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SEC-MRD
Memo Circular No. 009
Series of
2001
TO
: Member Brokers
Philippine
Stock Exchange, Inc.
Investment
Houses with Broker Dealer Affiliates
SUBJECT
: Broker/Dealer Prohibition
under Section 34 of the Securities Regulation Code
Whereas
Section 34 of the Securities Regulation Code makes it unlawful for any
Member-Broker of an Exchange to effect any transaction on such Exchange for its
own account, the account of an associated person, or an account with respect to
which it or an associated person thereof exercises investment discretion.
Whereas
under the same provision of the Code, four (4) transactions were exempted from
the prohibition on proprietary trading by Member-Brokers and one of these is
that involving "any other transaction of a similar nature as may be
defines by the Commission." (Section 34.1(d)).
Whereas,
there are transactions which partake of a nature similar to market making
activities which provide liquidity in the market by entering bids or offers for
the Member-Broker's own account in order to either improve the depth (size) or
to improve the price of the existing highest bid or lowest offer from any of his
public orders, or facilitates the execution of any public order in the market
including its own customer.
Whereas
to attain the objective of the law of preventing frontrunning, a "customer
first policy" environment must be in place as proposed by the
Philippine Stock Exchange.
Now
therefore, the Commission hereby interprets a "transaction of a similar
nature" under Section 34.1(d) of the Code to include alternative market
making transactions by a Member-Broker and its associated person's own account,
provided that:
1.
The Member-Broker shall trade for its account only under a "Customer First
Policy", and ensure the protection of the public and its client as follows:
a.
The Member-Broker gives priority to he execution of Non-Member orders over
Member orders at the same price according to the following rules:
i.
When the Member Order is pre-existing (and has priority in terms of time) and
thereupon the Member-Broker receives a non-member order and/or holds a wholly or
partially unexecuted Non-Member Order, then the Member-Broker shall surrender
priority and give precedence to his client's order;
ii.
When the Member-Broker holds an unexecuted Non-Member Order with priority
(pre-existing order), then any Member Order that intends to improve the price
shall do so at least (3) fluctuations better than the pre-existing highest bid
or lowest offer from a Non-Member Client.
b.
The procedure for executing the above-referenced priority rules shall be
programmed into the Exchange trading system so that full compliance can be
achieved prior to the execution of any Member order under this interpretation,
in accordance with SRC Rule 34.1-2(2).
2.
The order ticket states that the order is for the account of the Member-Broker,
associated person or other employee thereof, owner, officer or director of the
Member-Broker (collectively referred to as Member Orders)
3.
The Member-Broker retains a copy of the order ticket with the date and time of
its transmittal, which shall be time stamped thereon.
4.
In compliance with SRC Rule 52.1-7, the Member-Broker dates and time stamps the
order ticket to reflect the time that the order was received (if the order is
not a priority trade).
5.
The Member-Broker retains all order tickets in chronological order containing
the date, time, price and other significant details of the order, in accordance
with SRC Rule 52.1-2.
6.
The Member-Broker may adopt an alternative method (e.g. tape recorder with
timing instrument) in capturing the time stamping requirements prescribed by the
aforementioned sections 3 and 4 and by SRC Rule 52.1-7; Provided that it
conforms with the rules and procedures of the Exchange governing such
alternative method; Provided further, that such alternative method and
relevant rules and procedures have been approved by the Commission.
7.
Procedure for monitoring Member Orders, as set forth in SRC Rule 34.1-2(7) and
(8) shall be complied with.
Failure
to comply with the above-referenced procedures shall be deemed to be a violation
of Section 34.1 of the Code and pursuant to Section 34.2 of the Code shall be
subject to administrative sanctions provided in Section 29 and 54 of the Code.
EDSA,
Greenhills, Mandaluyong City.
August 7,
2001.
For
the Commission En Banc
Lilia
R. Bautista
(Original
Signed)
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