PDEx : When the Regulated Becomes Regulator
Prof. Federico M. Macaranas, Asian Institute of Management
The 22 March 2011 Senate hearing on the inefficient trading of government securities through a private for-profit monopoly called PDEx (Philippine Dealing and Exchange Corp) revealed many disturbing aspects of how the Philippine economy is exposed to systemic risks. For a country that has to rely on debt issues for its own economic growth, this is doubly dangerous in view of global developments.
Under RA 7653, the New Central Bank Act of 1993, the Bangko Sentral ng Pilipinas (BSP) transferred all fiscal agency functions to the Department of Finance (DoF) with the Bureau of Treasury (BTr) as the fiscal agent of the National Government; BTr was tasked, among others, with the issuance, servicing and redemption of government securities.
It seems that the BSP as the banking regulator further surrendered (a word used by the Amorsolo Research Group engaged in studies on Philippine financial economics) its responsibility to the Securities and Exchange Commission (SEC) in June 2001 on the subject of the regulation of trading of government bonds, despite the pivotal role these play in the conduct of monetary policy and thus the health of the entire economic system. Outstanding Philippine government debt papers amount to some Php2.8 trillion while secondary trading volume of the same as of end of 2010 amounted to Php 5.4 trillion when the GDP at current prices stood at Php 8.5 trillion (Php 1.5 trillion in 1985 prices).
In turn, the SEC delegated by July 2006 this responsibility of regulating the trades in government securities to a private for-profit entity called PDEx by giving it a status of a Self Regulatory Organization (SRO), in what seems to be an erroneous interpretation of who can constitute such a body. The Securities Regulation Code (RA 8799) defines an SRO, among others, as an organized Exchange (where trades are made through an auction-like system of matching buyers and sellers, and not bilaterally as in an over-the-counter or OTC market ); PDEx questionably claims itself to be an “exchange” even if it fails to meet globally accepted norms of what formal organized exchanges are.
PDEx derives most of its income from so-called mapping fees which are for mere recording of bilateral transactions conducted outside its trading platform – this is what broker/ dealers analogously refer to as paying a toll fee for a facility PDEx did not build and for services that are not needed by OTC traders that dominate the government securities market . Official Canadian development funds (CIDA) and US technical assistance (USAID) were used to set up the Registry of Scripless Securities or RoSS at the BTr for this facility in 1996, precisely to avoid the multiple ownership of bonds (notably shown in the 1994 Bancap scam) that figured prominently in the argument for capital market reforms touted by the end of the decade.
The enormous costs vs. vague benefits of PDEx
However, the biggest problem in this chain of delegation (from BSP to SEC to PDEx) is that the latter as an SRO has increased the cost of transacting in government debt papers enormously (as much as 3.5 times the old pre-PDEx rate for a P 500 million transaction), despite a promise to its members that it would not charge beyond the Php 900 per transaction regardless of amount for interdealer trades.
Because of continuing losses in its early years (Php 32.6 m, Php 55.0 m, Php 40.9 m, between 2005-07), PDEx migrated to an ad valorem charge apparently without the formal approval of its founders , the Bankers Association of the Philippines (BAP), thus reducing its losses (Php 5.5 m in 2009); it then gradually encroached on other markets like the inter-dealer, inter-professional, public and over-the-counter markets to assure itself of more revenues and be seen as profitable (Php 17.0 in 2010).
Bibliography: Andersen, Torben Juul, Global Derivatives: A Strategic Management Perspective , Financial Times/ Prentice Hall, 2006
Armas, Jr., Armando A.Trilateral Monopoly: Mythology of Destructive Creation, Manaoag House, 2009
Philippine Dealing System Holding Corporation, various Annual Reports, 2005-10
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