SEC urges bourse to sell derivatives, other products
In order to boost profitability
By JENNEE GRACE U. RUBRICO, Senior Reporter
The Philippine Stock Exchange (PSE) can start selling derivatives and other products to boost its profitability, an official of the Securities and Exchange Commission (SEC) said.
The official said the bourse should start looking beyond the products it is currently selling and "discover" if derivatives would sell.
Derivatives are highly complicated tools mainly used to hedge against financial risks. They are so named because they derive their value from the price of an underlying asset such as bonds, common stocks, currencies or an index.
A holder of this kind of security can buy or sell an underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves in the right direction, the owners of the derivative make money; otherwise, they lose money.
Derivatives include stock options, interest rate swaps, futures, foreign exchange forwards or options, and credit default swaps.
Earlier, SEC Chairman Lilia R. Bautista suggested the PSE expand its products to include products sold by overseas bourses.
At present, the local exchange sells equities -- namely stocks, warrants, and Philippine deposit receipts -- and trading data. The exchange has also been selling small denominated treasury bonds, but these are set to mature this month.
"It's about time that they [PSE] consider selling derivatives they will only discover whether or not there is a market for this if they try to sell the products," the SEC official said.
She said other stock exchanges sell such products, but did not specify what kind of derivative products the PSE should sell.
An official of the PSE said the bourse is currently not selling derivative products.
But she said that rules for listing exchange-traded funds and real estate investment trust (REIT) are being studied.
A real estate investment trust is typically a closed-end investment trust that trades on an exchange and uses the pooled capital of investors to purchase and manage income properties. Equity REITs primarily own commercial real estate, such as shopping centers, apartments and industrial buildings.
Exchange-traded funds are similar to mutual funds, but are traded like stocks. They represent a basket of securities that are traded on an exchange.
The stock exchange is looking at ways of increasing its profitability and is currently working with a consultant that was tapped by the Asian Development Bank (ADB) to come up with ways to make the bourse an "earning exchange."
The consultant was tapped by the ADB as part of the technical assistance package it extended to strengthen the Philippine financial market, improve the PSE corporate governance, and identify steps to enhance the bourse' profitability profile to attract both local and foreign investors and eventually diversify ownership of the exchange.
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The Prudent Investor:
The SEC has allowed the Philippine Stock Exchange to boost its profitability by expanding its product ranges to include that of the derivatives, Exchange Trade Funds, Real Estate Investment Trust (REIT) and others. While the intention to allow for a wide range of products to market to the public is ideal, what seems to be amiss is the fundamental cause of the underdevelopment of the Philippine Capital Markets.
Principally, the dynamics of the Capital markets are simply basic economics; demand and supply. An elementary representation of the capital market is the Stock Market, which simply is about equity. Companies raise capital through the market via the traditional route the initial public offering or the secondary offering or through the non-traditional route via backdoor, mergers and/or acquisitions. Moreover, the stock exchange functions to allow the market to value publicly listed companies as measured by the movements of its share prices.
The Philippine Stock Exchange, according to its website, “PSE traces its roots from the country's two former bourses: the Manila Stock Exchange (MSE) and the Makati Stock Exchange (MkSE). Founded in March 1927, the MSE was the first stock exchange in the Philippines and one of the oldest in the Far East.” While it is one of the oldest market in the Far East the harsh reality is that it remains as one of the smallest in the world in terms of market capitalization and in volume turnover.
In terms of market capitalization, the Phisix Composite Index is about $ 20 billion, while the entire Philippine Market excluding the International Insurance giants Manulife and Sunlife shares is about $25 billion. Neighboring Indonesia has a market cap of about $ 49 billion, while the Philippines only leads that of Pakistan, Sri Lanka and Vietnam.
In terms of volume turnover, for the first semester of the year, the Phisix averaged $12.865 million a day with foreign investors taking up 62.2% of the daily output. In other words, overseas investors invest more than Filipinos whose investments constitute only about $ 4.862 million a day or P 273 million a day. Yet the volume cited above includes the Special Block Sales which are negotiated special sales but are also reported as part of the market’s turnover. In comparison to our neighbors, Indonesia trades at no less than $100 million a day or even Argentina whose turnover is incrementally better than ours at least $15 million a day.
Simple arithmetic will tell you that if an average volume for a local investor, retail and institutional, would be around P 100,000 or about $ 1,800 per investor, this would translate to 2,730 investors. In 20 trading days a month assuming that an investor trades only once a month would mean 54,600 investors a month. Also assuming that an investor trades only once a year would mean an annualized 655,200 investors. Since the above assumptions limits investors to enter once a year, and is very restrictive the annualized figure would probably show a considerably lower stock market penetration level probably around the 300,000 level or lower.
The Philippines is said to have a population of about 82 million people. Five percent of these are reportedly the wealthy class or 4.1 million elite people, given the above figures, it is noteworthy that less than 10% of them are even invested in the stock market. Yet in perverse manner news reports show that some 1 million investors saw their investments of more than P 100 billion dissipate or lost to the recent pyramiding scams.
Question is why the low penetration level of the stock market? Could the poor turnover be attributed to fear arising from direct experience of loss? Or could distrusts emanating from the past anomalies be the factor that led to continued investor cynicism of the local stock market? Or could it be due to misplaced notions/impressions or the lack of information of the mechanics of stock market investing? In short, could demand be stimulated if these issues were promptly addressed? Or is it because of the lack of supply of investible instruments?
Considering that since the financial crisis in 1997, no Peso denominated assets appreciated despite the continued expansion of our money supply, where have all the money gone?
If the stock market is the elementary representation of the capital markets, of which local investors are seen as averse to invest, how will investors deal with even more complex markets as the derivatives, REIT’s, ETFs other products that came about as byproducts of mature markets?
Volume is the key to the diversification of product lines, when volume hardly exists supply side solutions are most likely bound to fail. Furthermore, lean volumes with loose controls are prone to manipulations like the defunct Manila International Futures Exchange (MIFE) experience.
If the SEC truly wants to augment the PSE’s profitability it should reform the stock market’s framework to that of global standards, in addition, institute parallel programs such as cross border listings, as the Mexico experience, or consider an intensive marketing program to tap the overseas Philippine workers and migrants to invest locally, as the Pakistan experience.
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