SEC Letter Regarding SCCP Issues

April 17, 2000 PSE MEMO FOR BROKERS NO. 097-00 FOR : All Member Brokers RE : SEC Letter Regarding SCCP Issues Please find attached copy of the letters of SEC Chairman Lilia R. Bautista dated April 13, 2000 addressed to PSE Chairman Felipe U. Yap and Mr. Carlos L. Velayo, Chief Operating Officer of Securities Clearing Corporation of the Philippines (SCCP), concerning various SCCP issues. For your information. TDcCIS (SGD.) JOSE G. CERVANTES Chief Operating Officer 13 April 2000 MR. FELIPE U. YAP Chairman Philippine Stock Exchange Philippine Stock Exchange Centre, Exchange Road Ortigas Center, Pasig City Metro Manila Dear Mr. Yap: We refer to the letters of Mr. William Ang to the Commission dated 06 and 10 April 2000 concerning various issues related to the Securities Clearing Corporation of the Philippines (SCCP). As resolved by the Commission in its meeting dated 11 April 2000 (SEC-EXS Res. No. 14, S of 2000), I wish to inform you of the following: 1. The PSE has until 15 May 2000 to reduce its-interest in the SCCP from 51% to 20%. Contrary to the PSE's claim as contained in the letter of Mr. Ramon T. Garcia to the Commission, we understand that certain commercial banks are interested to either increase their stake in SCCP or to buy into the corporation. Therefore, we are granting the PSE an extension of the deadline within which to reduce its interest in SCCP to 15 May 2000, which should give you sufficient time to follow these leads and comply with the directive. 2. The PSE is hereby granted an extension of two weeks within which to submit a proposal for an alternative entity to the SCCP. In this regard, we wish to inform you that during consultations with BSP Governor Rafael Buenaventura, he made it clear that BSP is not prepared to allow individual banks to take on clearing functions. Further, it also appears that the Bankers Association of the Philippines (BAP) has strong reservations about having the Philippine Central Depository, Inc. (PCD) take on the functions of SCCP. Therefore, we would like to advise you that any proposal to have the clearing functions undertaken by individual banks will not be accepted by the Commission. We also advise you to consider the reservations of the BAP before putting forward a proposal to have the PCD take over the functions of SCCP. cdll 3. In the meantime, we have directed and authorized the SCCP to immediately implement the following directives: a. Collect SCCP fees from PSE brokers effective immediately and retroactive to 07 January 2000 b. Impose sanctions and collect fines and penalties for settlement violations based on SCCP rules and operational procedures effective Monday, 17 April 2000 c. Commence a Mark to Market Collateralization System (negative indication) effective Monday, 17 April 2000. The collection by SCCP of actual collateral deposits shall commence on 01 May 2000. d. Immediately implement a risk monitoring system. We are furnishing you a copy of our letter to Mr. Carlos L. Velayo of SCCP regarding this, for your reference. We count on your cooperation and compliance. Thank you. Very truly yours, For the Commission: (SGD.) LILIA R. BAUTISTA Chairman 13 April 2000 MR. CARLOS L. VELAYO Chief Operating Officer Securities Clearing Corporation of the Philippines, Inc. 2nd Floor, Stock Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Dear Mr. Velayo: As resolved by the Commission on 11 April 2000 (SEC-EXC Res. No. 14, S of 2000, you are hereby authorized and directed as follows: 1. Collect SCCP fees from PSE brokers effective immediately and retroactive to 07 January 2000. cAaDHT In view of the SCCP Board Resolution dated 11 January 2000 and the PSE Board Resolution No 12 dated 26 January 2000 effectively resolving that "the Exchange impose on its members beginning January 2000 SCCP fees equivalent to 10% of PCD fees, to be adjusted as needed," we see no reason for the delay in implementing the same. The brokers shall be given until 21 April 2000 to settle all outstanding fees with the SCCP. 2. Impose sanctions and collect fines and penalties for settlement violations based on SCCP rules and operational procedures effective Monday, 17 April 2000 All fines and sanctions will be based on the 11 AM settlement deadline on T+4. 3. Commence a Mark to Market Collateralization System (negative indication) effective Monday, 17 April 2000. The collection by SCCP of actual collateral deposit, shall commence on 01 May 2000. For the first six months beginning 01 May 2000, SCCP shall require collateral coverage for each broker's negative exposure in excess of P5 million. Full collateralization will commence on 01 November 2000. Acceptable forms of collateralization will be cash, bank guaranty, or PSE-listed securities which are part of the PSE index. 4. Immediately implement a risk monitoring system. SCCP shall require all participating clearing members to submit monthly reports on financial data to be used in monitoring their capital adequacy. For the first two months of the implementation of the above directives, SEC representatives shall monitor compliance with the same. In this regard. please issue the necessary directives to all concerned brokers to ensure their compliance with the above. We request you furnish the SEC a copy of the text of this directive. We wish to emphasize that should they fail to comply with these requirements, the SEC shall take immediate steps towards the suspension of their licenses. We are also directing you to submit to the SEC on or before 30 April 2000 a report on the compliance with these directives, providing specific information on companies which have failed to comply. Very truly yours, For the Commission: (SGD.) LILIA R. BAUTISTA Chairman