BAP firms up bond exchange backing

BY KARL LESTER M. YAP, BusinessWorld Reporter The Bankers Association of the Philippines (BAP), an association comprising of the country’s commercial and universal banks, has asserted that the fixed-income exchange should be the only legitimate venue for the trading of government securities. In a Feb. 10, 2006 letter to the Securities and Exchange Commission, BAP President Cesar E. A. Virata said the association’s board has decided to adopt the fixed-income exchange as the sole venue for the trading of fixed-income securities. "We would like to inform you that the BAP board in its meeting of February 9, 2006 has reaffirmed its position that the BAP and its member banks, as the major proponent of the fixed-income exchange infrastructure, have chosen the Philippine Dealing & Exchange Corp. (PDEX), duly registered as an exchange by this Honorable Commission, to be the sole venue for the trading of the fixed-income securities such as the government securities," Mr. Virata said. PDEX is one of the three operating companies under the Philippine Dealing System Holdings Corp. which manages the fixed-income exchange. The fixed-income exchange is majority owned and controlled by the BAP. The BAP cited a section of the Securities Regulation Code (SRC), the law governing securities trading, as a basis for their decision. "This position is also consistent with Section 32.2 (a) of the SRC which states that ‘No broker, dealer, salesman, or associated person of a broker or dealer, singly or in concert with any other person, shall make, create or operate, or enable another to make, create, or operate any trading market, otherwise than on a registered exchange, for the buying and selling of any security, except in accordance with rules and regulations the Commission may prescribe," the letter further read. In a separate interview, Mr. Virata said the BAP move was only "logical" since it was the one that initiated the creation of the fixed-income exchange. "Being the major proponent of the project, the BAP is committed to the objectives of the project since its inception and continues to be committed. It is only logical and should be expected that it will choose PDEX as its sole venue for the trading of fixed-income securities. "Moreover, the BAP also owes it to the other partners of the project, both private and public, to manifest and demonstrate its support to the project to ensure its success," Mr. Virata explained. "The establishment of the fixed-income exchange infrastructure project and the support that the BAP is extending to it will hopefully achieve the desired effects that the proponents of the project have envisioned. Among the objectives identified are improvement of liquidity, the consolidation of the market and price discovery and transparency. Key to improving liquidity in the fixed-income market is centralization. It is envisioned that with centralization and the other noteworthy projects of the Bureau of the Treasury such as the recently concluded bond exchange, there will be improved liquidity in the government securities markets. This is hoped to be replicated in the corporate fixed-income market as well," he added. The SEC is the regulator of securities trading in the country. It is seeking opinions of various market participants on fixed-income securities trading to help it regulate the market effectively. BusinessWorld tried to contact the SEC but officials could not be reached. Fixed-income exchange officials, meanwhile, declined to comment on the BAP letter. The BAP stance comes amid a controversy regarding the legality of the over-the-counter trade, another venue for securities trading. The views of the BAP board, composed of the chief executive officers of the banks, are contrary to the position of the Money Market Association of the Philippines (MART). The MART is the country’s organization of fixed-income dealers and is comprised by bank treasurers and traders. The BAP is pushing for the sole use of the exchange while MART wants a free market where participants can choose the venue for trading. Over-the-counter (OTC) trading, in its most basic sense, refers to the system wherein bond dealers transact trades over the telephone. Today’s actual OTC trades have evolved into the use of an electronic trading platform, such as the system run by Bloomberg, currently used by local dealers, and the use of voice brokers. In a letter sent to the SEC dated January 6, 2006, MART defended OTC trading but it also stressed that it is not against the use of the fixed-income exchange. "[W]e believe that the existing OTC market must be preserved and allowed to develop and coexist with other fixed-income exchanges and trading markets. MART firmly believes that the existing OTC structure of the local fixed-income market can equal, if not surpass, the efficiency and transparency that an order-driven exchange is assumed to provide," MART President Dino Rudyardo F. Gasmen said in the letter. "While we have explicitly advocated an OTC market, we are not suggesting that the fixed-income exchange established by the PDEX, or any other order-driven fixed-income exchange to be established in the future must be discontinued or never granted registration," Mr. Gasmen added. The BAP position was not welcomed by the market with people saying it is leading to a monopoly. "Clearly, there is a conflict of interest. The BAP, since it owns the fixed-income exchange, will naturally endorse it. It is trying to force the banks to trade only through the exchange so it will benefit from the revenues," a bank treasurer, who declined to be named, said. Others want the BAP to encourage a free market and to allow banks to have a choice. "The way I think that market is reacting to that letter is why don’t you let the market choose. Shouldn’t one have a choice depending on how he sees each service provider to be beneficial to his requirements?" Philippine National Bank Treasurer Asterio L. Fabis, Jr. told BusinessWorld in an interview. "I don’t think it’s going to work. That will make the market inefficient. If you will deal with just one service provider and not allow competition, the market will not reap the benefits of having a free market where multiple service providers will compete and give the most efficient service at the least possible cost. The best would be to allow the market to choose the most efficient service provider," echoed Rizal Commercial Banking Corp. Treasurer Eduardo Sergio G. Edeza. Mr. Edeza, who is a former national treasurer, said having a monopoly can lead to unfair pricing and the costs may eventually be passed on to the government. "The cost of government securities trading and the borrowing cost of the government may increase. We may do a disservice to the development of the capital market as a whole," Mr. Edeza explained. Some banks said that even if the BAP mandates them to use the fixed-income exchange, they will still need to keep the Bloomberg platform for its other services. "Even if we will be required to use only the fixed-income exchange for the domestic securities trading, we still have to maintain the Bloomberg platform for our foreign securities trading, data for risk management, and its news services," said China Banking Corp. Treasurer Antonio S. Espedido, Jr. An SEC ruling that all fixed-income securities should be traded exclusively in the bourse poses a risk to the OTC market, particularly its service providers including Bloomberg and the two brokering companies operating in the country. Brokers stressed that their services are essential to the market. "Brokers are integral to a fixed-income market, be it in a developed or a developing financial center," said Jaime F. Villalon, managing director of Tullett Prebon Philippines Inc. "We put in efficiency in the market by scouting for the best possible price. Since we have confidentiality agreements with all the banks, their identities are protected," Mr. Villalon explained. "Any form of competition has, of course, the potential of affecting our business. But we thrive on competition, and appreciate it. It is what makes us more efficient. Competition is what hones us to become contributors to the overall efficiency and vibrance of the financial market. And the benefits of competition accrue to the rest of the economy including the public and the small investors," said Narciso L. Eraña, president of ICAP Philippines, Inc. "A properly regulated market with open competition is the tried and tested formula in the most robust markets globally. The tremendous growth in the domestic market in 2005 has been a very encouraging trend. We at ICAP like the challenge to be a participant in the Philippine financial market and continue to help it grow," he said. BusinessWorld tried to contact Bloomberg but officials were unavailable for comment.