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Annex A - Feedback Given by Mr. Chanda Shahani on Derivatives Module in Ateneo-CCE

Annex A - Feedback Given by Mr. Chanda Shahani on Derivatives Module in Ateneo-CCE

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Published by Chanda R. Shahani

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Published by: Chanda R. Shahani on Jun 18, 2011
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06/18/2011

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Feedback given by: Chanda ShahaniWhile the professor, Mr. Augusto M. Cosio was unquestionably competent in terms of his overallknowledge of the advanced market product of derivatives, REITs and ETFs; I must respectfully register my objections to the emphasis placed by the institution itself on the module on the purely mechanicalaspects of understanding derivatives with no information given to us on the downsides of derivatives – especially in terms of the Philippine context – in terms of the history and regulation of derivatives inour country. To not mention this in any level of meaningful detail results in a kind of historicalrevisionism that is not good, because a well-rounded securities specialist will inevitably encounter  people who are well-versed in the history and regulation of derivatives in this country, and thatsecurities specialist must be armed with the tools to answer these concerns, so as to allow the investor to make a meaningful and educated decision.This is to urge the curriculum committee for the securities specialist course to consider referring to theSecurities Regulation Code (RA 8799) itself for the relevant provisions with respect to derivatives andto integrate this in the handouts the next time the SSC is conducted. For example, Section 11(Commodities Futures Contracts) states “No person shall offer, sell or enter into commodities futurescontracts except in accordance with rules, regulations and orders the Commission may prescribe in the public interest. The Commission shall promulgate rules and regulations involving commodity futurescontracts to protect investors to ensure the development of a fair and transparent commodities market”is important. So is Section 25, which puts severe legal limits on a securities specialist to endorse anyoption product on any exchange: (Regulation of Option Trading): “No member of an Exchange shall,directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilegein relation to any security registered on a securities exchange.”By the way, RA 8799 as it stands does not specify whether “any security registered on a securitiesexchange” is limited to the securities on the PSE, or whether we may include foreign exchanges. Theneed for legal research on this matter is pat is now possible paramount, because it is now possible to buy and sell international derivatives online from the Philippines, seemingly without few legalrestrictions. The PSE itself is trying to revive interest in a new version of the now-defunct MIFE. Butrealistically, more emphasis could have been placed on how a securities specialist is bound, under existing SEC restrictions from endorsing a product that essentially has two functions: to hedge portfolioand operations risks and as a speculative gamble.Additionally, the undersigned found the material handouts wanting about the role of derivatives in thePhilippines equity market. I had to research elsewhere to elicit the finding that derivatives are alsoregulated by Bangko Sentral ng Pilipinas (BSP) and that currently the only way to avail of theseinstruments (aside from online) within the Philippines is through the over the counter market viaaccredited banks with derivatives licenses. The handouts also contained no reference whatsoever to theclosure of the Manila Futures Exchange (MIFE) in 1997, and what was the reason for its closure by theauthorities. I am pointing this out not to douse cold water over derivatives as a product, but simplykeeping in mind the words of the author, George Santayana, that “those who forget the past arecondemned to repeat it.”Lastly, while derivatives are a highly volatile instrument and this was admitted as such during themodule, it would have been preferable, if references were also made to the role that derivatives have placed in recent financial disasters such as the collapse of Barings Bank in the 1990s caused by roguederivatives trader Nick Leeson and the role that derivatives played in the more recent housingmeltdown in the U.S.A. We cannot just think happy thoughts about derivatives and pretend that none of 

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