REGULATORY FRAMEWORK FOR

SECURITIES BORROWING AND LENDING

IN THE PHILIPPINES

By: JOSE P. AQUINO

Director, Market Regulation Department, SEC

PSE SECURITIES LENDING SEMINAR 2006

Philippine Stock Exchange Auditorium, Pasig City, Philippines
June 22, 2006

Securities and Exchange Commission

 *SEC Memorandum Circular No. 7

RULES ON SECURITIES
BORROWING AND LENDING

* Approved by SEC on June 9, 2006.

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 ELEMENTS OF SBL TRANSACTION
1. The lender temporarily transfers the
title over borrowed securities to the
borrower.
2. The borrower provides the lender
with collateral as security for the
loan. The parties may agree that the
title over collateral securities shall
likewise be transferred to the
lender.

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 ELEMENTS OF SBL TRANSACTION
3.The lender earns a fee as consideration
for the loan.
4.The borrower is entitled to the economic
benefits of owning the borrowed
securities but the borrower is obliged to
create or manufacture equivalent
benefits and deliver these to the lender.

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 ELEMENTS OF SBL TRANSACTION
5. A lender of equity securities loses title
over said securities and so he is not
entitled to vote, but may reserve the
right to vote.
6. At the end of borrowing period or
maturity of the loan, the borrower
returns the borrowed securities or
equivalent to the lender
while the lender returns the collateral.

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 MODES OF CONDUCTIONG SBL
*THROUGH LENDING AGENT
*DIRECT LENDING
*OTHER SCHEMES
THAT MAY BE APPROVED BY SEC:
*Lending Pool System
     *Competitive Auction
        *Bid Offer
        *Others
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 LENDING AGENT
  * A juridical person who acts on
behalf of a client with respect to
the lending of securities.
 

* No person shall act as lending

agent unless registered as such
by the SEC.
 
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 REGISTRATION REQUIREMENTS FOR

LENDING AGENT
  a. Application Form.
b. Board Resolution/Authorization
allowing the lending agency service.
c. Organizational and functional charts
of the securities lending unit.

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 REGISTRATION REQUIREMENTS FOR
LENDING AGENT
  d. Names and Curriculum Vitae
of securities lending unit personnel.
e. Detailed description of automated
Securities Lending System.
f. Manual containing risk management

and internal control procedures.

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 REGISTRATION REQUIREMENTS FOR
LENDING AGENT
 g. Copy of BSP license if the applicant is
accredited securities custodian
for banks and NBFIs
h. A registration fee of Php 50,000.00
i. Copy of pro-forma MSLA
j. Copy of pro-forma SLAA

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 OTHER REQUIREMENTS
FOR LENDING AGENT
*Securities Lending System
* Securities lending unit personnel
with functional knowledge and
sufficient technical expertise in
operating the securities lending system
 
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 THIRD PARTY SERVICE PROVIDER
The lending agent may appoint a third
party to perform any or all the functions
of the Securities Lending System.
Provided that, the engagement of a third
party service provider be disclosed in the
application.
Provided further, the lending agent shall
be accountable for the acts, errors and
omissions of third party service provider.
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 BASIC REQUIRED FUNCTIONS OF
SECURITIES LENDING SYSTEM
1. Provide price quotation, trade
matching and confirmation services.
2. Run a lender selection process if
necessary.
3. Deliver the borrowed securities to the
account of the borrower.

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 BASIC REQUIRED FUNCTIONS OF
SECURITIES LENDING SYSTEM
4. Receive collateral securities from the
borrower.
5. Perform daily valuation of borrowed
and collateral securities.
6. Determine the adequacy of total
collateral value against total market value
of borrowed securities for each borrower.

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 BASIC REQUIRED FUNCTIONS OF
SECURITIES LENDING SYSTEM
7. Issue margin calls or effect margin
releases as appropriate.
8. Track corporate actions on borrowed &
collateral securities, collect & distribute
benefits to the borrower & lender.
9. Execute loan and collateral return and
recall processes.

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 BASIC REQUIRED FUNCTIONS OF
SECURITIES LENDING SYSTEM
10. Receive borrowed securities from the
borrower on maturity date.
11. Return collateral to the borrower at
the end of borrowing period or earlier.
12. Collect lending fee on agreed due date
and distribute the same to the lender.

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 BASIC REQUIRED FUNCTIONS OF
SECURITIES LENDING SYSTEM
13. Inform borrower of the occurrence of
default.
14. Report failed settlements.
15. Monitor foreign ownership of equity
securities.
 

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 WHO MAY ENGAGE IN DIRECT LENDING
1. Domestic banks & branches of foreign banks
2. Investment houses
3. Investment companies
4. Insurance companies
5. Pension funds or retirement plans
6. Securities dealers
7. Entities that may be authorized by the SEC.

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 REQUIREMENTS FOR DIRECT LENDING
1. MSLA between Borrower and Direct Lender
2. Securities Lending System of Direct Lender

NO REGISTRATION REQUIREMENTS WITH SEC

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 PROVISIONS IN THE MASTER
SECURITIES LENDING AGREEMENT
1. Capacity of parties
- principal, agent, other capacity
- a party may be lender in one
transaction but borrower in another
2. Term of loan
- open/on demand, specified/fixed

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 PROVISIONS IN THE MASTER
SECURITIES LENDING AGREEMENT

3. Requirements for delivery of securities

4. Eligible collateral & Collateral
management procedures
5. Statement that there is transfer of title
over the borrowed securities (and over
collateral securities, if agreed)

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 PROVISIONS IN THE MASTER
SECURITIES LENDING AGREEMENT
6. Valuation methodology
7. Arrangement for dealing with
manufactured dividend, payment, voting
right, corporate action
8. Return and recall of securities and
consequences

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 PROVISIONS IN THE MASTER
SECURITIES LENDING AGREEMENT
9. Events of default & remedies of parties
10. Grounds for termination of loan and
rights of parties upon termination
11. Lending fee & other charges
12. Representations, warranties and
liabilities of parties
13. Dispute resolution
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 LOANABLE SECURITIES
1. Securities listed in an Exchange
2. Securities issued by Bureau Treasury
3. Securities issued by BSP
4.Other securities allowed by SEC

Provided, the securities are in electronic form or, if

certificated, must be in electronic form at the time
of SBL, and free from all liens and encumbrances.
 
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 ELIGIBLE COLLATERAL
1. Cash
2. Securities listed in an Exchange
3. Securities issued by Bureau Treasury
4. Securities issued by BSP
4.Other forms allowed by SEC
Provided, collateral securities are in electronic form or,
if certificated, in electronic form at the time of SBL,
and free from all liens and encumbrances.  
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 DELIVERY OF
BORROWED SECURITIES
* After the delivery of collateral, or

* Simultaneous with the delivery of

collateral.
The parties shall execute documents
or issue instructions to ensure that the
title over the borrowed securities shall
pass from lender to borrower.
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 DELIVERY OF COLLATERAL
Be deposited or delivered
to the account of lender

* Prior to the delivery of borrowed

securities, or

* Simultaneous with the delivery of

borrowed securities.
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 OPTIONS OF PARTIES REGARDING
COLLATERAL SECURITIES
1. Provide in MSLA that title over
collateral securities shall also pass
from borrower to lender.
2. Provide in MSLA that the collateral
securities shall be pledged to lender,
or other arrangements.

* Consider tax impact and risk.

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 COLLATERAL LEVEL
* By agreement of parties.

* If without agreement:
At least 102% of current market value
of borrowed securities, if the collateral
is in the form of cash or GS.

At least 105% of current market value

of borrowed securities, if the collateral
is in the form of equities.
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 OTHER REQUIREMENTS ON
COLLATERAL
* Mark to Market at least once daily.

* Margining method may be done on:

- Aggregated or per account
- Loan by loan or per transaction
(Must be indicated in MSLA)

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 RESTRICTION ON FOREIGNERS
* Cannot borrow from Filipinos such
equity securities of companies
engaged in activities whose
foreign ownership is limited
by the Constitution & other laws
IF there is no mechanism monitoring
foreign ownership.

(eg. public utility companies)

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 TERMINATION OF LOAN
* Borrower to return borrowed
securities or equivalent.
(If not, then default. Transaction
deemed sale transaction with
corresponding tax impact)

* Lender to return collateral.

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 *DOCUMENTATION– Confirmation Notice
specifying details of SBL transaction.

*RECORD KEEPING– Lending Agents and

Direct Lenders
must keep SBL ledgers.

*REPORTING- Lending Agents and Direct

Lenders to submit to SEC
bi-annual Summary Report
of SBL transactions.
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 COMPLIANCE WITH BIR RULES

For SBL transaction to qualify for tax

exemption, the parties must comply
with BIR regulations.

(eg. Registration of MSLA with BIR

within specified period)

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 THANK YOU

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