THE Philippine Stock Exchange Inc. (PSE) said it secured the approval of the Securities and Exchange Commission (SEC) to introduce short selling in the stock market.
Short selling is in place in several exchanges and is utilized by investors as a hedging mechanism. It is basically the sale of a security not owned by the seller or that the seller has borrowed, mainly on the belief that a security’s price will decline, enabling it to be bought back at a lower price for a profit.
“We are grateful to the SEC for approving the guidelines for short selling. We are optimistic this facility will lend support to our securities borrowing and lending program and help improve liquidity in our market,” PSE President and CEO Ramon S. Monzon said.
The approved implementing guidelines for short- selling transactions include provisions on eligible securities, procedures for short-selling transactions, the execution of short-selling orders. Members of the benchmark 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.
Prior to executing short-selling orders, trading participants will have to ensure the client has entered into the necessary securities borrowing arrangements. Such 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 the ability to take short positions will further spur trading activity and attract more investors to our market,” he said.
“Once we launch short selling, investors will be able to employ this tool to help them hedge their portfolio risk,” Monzon added.
The PSE said it has outlined activities for various stakeholders in the coming weeks to apprise them of the rules and guidelines for short-selling transactions.