Tighter securities trade rules mulled

BY KARL LESTER M. YAP, BusinessWorld Reporter The central bank wants an independent third-party entity to regulate government securities trading in the secondary market to ensure transparency amid allegations of price fixing by some market participants. "Considering that the market is clearly imbued with public interest, it is ostensible that a self-regulatory organization (SRO) duly authorized by the Securities and Exchange Commission (SEC) may be the only acceptable and credible solution," central bank Deputy Governor Nestor A. Espenilla, Jr. said in a letter dated July 3 to the Money Market Association of the Philippines (MART). Some quarters have alleged price-fixing during the recent financial market meltdown when yields from Philippine bonds had skyrocketed, some by as much as five percentage points. While saying there was still no evidence that price manipulation had occurred, the central bank said it was enforcing stricter regulations. "We are accelerating upgrading of complementary Bangko Sentral ng Pilipinas (BSP) regulations on the conduct of BSP-supervised entities such as securities market makers, dealers, brokers, custodians, and other capital market-related roles," Mr. Espenilla said in his letter to the MART. "These will be strictly enforced in close coordination with the SEC utilizing specialist examiners and procedures," he added. The MART is the country’s organization of fixed income dealers and is comprised of bank treasurers and traders, and dealers from investment houses. At present, the only organization applying for an SRO status is the fixed income exchange. Mr. Espenilla said another alternative would be for the SEC to "directly regulate and supervise government securities trading." The SEC is now working on the rules on over-the-counter (OTC) trading of government securities. Over-the-counter trading refers to the practice of bond dealers and brokers negotiating with one another over computer networks, such as the system run by Bloomberg used by dealers Monday, and by phone. The other method by which banks trade in the secondary market is through the fixed income exchange. The present OTC market is not directly regulated. Over the years, market participants, through the Bankers Association of the Philippines (BAP) and the MART, have developed procedures for trading government securities over the counter. Mr. Espenilla cited the need to create more formal and stricter regulations to ensure compliance with standards as the market becomes more sophisticated. "The government securities market is a very important market in the Philippines. It is critical to the pricing of a lot of things. Its integrity must be ensured," Mr. Espenilla said in a separate interview. The official said the central bank could not assume the role given operational constraints. "Market regulation involves a lot of operations work. You need to monitor the market as it unfolds," he said, noting that the central bank examines banks only once a year. The monetary official said present market regulations are not enough. "It was good enough before because the market was smaller. Reforms are necessary, otherwise, it is a stunted market," he told BusinessWorld. In the same letter to the MART, Mr. Espenilla said the group’s proposals to improve existing market conventions are not enough to ensure price transparency. "We are greatly concerned that the proposals, although generally constructive and well intentioned, taken into totality, do not go far enough to secure the integrity of the government securities market. Recent events underscore the need for stronger, more decisive actions," Mr. Espenilla said. Last May 31, a bank trader e-mailed banks, requesting these to "post more realistic bids" to prevent the market from posting huge losses when they make their month-end mark-to-market valuation of portfolios. This prompted the central bank to initiate a probe. The bank in question denied there was an attempt to manipulate prices, saying the trader, who was then designated weekly officer of the week, was only making sure that banks followed the agreed maximum variances in the best bids for government debt instruments. MART officials also denied any price-fixing had occurred. "We categorically believe that there is no price manipulation in the setting of the interest rate benchmarks called the MART1," MART President Dino Rudyarto F. Gasmen said in a statement. Mr. Gasmen noted that the procedure for coming up with the benchmark rates involves 25 institutions, which makes it difficult for just one or a few players to manipulate prices. The BAP, meanwhile, admitted the e-mail was "inappropriate" but fell short of saying it had led to price-fixing. Last June 2, the BAP open market committee met to discuss the price manipulation issue. "It is the determination of the committee... that the subject e-mail, by any reasonable measure, would always have been in danger of being interpreted to be a highly inappropriate suggestion to artificially influence the day’s benchmark fixing rates," Roberto L. Panlilio, BAP open market committee chairman, said in a June 5 letter to the central bank. Mr. Panlilio said the BAP was committed to ensuring the credibility of the local government securities market. "The whole BAP membership, particularly fixing banks and government securities dealers, are therefore enjoined to review and refresh themselves with the letter and spirit of all applicable laws, regulations, and standards, to prevent a similar incident in the future," Mr. Panlilio said. Mr. Espenilla said any reform commitments by the MART should be confirmed with the BAP since majority of MART’s members are also BAP members. "For all intents and purposes, they are a subset of the BAP. We want any reform commitment to be made at the highest level of the organization," he pointed out. In response to questions on the integrity of its benchmark rates, the MART now wants to broadcast the best bids for government securities more regularly. It is also proposing to use a third party that will act as a market controller, directly responsible for monitoring, policing and reporting activities of all trading participants. The group likewise wants more severe sanctions against erring members.--Report from BusinessWorld