical harm or acts that cause or may likely cause mental or emotional suffering, such as intimidation, harassment, damage to property, public ridicule, humiliation, verbal abuse and threats of such acts; ○ Offer of money or other valuable consideration; ○ Non-cooperation in providing the required documents and/or information; and (see SRC Rule 52.1, par. 1[B]; Art. I, Secs. 2 & 6, CMIC; Art. VI, Sec. 4, CMIC) ○ Any other act unbecoming of a securities market professional. Page 30 of 47 TP: Trading participant Trading for Personal Account The Exchange shall allow traders and salesmen to deal for their own personal account on condition that: ○ they shall not abuse this privilege ○ that they will not enter into any transactions that would put their clients at a disadvantage ○ the Trading Participant shall trade for its account only under a “Customer First Policy,” and ensure the protection of the public and its clients To ensure effective monitoring and surveillance, all personal transactions of traders and salesmen shall be transacted only through their own firm A trader or salesman should use and maintain only one (1) personal dealing account, and only with his firm, which should be registered under his real name ○ prohibited from having, openin