蔡聪妙/菲律宾证券交易所高级顾问、菲律宾B.A.证券公司主席
    
    
    1. INTRODUCTION
    
    1.1 Background
    
    The Philippine stock market is one of the oldest in Asia. For decades, there were two separate domestic stock exchanges that traded basically the same listed issues: the Manila Stock Exchange (MSE), established on 8 August 1927, and the Makati Stock Exchange (MkSE) founded on 27 May 1963. In 1992, President Fidel V. Ramos declared a govemment policy of consolidating the operations of both exchanges to develop a more efficient capital market. Thus, on 14 July 1992, the two bourses were unified under The Philippine Stock Exchange, Inc (PSE).
    
    1.2 Legislation and Regulation Affecting the Exchange
    
    The enactment of the Securities and Regulation Code (SRC) is a single piece of legislation that affected the structure and operations of the Exchange. Section 33.2 (a) of the SRC mandated the reorganization of the PSE as a stock corporation by 8 August 2001.
    
    1.3 The Activity Agreement between the Australian Agency for International Development (AusAID), Philippines-Australia Governance Facility (PAGF) and PSE

    The Activity Agreement between the AusAID, PAGF and the PSE was signed on 24 November 2000 which embodies the technical assistance granted to the PSE in line with the demutualization project.
    
    This Activity is composed of nine (9) deliverables, each of which contributes directly to the accomplishment of the Activity Objective stated above. Each deliverable is briefly described below:
    
表1

    Deliverable Desciription
    
    1. Study Program and Schedule
    
    A document that will identify the program and time schedule for the formulation of the demutualization framework. It will enumerate the activities, consultative and orientation processes to be undertaken.
    
    2. Business Model Options Report
    
    A report that will identify the business units such as clearing and settlement, information technology and listing to be established in order to propel the Exchange into a performance-driven and profit-oriented corporation.
    
    3. Property Valuation
    
    Report
    
    A report that will reflect an accurate market value of the existing properties of the Exchange.
    
    4. Corporate Governance Model Framework Report
    
    A report that determine the appropriate number of members of the board of directors, the proposed qualifications and disqualifications for such members as well as the transitional structure in the Board of the Exchange upon demutualization.
    
    5. Membership/Trading
    
    Participant Rules Document
    
    The proposed rules that will prescribe the guidelines for admission as a trading participant and the retention of such rights.
    
    6. Operating and Business Rules Document
    
    The proposed business rules that comprises listing and disclosure, compliance and surveillance and trading and settlement activities.
    
    7. Market Regulation
    
    Policies document
    
    The proposed rules delineating the status of the Exchange as self-regulatory publicly listed corporation as against the oversight functions of the SEC.
    
    8. Independent Financial Report
    
    The report is an opinion on the financial viability of the Exchange and the financial impact of demutualization taking into account its assets, operations, valuation analysis and equity.
    
    9. Organizational Structure and Manpower Requirements Report
    
    The documents containing the organizational chart, the staffing requirements and employee qualifications suitable to a demutualized Exchange.
    
    The Technical assistance was given in the form of services of subcontractors who will provide objective and impartial knowledge and expertise on the subject at hand. The subcontractors for the Activity was the Australian Stock Exchange.
    
    2. OWNERSHIP STRUCTURE OF THE STOCK EXCHANGE UPON DEMUTUALIZATION
    
    2.1 Conversion as a Stock Corporation
    
    As a legal concept, demutualization is strictly the conversion into a stock corporation. However, the listing of the Exchange via introduction to the market and without the raising of capital consequently expands the ownership structure (i.e. Australian Stock Exchange (ASX) and Hong Kong Stock Exchange (HkEx)) and is widely seen as an effective way of improving corporate governance. The conversion of the Exchange into a stock corporation took effect on 8 August 2001, However, the strict timetable and the absence of steady revenue stream constrained the next step in demutualization, its listing from taking place.
    
    2.2 Ownership Structure
    
    Under the conversion plan, each of the one hundred eighty four (184) member-brokers subscribed to and fully paid for 50,000 shares in the PSE. The initial conversion of a mutual company into a stock corporation results in a shareholder-based company owned 100% by brokers. Its subsequent listing is expected to reduce the ownership by brokers significantly, similar to the ASX and HkEx experience. The SRC prohibits shareholders from having more than 5% of the voting rights as well as an “industry group” from owning more than 20% of the shares of the PSE after demutualization.
    
     3.TRADING RIGHTS
    
    3.1 Separation of Ownership of the Exchange from Access to Trading
    
    Effective 8 August 2001, ownership of shares in the Exchange and access to the trading facilities of the Exchange is separated.
    
    In recognition of the existing seat ownership by members, one Trading Right is conferred to each of the one hundred eighty four (184) members entitled to subscribe to shares.
    
    3.2 Policy of Imposing a Moratorium on the Issuance of New Trading Rights
    
    In the light of prevailing market conditions, one-hundred eighty four (184) trading rights are deemed sufficient to meet the business objectives of the Exchange. Thus, effective 8 August 2001, the Exchange is imposing a moratorium on the issuance of new trading rights.
    
    3.3 Transferability of Trading Right
    
    The trading right shall be transferable without any time limitation.
    
    4. CORPORATE GOVERNANCE
    
    4.1 Board Structure and Composition
    
    In compliance with the prescribed board structure in Section 33.2 (f) and (g) of the SRC, of the fifteen (15) members of the Board, eight (8) are non-brokers while seven (7) are brokers proportionately representing the brokers in terms of volume, value, and paid-up capital. The President of the PSE is also a nonbroker.
    
    Both ASX and HkEx eventually plan to reduce the number of directors pursuant to demutualization. PSE will examine the necessity of reducing the size of its Board when it turns public.
    
    4.2 Overall Organizational Structure upon Demutualization
    
    A key component of the future success of PSE is dependent on a business structure that reflects its business and strategic plans. PSE is proposing to develop a new organizational structure that will:
    
    reflect strategic directions aimed at rebuilding integrity, commercializing the organization, providing the best possible resources for the current business and expanding these services to diversify revenue sources. It is planned that a responsible business unit supports each strand of the strategy, with new or improved infrastructure for the whole organization.
    
    pursue decreases in the breaches of rules. It shall also seek to increase the PSE' s role in the marketplace through better surveillance and follow-up action as well as through involvement in practical policy setting.
    
    Maintain all core revenue sources: treasury and asset management returns; listing, trading and market data fees as well as clearing, settlement, and registry fees.
    
    4.3 Committees
    
    One of the most significant changes in the govemance structure during the transition period is the shift in the committee structure. The primary role of the committees under the new structure will be to provide external audit and appeals mechanisms for Exchange customers as well as strategic guidance and advice to the new Executive Team of the Exchange, and eventually to withdraw from all line management decision-making responsibilities.
    
    5. BUSINESS OF THE EXCHANGE
    
    5.1 Current Revenues
    
    As of 31 December 2000, PSE obtains revenues from a range of services covering listing fees and other listing related activities (52%), information technology services (27%), membership services (2%), administration recoveries (1%), and interest income (18%).

图1

    Revenues generated from listing is largely made up of initial, annual, and subsequent listing fees while income derived from membership comprises of filing fees and lounge membership fees. The revenues from the information technology services came from the charges for the hire of terminals, the Communication Front-End system (CFE), and the data feed connections.
    
    In its efforts to enhance productivity and profitability, PSE is currently seeking opportunities to improve returns and minimize costs in the short term and studying the long-term strategic directions it will needs to take. Pursuant to the advice of JP Morgan dated 14 February 2001 which states that:
    
    “...the demutualization process should aim to create, before listing, structures that will in due course establish the exchange as a viable and profitable listed entity where ownership is separated from market access. Importantly, it is vital for a newly listed exchange not to disappoint its shareholders soon after listing. This is because investor confidence, once shaken, is often difficult to re-establish in the short term."
    
    5.1.1 Data on Listed Companies
    
    Listed companies are significant client base of the PSE. As of 30June 2002, there are two hundred thirty six (236) companies listed on the First and Second board of the Exchange with a total market capitalization of approximately US$44.36B and one (1) company listed on the Small Medium Enterprise Board (SME). These companies came from different key sectors, which include commercial-industrial, property, mining, and oil sectors.
    
    Total number of listed companies is shown below:
    
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    Industry Classification/Number of Listed Companies

    Banks/21
    
    Financial Services/7
    
    Communication/17
    
    Power and Energy/4
    
    Transportation Services/6
    
    Construction & Other Related Products/12
    
    Food, Beverage, & Tobacco/13
    
    Holding Firms/65
    
    Manufacturing, Distribution, and Trading/24
    
    Hotel, Recreation, and other Services/9
    
    Philippine Deposit Receipts & Warrants/3
    
    Property/28
    
    Mining/15
    
    Oil/10
    
    Others/2
    
    Small and Medium Enterprise/1
    
    Total/237
    
    5.2 Business Prospects
    
    ASX and HKEx derive the bulk of their revenues from clearing and settlement. It is one avenue open for PSE to increase its revenues significantly, which is tied to an increase in market activity. The development of new services could include clearing and settling sales and purchases of retail managed funds, commodity contracts, and short-term money market instruments. At present, the Exchange owns 51% of Securities Clearing Corporation of the Philippines (SCCP), a private institution organized primarily as a clearance and settlement agency for eligible trades executed in the Exchange.
    
    Although the PSE is seriously considering owning SCCP, as part of the strategic direction of PSE, there are existing plans for purchasing a clearing and settlement system. The system to be acquired shall be a unified system designed to meet the needs of the Philippine equities market and shall support any model of settlement with fully integrated risk monitoring capabilities. It shall have direct links with the transfer agents and shall allow interface with the systems of all market participants.
    
    6. Risk Management
    
    Although primarily seen as a regulatory function, risk management is a business function as well. As the entity conducting risk management, SCCP must ensure that it manages risks to protect its own financial position and that of the investors and of the brokers who use the market. To improve the efficacy of risks, SCCP implemented the following the following vital steps:
    
    1. Reduction of settlement date from T+4 to T+3;
    
    2. Continuous evaluation of the Comprehensive Trade Guaranty Fund to achieve the ideal level;
    
    3. Imposition of Mark to Market Collateral Deposit (MMCD);
    
    4. Establishment of Guidelines for Cash payment or Early Delivery/Early Payment and for Special Isolated Immediate Settlement (SIIS)
    
    In addition, daily monitoring of trading activity (Volume/Value) per Broker and per Issue is in place. Actively traded issues are monitored based on the following categories:
    
    1. Price band 40%-50%
    
    2. 50% increase in Volume
    
    3. Trade Value exceeds the 25% current level of CTGF. 
    
    4. EQ TRADES
    
    7. STATUTORY REGULATORY ROLE
    
    The regulatory responsibilities of PSE are established under the SRC and its Implementing Rules and Regulation. It is within a framework of a self-regulatory organization that the responsibilities are imposed. Admittedly, however, there is a need to define the roles and functions of SEC to allow a demutualized PSE to operate independently pursuant to its role as a self-regulatory organization without compromising the oversight function of SEC. To this end, the development and publication of a policy statement from SEC setting out its oversight objectives with a view of strengthening its cooperation with PSE is necessary.
    
    7.1 Front-line Market Regulator
    
    The responsibility of monitoring market conditions and trading activity as prescribed in the SRC and its implementing rules provide the PSE with regulatory status and obligations. Pursuant to such regulatory responsibilities, the Exchange is enhancing its surveillance system by incorporating alerts in the system. Among the alerts to be introduced to the system are:
    
    1. Cumulative Price Alert - will list all issues deviating beyond a variance limit of cumulative price;
    
    2. Cumulative Volume Alert - will list all issues deviating beyond a variance limit of cumulative volume;
    
    3. Cross Transaction Alert - will list all brokers significantly involved in heavy cross transactions, compared to their regular floor transactions;
    
    4. Run-off Alert - will list all significant trading activity conducted proximately prior to the run-off period (end of trading day);
    
    5. Significant Shares Concentration Alert - will list all brokers, issuers who have had unusual concentration of traded shares activity; and 6. Significant Trading Alert - will list all issues with unusually significant market activity based on the issue's statistical average trading volume.
    
    7.2 ower Over Listed Companies
    
    Under the Implementing Rules and Regulations of the SRC, the Exchange shall be solely “responsible for processing and approving or rejecting applications for new listing of shares, suspension and delisting of listed issues and impositions of sanctions on listed companies for violation of SRO rules". The Exchange is also empowered to monitor compliance by listed companies with continuing listing obligations. With its demutualization, the PSE segregated its supervisory and commercial activities to ensure that both functions receive sufficient attention.
    
    As a commercial entity, the PSE will treat listed entities as customers and will enhance its service to the listed companies without prejudice to its duty to monitor them. Pursuant to its dichotomous roles and within the framework of full disclosure, the Exchange is introducing an Electronic Disclosure System.
    
    The implementation of the electronic disclosure system will allow listed companies to send their respective company disclosures (unstructured and structured) electronically. Upon the release of disclosures from the listed companies and review by the Listings and Disclosure Group, it will be simultaneously disseminated to all market participants, data vendors and media via electronic data feed and posted on the PSE Website. Implementation of the electronic disclosure system is scheduled on September 2002.
    
    7.3 Enhancing Organizational Structure for Regulatory Role
    
    The organizational structure is conceived upon the key consideration of resolving potential conflicts of interest. Thus, the separation of regulatory from commercial activities while centralizing regulatory activities with independent oversight is desirable. The PSE seeks to enhance its brand image to impart investors' confidence in the integrity of the market. To this end, PSE will add one or two high level executives on the operational and policy level or both.
    
    7.4 Delineation of Responsibilities between PSE and SEC through Memoranda of Understanding
    
    The success of the self-regulatory structure rely on a mutual recognition by the front-line regulator (Exchange) and by the market overseer (Securities and Exchange Commission) of their shared responsibilities and a delineation of these shared responsibilities. There are overlaps in the responsibilities over listed companies, market surveillance and investigation of members or trading participants.
    
    During the Joint PSE-SEC Seminar on Market Regulation held on 27 April 2001, the PSE and SEC agreed to develop a framework for co-regulation by delineating boundaries between the responsibilities of the Exchange and those of SEC. Thus, memoranda of understanding on listed companies, market surveillance and member regulation as well as on parallel investigations involving both persons who are and who are not subject of SRO jurisdiction will be explored by the SEC and PSE.