2. Securities and Exchange Commission REGULATORY FRAMEWORK FOR SECURITIES BORROWING AND LENDING IN THE PHILIPPINES By: JOSE P. AQUINO Director, Market Regulation Department, SEC PSE SECURITIES LENDING SEMINAR 2006 Philippine Stock Exchange Auditorium, Pasig City, Philippines June 22, 2006

3. Securities and Exchange Commission *SEC Memorandum Circular No. 7 RULES ON SECURITIES BORROWING AND LENDING * Approved by SEC on June 9, 2006.

4. Securities and Exchange Commission ELEMENTS OF SBL TRANSACTION 1.The lender temporarily transfers the title over borrowed securities to the borrower. 2. The borrower provides the lender with collateral as security for the loan. The parties may agree that the title over collateral securities shall likewise be transferred to the lender.

5. Securities and Exchange Commission ELEMENTS OF SBL TRANSACTION 3.The lender earns a fee as consideration for the loan. 4.The borrower is entitled to the economic benefits of owning the borrowed securities but the borrower is obliged to create or manufacture equivalent benefits and deliver these to the lender.

6. Securities and Exchange Commission ELEMENTS OF SBL TRANSACTION 5. A lender of equity securities loses title over said securities and so he is not entitled to vote, but may reserve the right to vote. 6. At the end of borrowing period or maturity of the loan, the borrower returns the borrowed securities or equivalent to the lender while the lender returns the collateral.

7. Securities and Exchange Commission MODES OF CONDUCTIONG SBL *THROUGH LENDING AGENT *DIRECT LENDING *OTHER SCHEMES THAT MAY BE APPROVED BY SEC: * Lending Pool System * Competitive Auction * Bid Offer * Others

8. Securities and Exchange Commission LENDING AGENT * A juridical person who acts on behalf of a client with respect to the lending of securities. * No person shall act as lending agent unless registered as such by the SEC.

9. Securities and Exchange Commission REGISTRATION REQUIREMENTS FOR LENDING AGENT a. Application Form. b. Board Resolution/Authorization allowing the lending agency service. c. Organizational and functional charts of the securities lending unit.

10. Securities and Exchange Commission REGISTRATION REQUIREMENTS FOR LENDING AGENT d. Names and Curriculum Vitae of securities lending unit personnel. e. Detailed description of automated Securities Lending System. f. Manual containing risk management and internal control procedures.

11. Securities and Exchange Commission REGISTRATION REQUIREMENTS FOR LENDING AGENT g. Copy of BSP license if the applicant is accredited securities custodian for banks and NBFIs h. A registration fee of Php 50,000.00 i. Copy of pro-forma MSLA j. Copy of pro-forma SLAA

12. Securities and Exchange Commission OTHER REQUIREMENTS FOR LENDING AGENT *Securities Lending System * Securities lending unit personnel with functional knowledge and sufficient technical expertise in operating the securities lending system

13. Securities and Exchange Commission THIRD PARTY SERVICE PROVIDER The lending agent may appoint a third party to perform any or all the functions of the Securities Lending System. Provided that, the engagement of a third party service provider be disclosed in the application. Provided further, the lending agent shall be accountable for the acts, errors and omissions of third party service provider. REGULATORY FRAMEWORK FOR SECURITIES BORROWING AND LENDING IN THE PHILIPPINES By: JOSE P. AQUINO Director, Market Regulation Department June 21, 2006

14. Securities and Exchange Commission BASIC REQUIRED FUNCTIONS OF SECURITIES LENDING SYSTEM 1. Provide price quotation, trade matching and confirmation services. 2. Run a lender selection process if necessary. 3. Deliver the borrowed securities to the account of the borrower.

15. Securities and Exchange Commission BASIC REQUIRED FUNCTIONS OF SECURITIES LENDING SYSTEM 4. Receive collateral securities from the borrower. 5. Perform daily valuation of borrowed and collateral securities. 6. Determine the adequacy of total collateral value against total market value of borrowed securities for each borrower.

16. Securities and Exchange Commission BASIC REQUIRED FUNCTIONS OF SECURITIES LENDING SYSTEM 7. Issue margin calls or effect margin releases as appropriate. 8. Track corporate actions on borrowed & collateral securities, collect & distribute benefits to the borrower & lender. 9. Execute loan and collateral return and recall processes.

17. Securities and Exchange Commission BASIC REQUIRED FUNCTIONS OF SECURITIES LENDING SYSTEM 10. Receive borrowed securities from the borrower on maturity date. 11. Return collateral to the borrower at the end of borrowing period or earlier. 12. Collect lending fee on agreed due date and distribute the same to the lender.

18. Securities and Exchange Commission BASIC REQUIRED FUNCTIONS OF SECURITIES LENDING SYSTEM 13. Inform borrower of the occurrence of default. 14. Report failed settlements. 15. Monitor foreign ownership of equity securities.

19. Securities and Exchange Commission WHO MAY ENGAGE IN DIRECT LENDING 1. Domestic banks & branches of foreign banks 2. Investment houses 3. Investment companies 4. Insurance companies 5. Pension funds or retirement plans 6. Securities dealers 7. Entities that may be authorized by the SEC.

20. Securities and Exchange Commission REQUIREMENTS FOR DIRECT LENDING 1.MSLA between Borrower and Direct Lender 2. Securities Lending System of Direct Lender NO REGISTRATION REQUIREMENTS WITH SEC

21. Securities and Exchange Commission PROVISIONS IN THE MASTER SECURITIES LENDING AGREEMENT 1. Capacity of parties - principal, agent, other capacity - a party may be lender in one transaction but borrower in another 2. Term of loan - open/on demand, specified/fixed

22. Securities and Exchange Commission PROVISIONS IN THE MASTER SECURITIES LENDING AGREEMENT 3. Requirements for delivery of securities 4. Eligible collateral & Collateral management procedures 5. Statement that there is transfer of title over the borrowed securities (and over collateral securities, if agreed)

23. Securities and Exchange Commission PROVISIONS IN THE MASTER SECURITIES LENDING AGREEMENT 6. Valuation methodology 7. Arrangement for dealing with manufactured dividend, payment, voting right, corporate action 8. Return and recall of securities and consequences

24. Securities and Exchange Commission PROVISIONS IN THE MASTER SECURITIES LENDING AGREEMENT 9. Events of default & remedies of parties 10. Grounds for termination of loan and rights of parties upon termination 11. Lending fee & other charges 12. Representations, warranties and liabilities of parties 13. Dispute resolution

25. Securities and Exchange Commission LOANABLE SECURITIES 1.Securities listed in an Exchange 2.Securities issued by Bureau Treasury 3.Securities issued by BSP 4.Other securities allowed by SEC Provided, the securities are in electronic form or, if certificated, must be in electronic form at the time of SBL, and free from all liens and encumbrances.

26. Securities and Exchange Commission ELIGIBLE COLLATERAL 1. Cash 2.Securities listed in an Exchange 3.Securities issued by Bureau Treasury 4.Securities issued by BSP 4.Other forms allowed by SEC Provided, collateral securities are in electronic form or, if certificated, in electronic form at the time of SBL, and free from all liens and encumbrances.

27. Securities and Exchange Commission DELIVERY OF BORROWED SECURITIES * After the delivery of collateral, or * Simultaneous with the delivery of collateral. The parties shall execute documents or issue instructions to ensure that the title over the borrowed securities shall pass from lender to borrower.

28. Securities and Exchange Commission DELIVERY OF COLLATERAL Be deposited or delivered to the account of lender * Prior to the delivery of borrowed securities, or * Simultaneous with the delivery of borrowed securities.

29. Securities and Exchange Commission OPTIONS OF PARTIES REGARDING COLLATERAL SECURITIES 1. Provide in MSLA that title over collateral securities shall also pass from borrower to lender. 2. Provide in MSLA that the collateral securities shall be pledged to lender, or other arrangements. * Consider tax impact and risk.

30. Securities and Exchange Commission COLLATERAL LEVEL * By agreement of parties. * If without agreement: At least 102% of current market value of borrowed securities, if the collateral is in the form of cash or GS. At least 105% of current market value of borrowed securities, if the collateral is in the form of equities.

31. Securities and Exchange Commission OTHER REQUIREMENTS ON COLLATERAL * Mark to Market at least once daily. * Margining method may be done on: - Aggregated or per account - Loan by loan or per transaction (Must be indicated in MSLA)

32. Securities and Exchange Commission RESTRICTION ON FOREIGNERS * Cannot borrow from Filipinos such equity securities of companies engaged in activities whose foreign ownership is limited by the Constitution & other laws IF there is no mechanism monitoring foreign ownership. (eg. public utility companies)

33. Securities and Exchange Commission TERMINATION OF LOAN * Borrower to return borrowed securities or equivalent. (If not, then default. Transaction deemed sale transaction with corresponding tax impact) * Lender to return collateral.

34. Securities and Exchange Commission *DOCUMENTATION– Confirmation Notice specifying details of SBL transaction. *RECORD KEEPING– Lending Agents and Direct Lenders must keep SBL ledgers. *REPORTING- Lending Agents and Direct Lenders to submit to SEC bi-annual Summary Report of SBL transactions.

35. Securities and Exchange Commission COMPLIANCE WITH BIR RULES For SBL transaction to qualify for tax exemption, the parties must comply with BIR regulations. (eg. Registration of MSLA with BIR within specified period)

36. Securities and Exchange Commission THANK YOU