SEC drafts rules on OTC trading

The Securities and Exchange Commission (SEC) has drafted new rules on the trading of securities over-the-counter (OTC) in line with efforts to further develop the domestic capital market.

An OTC market refers to the method of buying and selling securities outside of an established exchange or any alternative trading system (ATS).

Jose P. Aquino, head of the SEC’s Markets and Exchanges Department, said securities eligible to be traded in an OTC market include registered securities, exempt securities under Sections 9 and 10 of the Securities Regulation Code, and securities of public companies.

"With these rules, brokers and dealers would trade securities that may otherwise not qualify for listing or trading in an exchange or alternative trading system," he said.

Under the draft rules, no person is allowed to make, create or operate an OTC market unless such person is a registered broker, dealer or qualified investor. In applying for registration, the applicant shall specifically signify intention to conduct activities in the OTC market.

A broker or dealer in an OTC market is required to maintain adequate financial resources in accordance with the minimum capital adequacy requirements and other capital-related obligations that are required of such broker or dealer by the SEC.

Aquino said a security already being traded in an exchange or an ATS shall not be quoted or traded in an OTC market unless the SEC allows the quoting or trading of such security.

The SEC, recognizing the role of government securities relative to the government’s effort in laying down monetary and fiscal policies, will allow the trading of such securities in an OTC market even if they are already being traded in an exchange or ATS.

In general, the reason a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.