MANILA – Local bourse operator Philippine Stock Exchange Inc. (PSE) has secured the approval of the Securities and Exchange Commission (SEC) to introduce short selling in the equities market in a bid to improve liquidity.
In a memorandum, the PSE said the corporate regulator gave the green light for its guidelines for short selling transactions during a meeting on June 5.
Short selling refers to selling of stocks that a trader does not own by borrowing from a broker and immediately selling the stock at its current market price, according to Investopedia.
At a future point in time, the short seller will cover the short position by buying it in the market and repaying the loaned stock to the broker. Traders go short in anticipation that the stock will tumble.
The approval of PSE’s short selling guidelines came amid the market’s recent plunge to bear territory.
Short selling is in place in several exchanges and is utilized by investors as a hedging mechanism.
The approved implementing guidelines for short selling transactions include provisions on eligible securities, procedures for short selling transactions, and the execution of short selling orders, among others.
Members of the PSE index (PSEi) and exchange traded funds are the only securities considered as eligible for short selling transactions.
For any eligible security, only 10 percent of its outstanding shares can be shorted.
The limit acts as a safeguard for the orderly conduct of short selling activities, while still providing ample room for price discovery, the PSE said.
In executing short selling orders, trading participants will have to ensure that the client has entered into the necessary securities borrowing arrangements prior to entering a short selling order, it said.
Borrowing arrangements must adhere to existing SEC, Bureau of Internal Revenue, and PSE regulations governing securities borrowing and lending.
“Since this is the first time we are introducing short selling, our guidelines were crafted with the goal of ensuring that short selling transactions are transparent and effectively monitored. Even with a limited number of eligible securities and a cap on short interest to begin with, we believe that the ability to take short positions will further spur trading activity and attract more investors to our market,” PSE president and CEO Ramon Monzon said.
“Once we launch short selling, investors will be able to employ this tool to help them hedge their portfolio risk,” Monzon added.
The local bourse chief noted that the short selling facility will help improve liquidity in the stock market.
“We are grateful to the SEC for approving the guidelines for short selling. We are optimistic that this facility will lend support to our securities borrowing and lending program and help improve liquidity in our market,” he said.
The PSE said it shall announce in due course the effectivity of the Short Selling Guidelines as it has outlined several activities for various stakeholders prior to implementation, which include a series of product briefings, information dissemination initiatives, and reports and systems customizations, among others. (GMA News)
