The following rules and regulations issued by the Bureau of Internal Revenue (“BIR”), Securities and Exchange Commission (“SEC”) and the Philippine Stock Exchange (“PSE”) govern the conduct of SBL transactions:

A. BIR Revenue Regulations (“RR”) 10-2006, as amended by BIR RR 1-2008

B. SEC Memorandum Circular No 7, Series of 2006

C. PSE Rules and Guidelines on SBL

The rules and regulations governing SBL cover all participants and must be adhered to in order to qualify for the tax-free treatment provided under the BIR RRs and Republic Act No. 9243. Further, the repatriation of proceeds from SBL transactions involving foreign participants are subject to the guidelines set by the Bangko Sentral ng Pilipinas.

Anyone with a valid BIR-registered Master Securities Lending Agreement (“MSLA”) and its Addendum can participate in the PSE SBL Program as either a Borrower or a Lender. The Borrower will be responsible for registering the MSLA with the BIR.

All agreement templates and forms are available on the PSE website. For more information, kindly refer to the PSE Guidelines for MSLA Clearance.

All PSE-listed shares are generally available for borrowing and lending, provided that there is an MSLA which covers these transactions and for any of the following purposes: a) avoid failed settlement; b) replacement of previously borrowed shares from another lender; c) on-lending; and d) financing.

However, for SBL transactions executed for the purpose of short selling, only shares of PSEi constituent companies and exchange traded funds are considered eligible.

Under BIR Ruling 168-98, a transaction classified as SBL shall be accorded a tax-free status, provided the conditions under BIR RR No. 10-2006, as amended by BIR RR No. 1-2008, are strictly met and executed by the parties concerned. This means that the transfer of securities from the Borrower to the Lender, as well as the delivery to the Lender of the corresponding collateral, shall not be considered a sale and therefore are not subject to taxes such as stock transaction tax, documentary stamp tax, and capital gains tax.

The subsequent sale of the borrowed securities (short sale) as well as the income from subsequent transactions, such as the interest in the reinvestment of cash collateral or the lending fee (in case of non-cash collateral), shall be subject to the regular taxes. Further, manufactured dividends/substitute payments shall be taxed as other income in the hands of the Lender subject to the corresponding income tax rates.

For an SBL transaction to be considered tax-exempt, it must be conducted under the following conditions:

1) there must be an underlying valid BIR-registered MSLA executed by the parties;
2) the SBL Program is in accordance with the rules and regulations of the SEC; and
3) such a program is administered and supervised by the PSE.

Further, an SBL transaction will be deemed as sale subject to the applicable taxes if and when it falls under the following circumstances:

1. The borrowed shares are not returned in whole or in part within the two-year borrowing period
2. The borrowed shares have been used for purposes other than what is specified in the MSLA
3. The borrowed shares have been used for purposes other than what is specified in the MSLA
4. Failure to comply with the essential features of a valid MSLA
5. Failure to register or delayed registration of the MSLA
6. Transactions are entered into outside the borrowing period

The risks on SBL can be classified into two general categories:

Credit risk refers to the risk that the Borrower defaults on his contractual obligations either to return the securities borrowed or to provide sufficient collateral. This is further classified into counterparty risk which relates to the return of securities borrowed and the Lender’s income entitlements, and collateral risk which relates to the maintenance of the agreed value of the collateral versus the market value of the loan.

Related to collateral risk is the market risk that refers to drastic or significant changes in price of the borrowed shares, which may affect the ability of the borrower to return the shares as well as marking-to-market the collateral as necessary to match the changes in price of the borrowed shares.

Further, there is liquidity risk which pertains to the liquidity of the collateral or how easily it can be converted into cash in the event of a default by the Borrower.

Operational risk on the other hand refers to risk associated with the administrative aspect of SBL. This includes intra-day settlement risk, and other risks associated with systems control and procedures. Generally, this relates to the marking-to-market of collateral, monitoring of loans, and monitoring of ownership entitlements and other corporate actions.

In case of a dividend declaration on the borrowed securities, the Borrower is required under the terms of the MSLA to reimburse or make substitute payments/manufacture dividends to the Lender. Such reimbursements should be equal to the amount (in case of cash dividend) or the number of shares (in case of stock dividend) that would have accrued on the borrowed securities if the shares were not borrowed. The dividends shall be reimbursed on the date the Borrower receives them or on such other date as both parties agree on.

The Lender may likewise retain voting rights over the shares while in the possession of the Borrower, if mutually agreed upon by the parties. In such case, the parties must execute a written proxy or a voting trust to enable the Lender to exercise its voting rights in relation to said shares. Further, the Lender has the right to recall the borrowed shares, in whole or in part, if he wishes to exercise his voting rights or respond to other corporate actions.

1. Promotes better price discovery and market efficiency by allowing investors to have long or short views of the market;
2. Risk management for hedging long positions and managing portfolio risk;
3. Generates liquidity by enabling securities held by long-term investors to be lent out to other investors; and
4. Supports the efficient implementation of other products like exchange traded funds, structured warrants and derivatives

An eligible securities which breaches the short interest threshold will become ineligible for short selling on the next trading day and until such time that its short interest ratio falls back with the prescribed limit.

Pursuant to the provisions of SRC Rule 24.2-2.5, the short sale transaction must be:

At a price higher than the last sale price;
Example:
Last sale price: Php1.00
Short sell order price: Php1.01 or higher

Or, at the price of the last sale, only if that price is above the next preceding different sale price on such day.
Example:
Sale price prior to last sale price (10:01:00 AM): Php0.99
Last sale price (10:02:00 AM): Php1.00
Short sell order price (10:03:00 AM): Php1.00

Short selling orders shall be entered as day orders only. Amendments of short selling orders to regular orders and vice versa are likewise not allowed. The following short selling orders shall not be accepted by the system:

1. Odd lot board
2. Block sales
3. During the pre-open, pre-close and run-off/trading-at-last phases

1. Investor expects price of stock XYZ to decline
2. Investor borrows 10,000 XYZ shares to sell at current price of Php10.00
3. After three weeks, price of XYZ drops to Php6.00, investor buys back 10,000 shares
4. Investor makes a profit of Php4.00 per share or Php40,000 for 10,000 shares, subject to borrowing fees and other related trading expenses
5. Investor closes his short position, returns borrowed shares to the Lender
   
   

The process begins with the investor, as the Borrower, entering into a securities borrowing arrangement called the Master Securities Lending Agreement (“MSLA”) with a Lender. In the Philippines, all short selling transactions must be covered with an existing MSLA and MSLA Addendum. The MSLA and MSLA Addendum encompass Securities Borrowing and Lending (“SBL”) transactions for various purposes, including Short Selling.

The MSLA and MSLA Addendum are reviewed by the Philippine Stock Exchange and the Securities and Exchange Commission and approved by and registered with the Bureau of Internal Revenue. This MSLA enables the investor to borrow securities from the Lender to conduct short sell transactions. The investor must provide his broker a copy of the registered MSLA and a confirmation notice from the lender to ensure that his short selling transactions are covered.