Philippine Stock Exchange head reacts

In the interest of fair play, we are devoting this column to Philippine Stock Exchange president Francis Lim’s reaction to a recently published article on the speculations surrounding the suspension of the trading of Meralco shares at the local bourse. Here it goes:

“We are writing to clarify some points raised in your column entitled “PSE Woes” published in your column “Hidden Agenda” on December 24, 2008, in the Business Section of your paper.

“We fully recognize that the issue surrounding the MER shares and the consequent suspension of its trading therewith has inconvenienced Meralco shareholders. We categorically deny, however, that the Board of Directors of the Philippine Stock Exchange (PSE) has been unduly influenced into suspending the trading of the Meralco (MER) shares. Our Board, acting as a collegial body and without any hidden agenda or political motivation, adopted in utmost good faith this painful decision solely to protect the investing public and maintain the integrity of our stock market. We at the PSE spent considerable time resolving this issue. The issue is not as simple as it looks given the intricacies and complexities of stock market operations. It requires prudent deliberation and action consistent with our mandate to maintain an efficient and orderly market. The men and women of the PSE Board are particularly cognizant of their role as guardians of the stock market in the situation at hand because one of the PSE directors has been perceived – rightly or wrongly – to have prominently figured in the battle for control of Meralco.

“In this regard, the Securities Clearing Corporation of the Philippines (SCCP), a wholly-owned subsidiary of the PSE that is tasked with the clearing and settlement of all trades done within the PSE trading system, received on Dec. 16, 2008 a letter from the Philippine Depository and Trust Corp. (PDTC) stating, among others, that PDTC would not be downloading broker balances involving Meralco or MER shares to the SCCP for clearing. The practical effect of PDTC’s action was to prevent SCCP from settling any trades of MER shares. It would have been reckless and suicidal for the PSE NOT to suspend trading of MER shares, knowing full well in advance that no shares will be downloaded on settlement date. MER shares are one of the most highly traded issues in our stock market. Investors all over the world buy them. You can just imagine how investors located in different countries buying MER shares would react if, on settlement date, they do not get delivery of the MER they bought. Havoc will inevitably result to our stock market and investor confidence in our market will be shattered.

“By way of explanation, trading is only one component part of a stock market transaction. After trading, the shares purchased must be paid for and delivered to the buyer who paid money to purchase the shares through SCCP. We call this clearing and settlement. However, before SCCP can settle and clear any trade, it requires crucial information from PDTC. PDTC informs the SCCP whether there are available shares in the account of the selling broker (which PDTC obtains from its wholly-owned subsidiary, PCD Nominee Corp. (PCDNC)) which can be used to settle a trade. Without this crucial downloaded information from PDTC, there will be a settlement fail, i.e., the buyers will not get delivery of the shares which they paid for. A settlement fail is a “no-no” in the stock market world. It shatters investor confidence. As you correctly suggested, now is especially the time for prudence and sobriety in order to keep the market calm.

“PDTC, which is a corporation separate and distinct from the PSE, serves as the depository for shares traded through the PSE. As a depository, it plays an indispensable role in stock market trading – all shares traded in our stock market are first lodged with the PDTC in scripless and fungible form, which means that the shares are in electronic form and are not specifically registered in the name of the ultimate beneficial owner (like Lubrica) in the PDTC or PSE or SCCP records. As we understand it, PDTC suspended the downloading of broker balances on MER shares to the SCCP in order to preserve the purity of shares traded in the stock market.

“In this regard, when we at the PSE were satisfied that our brokers had already segregated Lubrica from the non-Lubrica shares and would not trade them, we immediately informed PDTC on Dec. 22, 2008, and reiterated on Dec. 23, that the PSE is ready to resume trading of MER non-Lubrica shares. We were informed, however, that a PDTC Board meeting was called to discuss the LBP-Lubrica case and some issues have yet to be resolved before PDTC could confirm to us that they would download MER non-Lubrica shares for clearing and settlement. We are eagerly awaiting confirmation from the PDTC that they would download broker balances on MER non-Lubrica shares so we can resume trading and clearing of MER shares.

“In closing and on a personal note, let me assure you that, as long as I am president and CEO, I will not allow the PSE to be used as an instrument to promote selfish interests, much less for political vendetta. Despite its age, our stock market remains a laggard in the region. We at the PSE have devoted countless hours and significant efforts to help put in place an enabling environment to regain investor confidence in our stock market. Modesty aside, we have made significant strides and we are not about to put them to naught to make way for selfish interests. Let me assure you that I am willing to take drastic actions even at the expense of my job, and I hope I can count on you for help if need be, once I sense a well-founded basis that the PSE iS being useD for reasons other than promoting the interest of the stock market and our country.

– FRANCISCO ED. LIM, president and CEO, PSE

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