SEC banks on short selling to bolster trading in stock market

The Securities and Exchange Commission (SEC) is banking on the potential of short selling to boost trading activity in the Philippine equities market, as it looks to make the regulatory environment more conducive for such transactions.

The SEC has paved the way for short selling in the country by issuing the relevant rules as early as 2018, when it approved the Philippine Stock Exchange (PSE) Guidelines on Short Selling Transactions.

It has since worked together with the PSE and market participants towards ensuring that they are ready for the implementation of the guidelines.

Recently, the Commission has looked at the adoption or non-adoption of existing practices in other markets to advance short selling in the Philippines. In Asia, short selling is allowed in Singapore, Hong Kong, Malaysia, Thailand and Indonesia, among others.

The SEC is also considering requiring the submission of a regular report on all short selling and securities borrowing and lending (SBL) activities and their compliance with current rules and policies, to better guide the Commission on policies on short selling moving forward.

“We are pushing to align the short selling environment with the major Asian markets, which has the potential to promote liquidity, stabilize the market, protect investors, and further unlock the value of shares of Philippine corporations,” SEC Chairperson Emilio B. Aquino said.

“We will balance our role as regulator and market innovator, imposing the necessary restrictions and safeguards while ensuring that they will not stifle investors and trading participants from fully taking advantage of this trading strategy,” he added.

Short selling is the practice of betting on the decline of a stock’s price in order to make a profit. Here, an investor sells a security that he does not own, consummated by the delivery of a borrowed security, with a commitment to return the borrowed security or its equivalent on a determined or determinable future date.

The SEC has already approved guidelines that will facilitate the conduct of short selling in the local market.

In 2018, the Commission cleared the PSE Guidelines on Short Selling Transactions, which provided that only the top 30 listed Philippine companies comprising the PSE Index, as well as exchange-traded funds, shall be eligible for short selling. Companies must also maintain a ratio of short interest to outstanding shares of at least 10%.

This was followed by the approval of the Capital Markets Integrity Corporation (CMIC) Implementing Guidelines on SBL and Short Selling in 2019. The guidelines govern the recording of SBL and short selling transactions on trading participants’ books and records. They also ensure that trading participants shall ascertain that parties have entered into the necessary borrowing arrangements prior to entering a short sale transaction.